Currencies

Shilling breaches Sh110 mark in historic plunge

shilling

Kenya currency notes. FILE PHOTO | NMG

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Summary

  • Though the local currency clawed back some ground to close at Sh109.90, its performance is expected to remain shaky in the short-term.
  • The exchange rate could feel more pressure towards the end of the year on rising demand from the corporate sector making new orders and government repayment of coupon debt.


The shilling on Thursday breached the Sh110.05 mark against the dollar during early morning trade, extending a run of record weakening, with analysts projecting further slumps on increasing demand for the greenback towards the end of the year.

Though the local currency clawed back some ground to close at Sh109.90, its performance is expected to remain shaky in the short-term due to declining foreign exchange inflows, which have always come in handy in stabilising the shilling through interventions in the repurchase agreements (repo) market.

“The shilling is taking a hit because of the demand of the dollars amid an import bill that has gone up,” Kenneth Minjire, a senior associate, debts and equity at AIB-AXYS Africa said.

Banks had projected that the shilling would be supported by sufficient foreign exchange reserves, strong diaspora remittances, recovery in agricultural exports and expected weakening of the dollar over the US elections.

However, the Central Bank of Kenya (CBK) has seen a massive dip in foreign reserves over the past few months due to external debt serving obligations and importers demand for the dollars following the resumption of business activity on easing of coronavirus containment measures by the government.

The reserves dropped to a seven-month low of Sh867.72 billion in the week to November 19, from highs of $9,717 million (or 5.84 months of import cover) in July, when they were backed up by loans from international institutions such as the IMF and the World Bank.

“The US elections coming to an end successfully has also seen the strengthening of the dollar even with the expectations for its weakening affecting the shilling,” he added.

The drop in reserves coincided with growth in import bill to Sh419.92 in the third quarter from Sh350.06 billion in the previous quarter.

Export receipts also grew to Sh162.57 billion from Sh138.46 billion under the period — an improvement Mr Minjire, however, partially linked to the weakening of the shilling.

The Covid-19 pandemic has also led to lower capital inflows and tourism earnings.

Mr Minjire has said the exchange rate could feel more pressure towards the end of the year on rising demand from the corporate sector making new orders and government repayment of coupon debt.

The government is expected to spend $223.15 million (Sh24.32 billion) in debt service this month and another 325.22 million (Sh35.74 billion) in December according to World Bank debt repayment tracker.