The Kenyan shilling depreciated by 0.1% against the US dollar to close the week at Kshs 120.4, from Kshs 120.3 recorded the previous week, 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 6.4% against the dollar, higher than the 3.6% depreciation recorded in 2021.
“We expect the shilling to remain under pressure in 2022,” said Cytonn in their latest report.
Pressure on the shilling will come from:
The high global crude oil prices are on the back of persistent supply chain bottlenecks coupled with high demand as most economies gradually recover.
An ever-present current account deficit due to an imbalance between imports and exports, with Kenya’s current account deficit estimated at 5.1% of GDP in the 12 months to July 2022 compared to the 5.2% within a similar period in 2021.
The aggressively growing government debt is not translating into GDP growth thus putting pressure on forex reserves to service some of the public debt.
Notably, Kenya’s public debt has increased at a 10-year CAGR of 18.2% to Kshs 8.6 trillion in May 2022, from Kshs 1.6 trillion in May 2012 while the average GDP growth over the same period has been 3.9%.
The shilling is however expected to be supported by:
Sufficient Forex reserves are currently at USD 7.3 bn (equivalent to 4.2-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover.
Sufficient diaspora remittances are evidenced by a 14.7% y/y increase to USD 3,992.0 mn cumulative remittances as of August 2022, from USD 3,481.0 mn recorded over the same period in 2021, which has continued to cushion the shilling against a faster depreciation.
During the week, liquidity in the money markets eased, with the average interbank rate declining to 4.0% from 4.3% recorded the previous week, partly attributable to government payments that offset tax remittances.
The average interbank volumes traded increased by 103.1% to Kshs 27.3 bn from Kshs 13.5 bn recorded the previous week.
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