The shilling Wednesday weakened to a new record low of 108.40 against the dollar, pulled down by the scramble for hard currencies from importers resuming business following the easing of coronavirus lockdowns.
Given that Kenya is a net importer of goods, including vital commodities such as fuel, medicine, clothes, cars and industrial raw materials, a depreciating shilling makes the imports costly with the effect trickling down to all facets of the economy.
The shilling has shed 5.83 percent since March 13 when Kenya reported its first Covid-19 case and has breached forecasts of the local currency hitting a low of Sh107 against the dollar due to the pandemic.
The fall has, however, been sharp since July 6 when President Uhuru Kenyatta eased the restrictions, including allowing movement in and out of Nairobi and the port city of Mombasa as well as resumption of both international and domestic commercial passenger flights.
The shilling stood at 106.66 against the dollar ahead of Mr Kenyatta’s announcement.
Traders attributed this to a surge in demand for dollars by importers seeking to buy the US currency in sizeable chunks for the first time since March.
Head of research at Genghis Capital Churchill Ogutu said that oil importers have been raising their stock levels as travel restrictions eased.
“There has also been the issue of some corporates shoring up their dollar holdings in anticipation of dividend payments at some point. This gives a signal that they expect further weakening in the short term,” said Mr Ogutu.
In the meantime, the supply of dollars has been squeezed by a lack of tourists and a reduction in exports of other commodities, creating a pressure for the shilling.
The central bank has been selling dollars to banks to calm the market, which has also been affected by a rise in liquidity.
The weighted average interest in the overnight borrowing market has been hovering at about two percent for weeks, indicating a surge in liquidity, which usually makes it easier for traders to build up their dollar positions.
Head of research for Africa at Standard Bank Group Jibran Qureishi said the level of forex reserve is adequate for the Central Bank of Kenya (CBK) to save the shilling and take it below 107 units to the dollar.
“There is a lot of liquidity in the market and CBK has enough ammunition to sell dollars and slow down the moves we are seeing. I think the move is temporary and I don’t see it becoming a one-way street,” said Mr Qureishi.
“There is no enough import demand in the market despite the relaxation of Covid-19 measures to place pressure on the current account deficit. There have been some portfolio outflows from some custodial accounts but I think the CBK reserves give the regulator enough war chest to react.”
Energy sector operators are bracing themselves for tougher times as they will need more dollars to import petroleum as the price of crude continues to recover from last year’s historic lows. A higher exchange rate coupled with rising oil prices will make imported petroleum more expensive, raising the cost of transport, which in turn trickles down to the cost of goods — including fresh produce.
The higher cost of fuel and a weaker shilling will also impact the household energy budgets, potentially raising the fuel levy and forex adjustment components in the electricity bill.
Motor vehicle importers can also expect to fork out more when paying for their cars from abroad.