Kenyan Shilling On Its Knees, Drops To Lowest In History

During the week, the Kenyan shilling depreciated by 0.2% against the US dollar, to close the week at 114.4 shillings, from 114.2 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 year-to-date basis, the shilling has depreciated by 1.1 percent against the dollar, in comparison to the 3.6 percent depreciation recorded in 2021.

Pressure on the shilling will come from the rising global crude oil prices on the back of supply constraints and geopolitical pressures at a time when demand is picking up with the easing of COVID-19 restrictions and as economies reopen. Key to note, risks abound the recovery following the emergence of the new COVID-19 variants.

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 continue hurting the shilling.

An ever-present current account deficit 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 44.6 percent to 127.6 billion shillings in November 2021, from 88.3 bn recorded in November 2020, attributable to a robust increase in commercial imports by 37.1 percent to 185.9 billion shillings in November 2021, from 88.3 billion shillings in November 2020.

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 18.4 percent to 8.0 trillion shillings in December 2021, from 1.5 trillion shillings in December 2011 thus putting pressure on forex reserves to service some of the public debt.

The shilling is however expected to be supported by high Forex reserves are currently at USD 8.0 bn (equivalent to 4.9-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, the USD 130.0 mn World Bank loan financing received in June 2021, and USD 750.0 mn which has recently been approved by the World Bank in March 2022,  and,

Improving diaspora remittances evidenced by a 23.5 percent y/y increase to USD 321.5 mn in February 2022, from USD 260.3 mn recorded over the same period in 2021, which has continued to cushion the shilling against further depreciation.