Shilling drops to 32-month low on importer demand

The shilling Monday opened the week at an official 32-month low of 88.33 to the dollar amid sustained demand pressure from importers and delayed impact of insecurity incidents.

Dollar demand by oil marketers and industrialists has piled pressure on the local unit despite tight liquidity which would normally help to buoy the shilling through its limited supply.

Commercial banks quoted the currency at an average of 88.60/70 with dealers saying low inflow of dollars coupled with end-month demand is pushing the currency down.

According to Robert Gatobu of the Bank of Africa, the tight market liquidity has only helped to keep the shilling from a sharp decline but has not been sufficient to protect the local unit from depreciating against the dollar in the face of increased demand and low hard currency inflows.

“We are now seeing the real effects on dollar inflows of the insecurity that gripped the country sometime back, which could not have been felt immediately,” Mr Gatobu said.

“Unless there is intervention from the regulator we might see the shilling touch the 89 level since we don’t see any other source that will increase the inflows at the moment,” said Mr Gatobu.

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He said the current subdued government spending means the sectors, such as the construction industry, that depend on government payments for cash flow are likely to delay their dollar demand into early September as the payments are gradually effected.

According to CBK, the money market remained relatively tight through last week, owing to the continued remittance of taxes to the Treasury by commercial banks and the pending government payments.

CBK, which injected Sh38 billion into the market through reverse repo in the first week of August, was absent from the money markets in the past week even as the shilling went above the 88 level.

“The Central Bank liquidity management committee stayed out in order to allow the market to redistribute the available liquidity,” said CBK in its latest weekly bulletin.

Central Bank has in the past been seen to come into the market when the shilling touches the 88 level to the dollar, with forex dealers saying that the gradual depreciation this time round could be one of the reasons the regulator has stayed off the market so far.

The shilling has been ceding ground to the dollar gradually in the past two months as opposed to a sudden drop.

CBK has always stressed that it does not target a particular level or direction of the exchange rate, but comes in to stem excessive volatility brought by external shocks or to cover a short-term shortage of foreign exchange liquidity in the market.

External debt

One result of the tight liquidity has been an increase of the interbank rate that currently stands at 13.45 per cent, the highest for two years.

While there is a negative implication of a weaker shilling as it implies higher costs in financing imports, it also means lower foreign prices for Kenyan exports which increase the competitiveness in the world market at a time when the country is in need of increased dollar inflows.

However, it will translate into higher payment of rising external debt.