Exchange rate slide pushes shilling past 95 units mark
The shilling crossed the 95 units to the US dollar level on May 5, 2015, continuing a losing streak that saw it drop past 98 units to the dollar within a month. PHOTO | FILE
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A weaker currency and its effect on inflation are expected to be one of major issues on the table when the Monetary Policy Committee (MPC) meets in Nairobi Wednesday morning.
Traders said that a breach of the 95 mark to the dollar is likely to yield a slide to exchange levels of 95.50 and 96 units to the dollar in the near term.
Kenyans are therefore likely to feel the pinch as the shilling weakens further, with imported household products, fuel and motor vehicles becoming more expensive.
The Kenya shilling Tuesday crossed the 95 units to the US dollar level, continuing a losing streak that forex traders said could see it drop to 98 units to the dollar by end of year.
Commercial banks quoted the shilling at 94.90/95.00 to the dollar, having weakened slightly from Monday’s 94.80/94.90.
The Central Bank of Kenya’s mean indicative rate issued ahead of the day’s trading quoted the shilling at 94.76, compared to 94.64 on Monday.
“The market has breached the 95.00 level. As the depreciation is not too sharp, it is unlikely that we shall see any market intervention by the CBK,” said Ecobank Kenya country treasurer Bobby Otieno.
“Month-end demand for forex will begin to taper off towards the end of the week and early next week but we expect the shilling to remain under pressure.
The weaker shilling is expected to raise the cost of living in a country that largely depends on imports for consumer goods and for capital goods needed to drive its commercial (manufacturing) sector.
Traders said that a breach of the 95 mark to the dollar is likely to yield a slide to exchange levels of 95.50 and 96 units to the dollar in the near term.
The shilling’s relatively quick slide to a low of mid 90s against the dollar has beat the general expectation that the local currency would weaken only progressively to reach the current levels at the end of the year. Mr Otieno said that the shilling’s rapid slide means the exchange rate could end up anywhere between 95 and 98 to the dollar by year-end.
The shilling has depreciated by a margin of 4.5 per cent to the dollar this year, which has largely been attributed to a global strengthening dollar, and reduced foreign exchange inflows from tourism, trade and agriculture.
Reduced dollar inflows have also come against a rising import bill, thus negatively impacting on the balance of trade, which according to data from the Kenya National Bureau of Statistics saw the current account deficit widen from Sh911 billion to Sh1.08 trillion between 2013 and 2014.
Inflation has also risen in the past two months, standing at an eight month high of 7.08 per cent last month, according to data from KNBS. Inflation is being pushed up by rising prices of food that have piled pressure on lower income households.
Kenyans are, therefore, likely to feel the pinch as the shilling weakens further, with imported household products, fuel and motor vehicles becoming more expensive.
Importers of capital goods, including those implementing infrastructure projects, are also facing higher costs.
The shilling has also resisted any gains in recent weeks when the dollar loses ground against major world currencies, indicative of the fact that some of the fundamentals weighing down the currency are purely domestic.
Lower liquidity in the money markets has also failed to offer the shilling much support other than slowing down the rate of depreciation and cutting volatility, according to dealers.
“Even as the overnight and Treasury bill rates go up — indicators of tight liquidity — we have not seen them helping stop the shilling’s slide,” said Commercial Bank of Africa senior dealer Joshua Anene. The dealers have, however, been complimentary of the efforts by CBK to control volatility of the exchange rate and thereby discourage speculative activity which was largely seen in November 2011 when the shilling slid to a record low of 107 units to the dollar.
The Central Bank of Kenya (CBK) has intervened in the currency market three times over the past one month with direct dollar sales to prop up the shilling when it breached key psychological levels.
The CBK has periodically reassured the market that it has sufficient reserves to support the shilling if necessary, and is also ready to apply appropriate monetary policy instruments to minimise exchange rate volatility.
The CBK’s foreign exchange reserves have contracted by Sh54.2 billion ($570 million) in the past four months, showing that it has been using its dollar pile to shore up the shilling, in addition to debt servicing.
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