Kenya Shilling Maintains its Position on the Receiving End for Two Months in a Row

By Amina Faki,

The Kenya Shilling depreciated by 0.3 percent against the dollar on Tuesday to close at 103.9 shillings from 103.7 shillings previously, mainly driven by increased dollar demand from merchandise and oil importers.

On a year to date basis, the shilling has depreciated against the dollar, pound, and euro by 1.4 percent, 6.63 percent, and 10.56 percent respectively.

Liquidity remained tight in the market that saw the Central Bank of Kenya (CBK), in a bid to ease the liquidity situation in the market, participate in the reverse repo market, injecting 8.9 billion shillings last week.

The CBK Weekly Report revealed that the interbank rate increased by 80 bps to 8.3 percent, from 7.5 percent registered the previous week, a reflection of the skewed liquidity distribution in the money market towards larger banks.

The shilling will remain relatively stable in the short term, supported by:

(i)         The Forex reserve level currently at 7.9 billion US Dollars equivalent to 5.2 months of import cover.

(ii)        The IMF precautionary credit facility of 1.5 billion US Dollars equivalent to 1.0 more month of import cover that Kenya can utilize to stabilize the shilling in the case of adverse movement in the Forex market.

Cytonn Investment in a weekly report projected an upward pressure on food prices come 2018, which might lead to an increase in the inflation rate and could also have an impact on the currency as the country may rely on imports to supplement the food shortage gap.