The Kenyan shilling is in the spotlight as diaspora remittances fell for a second straight month amid expected pressure from the demonetisation of the old Sh1,000 note that has raised liquidity in the market.
Diaspora remittances, which account for the largest share of Kenya’s foreign inflows, have grown significantly in the last two years, offering an important bulwark for the shilling against the dollar.
They have however been on a slide in July and August following the expiry of the tax amnesty offered by the Treasury to Kenyans holding wealth abroad to repatriate it home in June.
“Remittance inflows for August stood at $214 million (Sh22.2 billion) compared to $224 million (Sh23.3 billion) in July 2019, reflecting a decline of 4.5 percent,” the Central Bank of Kenya (CBK) said in last week’s market bulletin.
Cumulative inflows for the first eight months of the year rose slightly from $1.809 billion (Sh187.8 billion) in 2018 to $1.888 billion (Sh196 billion), reflecting the high remittances in the first half of this year.
The slower flow of dollars comes at a time when they are most needed given the pressure the shilling is experiencing partly due to demonetisation and rising oil prices due to geopolitical tensions in the Middle East.
Commercial banks were trading the shilling at an average of 103.80 Monday afternoon, compared to Friday’s closing average of 103.70 units to the greenback.
The home stretch to the deadline of demonetisation of the Sh1,000 note this week is expected to drive the demand for dollars, and those already holding hard currency becoming reluctant to part with it.
The market has been experiencing excess liquidity, forcing the CBK to mop up large amounts in open market operations.
On Monday, the CBK was in the market for Sh60 billion in seven-day repurchase agreements, managing to mop up Sh40.05 billion from banks at an average rate of 8.98 percent.
The CBK also has the option of falling back on dollar reserves should the exchange rate exhibit signs of volatility.