Kenyan Shilling On free Fall, Hits The Lowest In History

During the week, the Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 123.8 shillings, from 123.5 shillings recorded the previous week.

The performance 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 0.3 percent against the dollar, adding to the 9.0 percent depreciation recorded in 2022.

Pressure on the shilling is coming from:

The high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand have been putting pressure on the local currency.

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 69.3 percent of Kenya’s External debt was US Dollar denominated as of October 2022.

A continued hike in the USA Fed interest rates in 2022 to a range of 4.25 – 4.50 percent in December 2022 has strengthened the dollar against other currencies by causing 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 for the year 2022, representing an 8.3% y/y increase from a cumulative USD 3.7 bn recorded in 2021.

Notably, on an m/m basis, the remittance for the month of December 2022 increased by 3.4% to USD 0.4 bn, from USD 0.3 bn recorded in November 2022.

Sufficient Forex reserves currently at USD 7.4 bn (equivalent to 4.2 months of import cover) as of 12^th January 2023, which is above the statutory requirement of maintaining at least 4.0 months of import cover.

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