A weakening shilling yesterday breached the 89 units exchange rate to the US dollar, touching a three-year low even as the Central Bank weighed in with a Sh20 billion mop-up of liquidity from the market.
The local currency has been gradually weakening against the dollar since the beginning of July and yesterday briefly touched a low of 89.05 units to the dollar before closing at about 88.95. CBK has been supporting it through dollar sales to the banking
system since late August, when the market started recovering from a liquidity crunch after delays in Treasury disbursements.
“What has been holding up the shilling from moving past the 89 level is CBK action. The usual demand for dollars from manufacturers and the oil sector is there, but the usual corresponding inflows from the three sectors of tea, tourism and horticulture are not keeping up with demand,” said Bank of Africa forex dealer Robert Gatobu.
“The shilling has been weakening based on fundamentals and not due to speculative actions in the market. It can be supported through CBK action only for a limited period, and if we don’t get direct selling from the regulator this week, we might weaken to 89.50.”
I&M Bank head of trading Sheikh Mehran told Reuters earlier yesterday that there was also demand for dollars coming in from the telecommunications sector and the inter-bank market, heaping further pressure on the shilling. The weakening shilling will hurt importers who will now have to pay more to acquire the dollars needed to pay for goods.
For exporters, the weakening currency translates into more earnings when they convert their dollars to shillings.
The Central Bank has regularly soaked up excess liquidity since last year. On Friday, the bank drained excess liquidity for the seventh trading session in a row. The action supports the shilling by making it more costly to hold dollars.
Having quoted the shilling at 88.85/95 to the dollar in the morning, commercial banks reported that the currency weakened through the day and was exchanging at 88.95/89.05 at the close of trading in the afternoon. In the indicative CBK rates posted yesterday morning, the regulator pegged the shilling at 88.81 to the dollar compared to Friday’s 88.79.
The local unit closed at 88.80/90 last Friday, when CBK had come in with another Sh10 billion mop-up of excess liquidity, taking last week’s total to Sh43.2 billion through repos and term auction deposit.
The tea and tourism sectors, which are leading foreign exchange earners, have seen volume of inflows drop this year due to low world prices and reduced visitor numbers respectively.
The price of Kenyan tea at the Mombasa auction last week averaged $2 (Sh176) per kilogramme, compared to $2.22 (Sh190) at the point in 2013. The average price for Kenyan tea at the auction in 2014 has been $2.20, compared to an average of $2.68 per kg in the nine months to September 2013. The drop in world tea prices has been blamed on a production glut.
The drop in tourist numbers has come at a cost of billions of shillings following travel advisories issued in the wake of gun and grenade attacks in Nairobi, Mombasa and Lamu, with hotels at the Coast reporting high-season bed occupancy of 20 per cent against the 60-70 per cent they need to break even.
Federation of Kenya Employers (FKE) said that the hit on inflows from tourism could be as high as Sh40 billion as per estimates of the hoteliers, in a sector which brought in Sh93.97 billion last year.
“There is an effect on jobs and the supply chain affecting various subsectors as well. The government has been carrying out some measures to improve the situation although we are yet to see the fruits of these actions,” said FKE in a reply to the Business Daily queries.
The Central Bank could yet allow further depreciation in line with market fundamentals, as it may not have sufficient dollars to support the currency in the long term.