Kenyan Shilling Appreciates Marginally Against The US Dollar

The Kenyan shilling appreciated marginally by 0.03 percent against the US dollar last week to 109.6 shillings, from 109.7 shillings recorded the previous week.

The slight appreciation was mainly attributable to market participants anticipating a positive economic recovery following the arrival of the Covid-19 vaccine in the country.

“On a YTD basis, the shilling has depreciated by 0.4 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020. We expect continued pressure on the Kenyan shilling,” said Cytonn Investments.

Pressure on the local currency will come from a slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture.

The continued uncertainty globally making people prefer holding dollars and other hard currencies will also put more pressure on the Kenyan shilling.

In the short term, the shilling is expected to be supported by the Forex reserves which are currently at USD 7.4 billion 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.

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The Forex reserves have been declining and are now at the same level as the EAC criteria for import cover. Countries use foreign currency reserves to keep a fixed or quasi-fixed rate value, maintain competitively priced exports, remain liquid in case of a crisis, and provide confidence for investors.

Therefore, the dwindling in the forex reserves may mean the government of Kenya will struggle to support the local currency when it depreciates.

The improving current account position which 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 will support the shilling.

Improving diaspora remittances evidenced by a 19.7% 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.