The Meltdown For The Kenyan Shilling Continues, Sheds 1.1% In A Week

The Kenya Shilling depreciated by 1.1 percent against the US dollar to close the week at 131.3 shillings from 129.9 shillings recorded the previous week.

The depreciation of the shilling during the week was partly attributable to increased dollar demand from manufacturers and importers, especially oil and energy sectors against a slower supply of hard currency.

On a year-to-date basis, the shilling has depreciated by 6.4 percent against the dollar, adding to the 9.0 percent depreciation recorded in 2022.

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. The high crude oil prices have inflated Kenya’s import bill and as a result, petroleum products imports have continued to weigh heavily on the country’s import bill and accounted for 27.6 percent of the total import bill in Q3’2022.

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Pressure will also come from an ever-present current account deficit estimated at 4.9 percent of GDP in the 12 months to January 2023, from 5.6 percent recorded in a similar period last year.

At the same time, 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 interest rate hikes in the USA and the Euro Area with the Fed and European Central Bank increasing their benchmark rates to 4.75-5.00 percent and 3.50 percent respectively in March 2023, which has strengthened the dollar and sterling pound against other currencies following capital outflows from other global emerging markets.

The shilling is however expected to be supported by diaspora remittances standing at a cumulative USD 658.6 mn in 2023 as of February 2023, albeit 0.3 percent lower than the USD 660.3 mn recorded over the same period in 2022.

The shilling will also be supported by the tourism inflow receipts that came in at USD 268.1 bn in 2022, a significant 82.9 percent increase from USD 146.5 bn inflow receipts recorded in 2021.

Key to note, Kenya’s forex reserves remained relatively unchanged at USD 6.6 bn as of 23^rd March 2023, similar to what was recorded the previous week.

As such, the country’s months of import cover also remained unchanged at 3.7 months, similar to what was recorded the previous week, and below the statutory requirement of maintaining at least 4.0 months of import.

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