During the week, the Kenyan shilling depreciated by 0.2percent against the US dollar to close the week at 121.8 shillings from 121.5 shillings recorded the previous week.
The depreciation of the shilling was attributable to increased dollar demand from importers, especially oil and energy sectors against a slower supply of hard currency.
On a year-to-date basis, the shilling has depreciated by 7.6 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.
Pressure on the Kenyan shilling will continue coming from the high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand.
Pressure will also come from the ever-present current account deficit estimated at 5.3 percent of GDP in the 12 months to September 2022, the same as what was recorded in a similar period in 2021.
The need for Government debt servicing continues to put pressure on forex reserves given that 68.1 percent of Kenya’s External debt was US Dollar denominated as of July 2022 will put pressure on the shilling too.
A continued hike in the United States of America Federal interest rates in 2022 to a range of 3.75%-4.00% in November 2022 has strengthened the dollar against other currencies and has caused capital outflows from the Kenyan market.
The shilling is however expected to be supported by the improved diaspora remittances standing at a cumulative USD 4.0 bn as of September 2022, representing a 13.3% y/y increase from USD 3.5 bn recorded over the same period in 2021.
Sufficient Forex reserves currently at USD 7.2 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.
It is important to note that Forex reserves have dropped by 17.5% YTD from USD 8.8 bn. The chart below summarizes the evolution of Kenya’s months of import cover over the last 10 years.
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