Shilling in rare upturn, records biggest gain in three years

Kenya shilling notes.

Kenya shilling notes.

The Kenya shilling on Tuesday gained at the fastest pace in three years against the US dollar after it added 0.73 percent value to trade at 160.19 compared to 161.36 on Monday.

This marked a surprise shift from a long-running depreciation trend that saw the local currency shed more than 26 percent value against the greenback last year.

Official data from the Central Bank of Kenya (CBK) shows that the shilling last made similar level gains during the Covid-19 pandemic era, on December 23, 2020, when it added 1.46 percentage value against the dollar.

At the time, the local currency strengthened to trade at 109.44 against the dollar compared to 111.04 on December 22.

Read: Kenya shilling's free fall slows down on rising dollar inflows

Latest trends in the past nine days point to a shilling that is finding its new level, having broken the pattern of sustained daily losses to post a gain in five days against four loss-recording days, in stark contrast to previous weeks where it would record just one or two gains in a 30-day period.

“If you are getting days of strengthening, then that begins telling you that the market is improving. It is a positive sign and shows that liquidity may be returning to the interbank forex market,” Muathi Kilonzo, frontier equity sales and head of equities Kenya at EFG Hermes told the Business Daily.

The apex bank’s average has also maintained close similarity with the buy/sell average as quoted by banks, with Equity Bank, for example, Wednesday quoting the dollar at Sh164 on the sell end and Sh158.5 buying, while I&M quoted it as Sh166.9 selling and Sh161.9 buying.

Last October, CBK governor Kamau Thugge told Parliament that the shilling had for years been overvalued by up to 25 percent, suggesting at the time that the then prevailing free-fall of the currency would extend for a while before flattening out.

During the 12-month period to December last year, the shilling depreciated by more than 26 percent, which was an over three-fold rise in the devaluation rate compared to the 8.3 percent it shed against the greenback in the whole of 2022.

Last year’s performance was the worst for the shilling in 30 years, having previously shed a record 89 percent value against the dollar in 1993 on the back of near hyperinflation the previous year.

But while the current trend would easily be construed to be pointing to a way out of the woods at last, pundits have warned that the mild strengthening cannot be used to claim a reversal of the free-fall.

“The slowdown (of the depreciation) is more out of regulatory interventions than it is attributable to demand and supply factors such as narrowing of the current account deficit on a growing export base, which would lead to a stronger currency,” observes Willis Nalwenge, an investment manager at Orient Asset Managers Limited.

“The local currency seems to be currently supported by the utilisation of forex reserves which widened on receipt of International Monetary Fund (IMF) funding for budgetary support. We expect that when the forex reserves decline on upcoming debt payments, the shilling will be left vulnerable as it has been,” he said.

Further, Mr Nalwenge projects that the shilling depreciation will continue until the end of the current year courtesy of high demand for energy imports coupled with low inflows as exports keep shrinking.

Read: Kenya shilling official exchange rate against dollar hits 150

Last month, the banking sector regulator hit the market with a two percentage point increase in its base rate to 12.5 percent in the hope that a transmission of higher rates into the country’s financial assets would attract foreign inflows and support the shilling.

In its decision, the CBK’s Monetary Policy Committee noted that the exchange rate depreciation had continued to exert pressure on domestic prices.

If the local currency makes a rebound from the depreciation as the current trend suggests, it will spell a sigh of relief for importers that pay foreign institutions as well as hard currency borrowers who have taken forex losses hit by the sustained weakening of the shilling.

It will also aid in stemming the ballooning of dollar-denominated public debt that was reported to have expanded by an extra Sh65 billion during the year to June 2023 on the subdued currency.

The shilling’s recovery will, however, spell doom for expatriates, locals with dollar-denominated salaries, exporters and recipients of diaspora remittances who have reaped a significant windfall from its devaluation.

[email protected]