The Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 111.8 shillings, from 111.5 shillings recorded the previous week.
The depreciation, according to Cytonn, was mainly attributable to increased dollar demand from commodity and energy sector importers outweighing the supply of dollars from exporters. As the year moves to an end, it is not clear how the shilling will hold.
“On a YTD basis, the shilling has depreciated by 2.4 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 Cytonn.
Pressure on the local currency will continue coming 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.
The increased demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally will also pile pressure on the shilling.
At the same time, the rising global crude oil prices are 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.
The shilling is expected to be supported by the Forex reserves, currently at USD 9.1 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.
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.
Improving diaspora remittances evidenced by a 28.2% y/y increase to USD 337.4 mn in October 2021, from USD 263.1 mn recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.