Kenyan Shilling Still On A Free-Fall As 2022 Takes Shape

The Kenyan shilling depreciated marginally by 0.1 percent against the US dollar to close the week at 113.6 shillings from 113.5 shillings recorded the previous week, partly attributable to increased dollar demand from the oil and energy sectors.

Key to note, this is the lowest the Kenyan shilling has ever depreciated against the dollar. On a YTD basis, the shilling has depreciated by 0.4 percent against the dollar, in comparison to the 3.6 percent depreciation recorded in 2021. 

Pressure on the shilling will come from the increased demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally.

The ever-present current account deficit is due to an imbalance between imports and exports with Kenya’s current account deficit estimated to come in at 5.4 percent of GDP in 2021, having expanded by 27.4% in Q3’2021 to 184.6 billion shillings, from 145.0 billion shillings recorded in Q3’2020.

This was attributed to a robust increase in merchandise imports by 39.6 percent to 321.8 billion shillings in Q3’2021, from 230.5 billion shillings in Q3’2020. 

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 17.7 percent to 7.8 trillion shillings in July 2021, from 1.5 trillion shillings in July 2011 thus putting pressure on forex reserves to repay some of the public debt.

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.

“Key to note, risks abound this global recovery following the emergence of the new COVID-19 variants. We are of the view that should the variants continue to spread; most nations will respond swiftly by adopting stringent containment measures to curb transmissions,” said Cytonn Investments.

High Forex reserves, currently at USD 8.3 bn (equivalent to 5.1-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 972.6 mn IMF disbursement and the USD 130.0 mn World Bank loan financing received in June 2021. 

Improving diaspora remittances evidenced by a 17.0 percent y/y increase to USD 350.6 million in December 2021, from USD 299.6 million recorded over the same period in 2020, which has continued to cushion the shilling against further depreciation.

Read More: Kenyan Shilling Sheds 0.1% During The Week