Days To The General Election And The Shilling Is Still Sinking

The Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 118.3, from 118.1 shillings recorded the previous week.

The depreciation of the local currency was partly attributable to increased dollar demand from the oil and energy sectors against a slower supply of hard currency.

On a year-to-date basis, the shilling has depreciated by 4.5 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.

Pressure on the shilling will continue coming from the high global crude oil prices on the back of persistent supply chain bottlenecks further exacerbated by the Russian-Ukrainian geopolitical pressures at a time when demand is picking up with the easing of COVID-19 restrictions and as economies continue to recover.

The increased demand from merchandise traders as they beef up their hard currency positions in anticipation of increased demand as economies gradually recover will continue piling pressure on the local currency.

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 5.3 percent of GDP in the 12 months to May 2022 compared to the 5.0 percent for a similar period in 2021.

The wider deficit reflects a higher import bill, particularly for petroleum products, with the imports for Q1’2022 increasing by 14.5 percent, 5.7 percentage points higher than the 8.8 percent increase in exports will hurt the shilling too.

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 19.8 percent to 8.5 trillion shillings in April 2022, from 1.4 trillion shillings in April 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 4.6-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 mn from the International Monetary Fund (IMF).

Improving diaspora remittances is evidenced by a 6.6% y/y increase to USD 326.1 mn as of June 2022, from USD 305.9 mn recorded over the same period in 2021 which has continued to cushion the shilling against further depreciation.

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