Kenyan Shilling Still Spiraling Down; Any Hope?

The Kenyan shilling continued to depreciate against the US dollar to close the week at 119.6 shillings, a 0.2 percent depreciation from 119.3 shillings recorded the previous week.

The depreciation during the week 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 5.7 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.

Pressure on the shilling will come from:

High global crude oil prices are on the back of persistent supply chain bottlenecks coupled with high demand as most economies gradually recover.

Increased demand from merchandise traders as they beef up their hard currency positions in anticipation of increased demand as economies pick up.

An ever-present current account deficit due to an imbalance between imports and exports, with Kenya’s current account deficit estimated at 5.3 percent of GDP in the 12 months to May 2022 compared to the 5.0% within a similar period in 2021.

The aggressively growing government debt, with Kenya’s public debt, has increased at a 10-year CAGR of 18.2 percent to 8.6 trillion shillings in May 2022, from 1.6 trillion in May 2012 thus putting pressure on forex reserves to service some of the public debt.

The shilling is however expected to be supported by:

Sufficient Forex reserves are currently at USD 7.6 bn (equivalent to 4.4-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 USD 235.6 mn funding from the International Monetary Fund (IMF).

Sufficient diaspora remittances which stood at USD 319.4 mn as of July 2022, which have continued to cushion the shilling against a faster depreciation. Notably, the US remains the largest source of remittances to Kenya accounting for 58.0 percent in the period as of July 2022.

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