Is The Kenyan Shilling On A Free Fall Against The US Dollar?

During the month of August, the Kenya Shilling depreciated by 1.2 percent against the US Dollar to close the month at 109.9 shillings from 108.6 shillings recorded at the end of July 2021.

The depreciation was mostly attributable to increased dollar demand from general importers outweighing the supply of dollars from importers.

During the week, the Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 109.9 shillings, from 109.8 shillings recorded the previous week, mainly attributable to increased dollar demand from general importers.

On a YTD basis, the shilling has depreciated by 0.7 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020.

“We expect the shilling to remain under pressure for the remainder of 2021,” said experts from Cytonn Investments in this week’s Cytonn Report.

The shilling will get pressure from the rising uncertainties in the global market due to the Coronavirus pandemic, which has seen investors continue to prefer holding their investments in dollars and other hard currencies and commodities.

At the same time, the widened current account position which increased by 0.5 percentage points to 5.4 percent of GDP in the 12 months to July 2021 from 4.9 percent of GDP for a similar period in 2020 will pile pressure on the local currency.

The demand from energy importers as they beef up their hard currency positions in the prevailing elevated global oil prices will also impact negatively on the shilling.

The shilling is however expected to be supported by the Forex reserves, currently at 8.9 billion shillings (equivalent to 5.4 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.

Improving diaspora remittances evidenced by a 21.6% y/y increase to USD 336.7 million in July 2021, from USD 277.0 mn recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.