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Currency Rollercoaster: Shilling’s Epic Slide Sets Records

BY Standard Investment Bank · January 5, 2024 07:01 am

In 2023, the shilling hit a record-high slide against the dollar, losing 26.8% in what seemed closer to the depreciation recorded in 2008 following the post-election violence – the depreciation was largely attributable to the supply and demand mismatches in a year marked by significant investor flight.

As a net importer, Kenya is susceptible to currency-related inflation, given that a significant portion of its goods is transacted in dollars – this implies that even a modest depreciation of the shilling exposes the country to increased prices of imported goods.

However, the current account deficit narrowed to 4.4% of GDP as of June 2023, from 5.1% of GDP in June 2022. The shilling also depreciated against other relevant currencies with the steepest slide being observed in the British Pound (34.3%).

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The shilling lost 19.8% and 15.0% against the UGX and TZS. In 2023, the shilling hit a record-high slide against the dollar, losing 26.8% in what seemed closer to the depreciation recorded in 2008 following the post-election violence – the depreciation was largely attributable to the supply and demand mismatches in a year marked by significant investor flight.

Over the same period, forex reserves fell below the CBK’s statutory requirement which endeavors to maintain at least 4 months of import cover, and ended the year at the second lowest since the year began.

The official forex reserves ended the year at USD 6.61b, an 11.1% decline from USD 7.44b at the end of 2022. The decline was primarily attributable to the coupon payments of the existing Eurobonds and most recently the USD 68.7mn paid towards KENINT2024.

The apparent scarcity of dollars is presumed to have compelled the government to utilize the available reserves for meeting interest payment obligations. Additionally, it is observed that the inflows traditionally received at the end of each year under the IMF program are scheduled for January – these inflows have been replenishing the foreign exchange reserves.

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