Kenyan Shilling Still Sinking Deeper; Any Hope?

During the week, the Kenyan shilling depreciated by 0.1 percent against the US dollar to close the week at 120.6, from 120.4 shillings recorded the previous week.

The continuous fall of the shilling 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 6.6 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.

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 percent to 8.6 trillion shillings in May 2022, from 1.6 trillion shillings in May 2012 while the average GDP growth over the same period has been 3.9 percent.

The shilling is however expected to be supported by: 

Sufficient Forex reserves are currently at USD 7.4 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 percent 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.

At the same time, during the week, liquidity in the money markets tightened, with the average interbank rate increasing to 4.5 percent from the 4.0 percent recorded the previous week, partly attributable to government payments that offset tax remittances.

The average interbank volumes traded declined by 11.9 percent to 24.1 billion shillings from 27.3 billion shillings recorded the previous week.

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