During the week, the Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at Kshs 123.2 shillings, from the 123.0 shillings recorded the previous week.
The depreciation of the shilling was partly 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 8.9 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.
Pressure on the shilling will come from the high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand.
At the same time, an ever-present current account deficit estimated at 5.5 percent of GDP in the 12 months to October 2022, the same as what was recorded in a similar period in 2021 will pile pressure on the shilling.
The need for Government debt servicing continues to put pressure on forex reserves given that 69.3% of Kenya’s External debt was US Dollar denominated as of October 2022 hence more pressure on the local currency.
A continued hike in the US Fed interest rates in 2022 to a range of 4.25-4.50 percent in December 2022 which has strengthened the dollar against other currencies following capital outflows from other global emerging markets.
The shilling is however expected to be supported by improved diaspora remittances standing at a cumulative USD 4.0 bn as of November 2022, representing a 9.7 percent y/y increase from USD 3.7 bn recorded over the same period in 2021.
Sufficient Forex reserves currently at USD 7.5 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.
However, despite the Forex reserves being adequate, it has dropped by 14.0% 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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