Kenyan Shilling Losing To The Dollar But Still Strong In The Region

During the week, the Kenyan shilling depreciated by 0.1% against the US dollar to close the week at Kshs 121.0, from Kshs 120.9 recorded the previous week.

The depreciation 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 6.9% against the dollar, higher than the 3.6% depreciation recorded in 2021.

Pressure on the shilling will come from:

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

2. An ever-present current account deficit estimated at 5.2% of GDP in the 12 months to August 2022, the same as that was recorded in a similar period in 2021,

3. The aggressively growing government debt continues to put pressure on forex reserves given that 68.1% of Kenya’s debt was US Dollar denominated as of July 2022.

The shilling is however expected to be supported by:

1. Sufficient Forex reserves currently at USD 7.3 bn (equivalent to 4.1 months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover, however, it’s important to note that Forex reserves have dropped by 17.0% on YTD from USD 8.8 bn to the current USD 7.3 bn.

During the period of review, the Kenya shilling remained under pressure, depreciating by 9.2% y/y to close the quarter at Kshs 117.8, from Kshs 107.9 at the end of Q2’2021.

However, the shilling was supported by the sufficient forex reserves held by the Central Bank of Kenya which stood at Kshs 8.0 bn at the end of Q2’2022.

“Going forward we expect relative stability in the business environment in the fourth quarter of 2022, following the culmination of the election period,” said Cytonn Investments.

However, for the country to sufficiently improve the Balance of Payments, there needs to be an emphasis on reducing imports, especially agricultural imports by being self-sufficient, as well as adopting policies that encourage more exports.