Kenyan Shilling Drops Further To The Lowest In History

The Kenyan shilling depreciated by 0.1 percent against the US dollar, to close the week at 115.4 shillings from Kshs 115.3 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 2.0 percent against the dollar, in comparison to the 3.6 percent depreciation recorded in 2021.

Pressure on the shilling will continue coming 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.

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.

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 5.6 percent of GDP in the 12 months to February 2022 compared to the 4.3 percent for a similar period in 2021.

At the same time, a wider deficit reflects a higher import bill, particularly for oil, which more than offset increased receipts from agricultural and services exports, and remittances will hurt the local currency.

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 18.4 percent to 8.0 t 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 expected to be supported by the high forex reserves currently at USD 8.3 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, USD 972.6 mn IMF disbursement, USD 130.0 mn World Bank loan financing received in June 2021, and, the USD 750.0 mn World Bank loan facility issued in March 2022, and,

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