Demand From Merchandize Traders To Heap Pressure On The Shilling

The Kenya Shilling depreciated by 0.8 percent in January against the US Dollar to close the month at 110.1 shillings, from 109.2 shillings recorded at the end of December 2020.

The slide shed off has been mostly attributable to the high dollar demand from general importers as businesses resumed following the festive season.

During the week, the Kenyan shilling depreciated marginally against the US dollar by 0.3 percent to 110.1 shillings from 109.8 shillings recorded the previous week.

“On a YTD basis, the shilling has depreciated by 0.9 percent against the dollar. We expect continued pressure on the Kenyan shilling,” said experts from Cytonn Investments.

Pressure on the shilling will continue coming from the demand from merchandise traders as they beef up their hard currency positions as businesses reopen following the festive season.

There is a slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture and continued uncertainty globally making people prefer holding dollars and other hard currencies.

In the short term, the shilling will be supported by the Forex reserves which are currently at USD 7.7 billion (equivalent to 4.7-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,

The improving current account position narrowed to 4.8 percent of GDP in the 12 months to December 2020 compared to 5.8 percent of GDP during a similar period in 2019.

Improving diaspora remittances evidenced by a 19.7 percent y/y increase to USD 299.6 mn in December 2020, from USD 250.3 mn recorded over the same period in 2019, has cushioned the shilling against further depreciation.