Pressure On Kenyan Shilling Mounts, Falls To The Lowest

The Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 123.0 shillings, from 122.8 shillings recorded the previous week.

The consistent depreciation of the local currency 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 8.7 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021.

“We expect the Kenyan shilling to remain under pressure in 2022,” said analysts from Cytonn Investments in their latest weekly report.

Pressure on the Kenya shilling will come from:

The high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand will pile pressure on the Kenyan shilling.

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.

The need for Government debt servicing continues to put pressure on forex reserves given that 69.7% of Kenya’s External debt was US Dollar denominated as of September 2022.

A continued hike in the US Fed interest rates in 2022 to a range of 4.25-4.50 percent in December 2022 has strengthened the dollar against other currencies following capital outflows from other global emerging markets.

The shilling is however expected to be supported by: 

The improved diaspora remittances stood at a cumulative USD 4.0 billion as of November 2022, representing a 9.7 percent y/y increase from USD 3.7 billion recorded over the same period in 2021.

Sufficient Forex reserves currently at USD 7.1 bn (equivalent to 4.0 months of import cover), which is at par with 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 19.3 percent YTD from USD 8.8 billion. The chart below summarizes the evolution of Kenya’s months of import cover over the last 10 years.