The Kenyan shilling depreciated against the US dollar by 0.4 percent to 109.9 shillings from 109.4 shillings. The local currency hit its lowest in history during the week.
The depreciation of the shilling was mainly attributable to the persistent dollar demand from general importers as they meet their end of month obligations, as well as low inflows from sectors like horticulture and tourism.
On a YTD basis, the shilling has depreciated by 8.4 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
Experts from Cytonn Investments say they expect continued pressures on the Kenyan shilling in the coming months, meaning the local currency might cross into the new year still limping.
Pressure from the shilling will come from the demand from merchandise and energy sector importers as they beef up their hard currency positions amid a slowdown in foreign dollar currency inflows.
Currently, there is also a continued uncertainty globally making people prefer holding dollars and other hard currencies. The shilling will continue facing these uncertainties as well.
However, in the short term, the shilling is expected to be supported by the Forex reserves which are currently at USD 8.0 bn (equivalent to 4.9-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.
There is an improving current account position which narrowed to 4.9 percent of GDP in the 12 months to October 2020 compared to 5.3 percent of GDP during a similar period in 2019.
There is an improving diaspora remittances evidenced by a 17.3% percent y/y increase to USD 263.1 mn in October 2020, from USD 224.3 mn recorded over the same period in 2019, has cushioned the shilling against further depreciation.