Currencies

Shilling hits new historic low of 109.2 to dollar

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A trader holds bank notes. FILE PHOTO | NMG

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Summary

  • Monday’s run marked the eleventh straight day of trading the shilling has lost ground against the dollar.
  • The sustained weakening of the Kenyan currency raises the prospects of pushing up living costs.
  • Analysts are attributing the latest fall on heightened demand for the foreign currency as importers raise stock levels.

The shilling hit a new historic low on Monday to trade at 109.23 units to the US dollar, signalling rising costs of imports of raw and finished goods such as petroleum products, wheat, vegetable oil and motor vehicles.

The local currency has come under pressure in recent months as demand for dollars surged in a period that has seen supply of dollars get squeezed by lack of tourists and a reduction in exports of other commodities.

Monday’s run marked the eleventh straight day of trading the shilling has lost ground against the dollar since touching 108.83 on November 2 and has shed Sh6.81 since March 13 when Kenya reported its first Covid-19 case.

Analysts link the weakening shilling to increased dollar demand and dim outlook for exports in the wake of renewed lockdowns in Europe following a second wave of Covid-19 infections.

Countries such as France, Austria, Germany, Portugal and Sweden have implemented a second wave of lockdowns to battle fresh Covid-19 infections, raising fears it could hit the export of items such as flowers, fruits and vegetables.

The shilling has also been dragged down by demand for hard currencies from importers resuming business after the State started to ease coronavirus containment measures in July, which has seen businesses increase activities.

“The second wave of lockdowns in European countries has softened the recovery of exports such as flowers because we expect business to be lost,” said a senior currency trader at a commercial bank.

“Generally there is a lot more dollar demand than supply. The fact that we are selling reserves to support the shilling yet we have debts to repay means at some point we will also be buying.”

The sustained weakening of the Kenyan currency raises the prospects of pushing up living costs in a country that largely depends on imports for its consumer and capital goods, especially fuel and industrial raw materials.

Kenya imports a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery.

Goods exporters normally gain in in an environment of weakening local currency since they end up with more money in shilling terms. However, the weak export market looks set to blunt such advantage.

Analysts are attributing the latest fall on heightened demand for the foreign currency as importers raise stock levels to meet the rising demand for goods and services on relaxation of trade and travel curbs.

October findings of the Stanbic Bank Kenya’s Purchasing Managers Index (PMI) survey showed that firms stopped layoffs and raised the number of workers on their payroll for the first time since February to meet the rise in demand.

Corporate activity has been lifted by more firms resuming operations and others increasing factory floor activities after the easing of some restrictions imposed to stem the spread of Covid-19

The Central Bank of Kenya (CBK) foreign exchange reserves have come under pressure, declining from $8.417 billion mid-March or 5.11 months import cover to $8.121 billion at the close of last week.

However, the CBK maintains that the current forex reserves, an equivalent of 4.93 months import cover, is an adequate arsenal to deal with volatilities.

The CBK’s statutory requirement is to maintain at least four months of import cover, while the East African Community’s minimum is 4.5 months of import cover.

Bank executives polled by the CBK in September had expected the shilling to come under pressure this month due to the US elections and lower capital flows and tourism earnings among other factors.

Non-bank firms expected the pressure on the shilling to arise from increased imports, concerns on external debt obligations and the continued uncertainty brought about by the infectious virus.

Kenya’s public debt touched Sh7.12 trillion in September, a Sh1.157 trillion rise since September last year, with Sh835 billion or 72 percent of it coming in the Covid-19 period.

The shilling has been unstable since mid-March when Covid-19 struck, ushering in major economic disruption as the government moved to control spread of the infectious virus.

The fall became more pronounced from July 6 when President Uhuru Kenyatta opened up Nairobi, Mombasa and Mandera counties and announced resumption of local air transport in bid to restart the economy.