Rising Oil Prices Partly To Blame For The Ailing Kenyan Shilling

The Kenya Shilling depreciated by 0.7 percent during the month of April against the US Dollar.

The shillings closed the month at 115.8 shillings from 115.0 shillings recorded at the end of March 2022, driven by the increased dollar demand from oil and merchandise importers.

During the week, the Kenyan shilling depreciated marginally by 0.2 percent against the US dollar to close the week at 115.8, from 115.6 shillings recorded the previous week.

The depreciation was 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 2.3 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.

Increased demand from merchandise traders as they beef up their hard currency positions in anticipation for more trading partners reopening their economies globally.

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

The wider deficit reflects a higher import bill, particularly for oil, which more than offset increased receipts from agricultural and services exports, and remittances.

The aggressively growing government debt, with Kenya’s public debt having increased at a 10-year CAGR of 18.6 percent to 8.2 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.

It is worth noting that the average GDP growth over the same period has been 4.5%, an indicator that the increase in debt is not translating into GDP growth.

The shilling is however expected to be supported by:

High Forex reserves currently at USD 8.4 bn (equivalent to 5.0-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 750.0 mn World Bank loan facility received in March 2022 and are expected to be boosted further by the expected USD 244.0 bn from the International Monetary Fund (IMF).

At the same time, the improving diaspora remittances evidenced by a 25.0% y/y increase to USD 363.6 mn as of March 2022, from USD 290.8 mn recorded over the same period in 2021, the highest figure ever which has continued to cushion the shilling against further depreciation.