Shilling to lose more ground against dollar

The shilling is likely to gradually depreciate this year and in 2016 as the US dollar strengthens and expectations of lower interest rates rise.

It is likely to weaken to Sh91 this year and lose more ground next year to Sh92, Standard Chartered Bank Plc head of research on Africa Razia Khan said in a forecast.

The event of the currency weakening spells good news for exporters but puts increased pressure on an import-dependent economy that has to fork out more Kenya shillings to afford foreign goods.

Going by Central Bank of Kenya (CBK) data, 2015 is the fifth straight year in which the Kenya shilling has begun the year weaker than it opened the previous one. In nominal terms, the unit has lost an average of Sh3 per year in the past five years and ended Wednesday on a three year low.

While the unit opened at a mean value of Sh90.82 to the dollar this year, it opened at Sh75.84 in 2010, thereby losing about Sh15 per unit over the five-year period.

Ms Khan said recent injection of $750 million into the forex reserves after the re-opening of the Eurobond, and CBK open market operation (OMO) will however limit any major weakness in the shilling.

“The $750 million re-tap of the Eurobond should add further to reserves, helping the CBK’s efforts to smooth any excessive currency volatility. With the CBK also actively draining liquidity from the market using OMOs, we forecast only a very gradual depreciation path for the Kenyan shilling in the year ahead,” said Ms Khan.

The Kenya shilling has for years been under pressure from a growing trade deficit fuelled by mega projects and a growing consumer demand.

Other analysts say the CBK is unlikely to put a lot of emphasis on controlling the value of the shilling and would rather concern itself more directly with inflation.

“It appears that the CBK is going to be more concerned about inflation and let the market determine the value of the shilling. So you can expect the weakening trend as seen in the recent years to continue. I think there is a tendency to favour exporters,” said Joshua Otiende, a research analyst at ABC Capital.

Mr Otiende noted there had been a nominal depreciation of the shilling in the past 10 years, a trend that was bound to continue.

In a separate report, ABC Capital attributed the weakness of the shilling in recent years – especially in 2010 and 2011 – to a loose monetary policy that saw double-digit growth in money supply.

“Money supply has been growing at double-digit figures over the past five years. Indeed, one could attribute the high inflation rates as well as the near-collapse of the Kenya shilling in 2010 and 2011 against major world currencies to the loose monetary policy deliberately pursued to boost economic growth,” said the ABC Capital report.