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Shilling weakens against dollar after being static for 5 months
A teller handles US dollar banknotes and Kenya shilling banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya on February 16, 2024.
The shilling has weakened to its lowest level versus the dollar in over six months, as dollar supply in the market dipped on Friday, breaking a five-month run that saw the local currency remain static at between Sh129.23 and Sh129.26 against the US currency.
Official data from the Central Bank of Kenya (CBK) shows that the local unit traded at an average of Sh129.35 on Friday, with commercial banks indicating that it had edged lower to an average of Sh129.38 by Monday afternoon.
Before the marginal decline in the last three trading sessions, the dollar was trading within a tight band of between Sh129.23 and Sh129.24 since June.
In that period, the market was characterised by ample supply of dollars, which reduced pressure on the shilling while also allowing the CBK a window to bulk up on its dollar reserves through open market purchases.
Traders however reported that the availability of dollars in the market tightened from the latter part of last week, hence the shilling’s marginal weakening by about 0.1 percent.
“Dollar supply tightened from Thursday. We are waiting to see whether the regulator will intervene in the market with any sales,” said a dealer in a commercial bank, who added that the market was fairly balanced at the beginning of last week.
The shilling’s prolonged run at the 129 range, while good for businesses due to predictability of costs and earnings, has raised concerns recently from the International Monetary Fund (IMF) that it was interfering with inflation targeting.
However, the IMF did not give further details on its position that the shilling is overly stable against the dollar.
Kenya, as a member of the IMF, has obligations on its exchange rate dealings where it is required to to allow market forces to influence the currency market. In turn the IMF is tasked with overseeing the international monetary system to ensure its effective operation, a role that includes surveillance of members’ respective exchange rate policies.
The stability against the dollar is in contrast with the shilling’s performance against other major global currencies, having for instance depreciated by 4.6 per cent versus the British pound and 10.5 percent against the euro since the beginning of the year.
The shilling was stuck at the same level against the dollar despite the US currency becoming weaker globally this year, improved balance of payment receipts for Kenya and higher official forex reserves.
Earlier this year, the National Treasury disclosed that the CBK was taking advantage of the friendly market conditions to buy dollars from the market, which was also preventing further strengthening of the currency. The regulator’s position however remains that Kenya has a flexible rate policy, and it only intervenes to iron out volatility.
Speaking earlier this month, Treasury Cabinet Secretary John Mbadi said that the shilling would have strengthened to about 118 to the dollar if it had been allowed free movement in the face of improved dollar inflows.
By the end of last week, the CBK’s official forex reserves stood at a record high of $12.29 billion (Sh1.59 trillion), having risen by a third or Sh400 billion from $9.19 billion (Sh1.19 trillion) at the beginning of this year.
