Kenyan Shilling Still On A Free-Fall Against The Dollar

The Kenyan shilling depreciated marginally by 0.2 percent against the US dollar to close the week at 110.9 shillings, from 110.7 shillings recorded the previous week.

The depreciation of the local currency was mainly attributable to increased dollar demand from the energy sector importers. The shilling has been on a free-fall for months now.

“On a YTD basis, the shilling has depreciated by 1.6% 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.

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 will continue piling pressure on the shilling.

At the same time, the increased demand from merchandise traders as they beef up their hard currency positions in anticipation for more trading partners reopening their economies globally will hit the local currency. 

The rising global crude oil prices on the back of supply constraints at a time when demand is picking up with the easing of COVID-19 restrictions and as economies reopen will affect the performance of the shilling.

The shilling will be supported by the forex reserves, currently at USD 9.3 bn (equivalent to 5.7-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.

In addition, the reserves were boosted by the USD 1.0 bn proceeds from the Eurobond issued in July 2021 coupled with the USD 407.0 mn IMF disbursement and the USD 130.0 mn World Bank loan financing received in June 2021.

The improving diaspora remittances evidenced by a 14.2% y/y increase to USD 312.9 mn in August 2021, from USD 274.1 mn recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.