The Kenya shilling hit a new historic low yesterday to trade at 108.55 units to the US dollar, signalling rising costs of imports of raw materials and finished goods such as petroleum products, wheat, vegetable oil and motor vehicles.
The local currency has come under pressure in recent months as demand for dollars surged and supply squeezed by lack of tourists and a reduction in commodity exports.
The shilling has depreciated 5.7 percent from March 12 – the day the country recorded its first case of coronavirus— when it traded at 102.3 units to the greenback.
It has also been dragged down by demand for hard currencies from importers resuming business after the State started to ease coronavirus containment measures in July.
“This was likely a result of increased dollar demand with less supply. The demand was been driven by two forces; the first one being the Central Bank of Kenya (CBK) communication of the intention to buy $300 million from commercial banks for three months (March, April and May),” the Parliamentary Budget Office (PBO) said of the shilling’s rapid weakening in recent months.
“The second one was, the possible buying and hoarding of dollars as a result of panic in the market caused by uncertainty due to the Covid-19 pandemic.”
Rich individuals and big companies, seeking a safe haven for their wealth, stockpiled a record Sh45.5 billion in dollars in the three months to May when Kenya imposed restrictions to curb the spread of the virus.
CBK data shows that foreign currency bank deposits held by Kenyans hit a historic high of Sh671.4 billion, up from Sh625.9 billion in February, one of the largest three-month jumps.
This is an indication that the wealthy are protecting the value of their cash holdings rather than seeking new areas to invest their fortunes.
Part of the jump was also attributed to the weakening of the shilling, which inflated dollar accounts when converted to local currency.
The dollar has traditionally been a safe haven during periods of global economic turmoil when currencies of frontier and emerging countries tend to lose their value by significant margins.
The PBO said in its report that the local currency could weaken further in the short term as imports rise and various parts of the economy remain subdued.
“Going forward, the value of the Kenya shilling is expected to decline further as importation picks up, pushing the dollar demand upwards,” the PBO said.
“The tourism sector, which is expected to alleviate the pressure by earning foreign revenue for the country, may not earn much in the second half of the year due to reduced international travel on account of Covid 19.”
The shilling’s weakening risks raising inflation, which dropped to 4.36 percent in August, largely due to suppressed consumer demand.
Businesses have reduced their capital spending while consumers’ wallets have been battered by a mix of retrenchment, pay cuts and unpaid leave cutting across diverse sectors, including tourism, trade, education and entertainment.
Kenya imports a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery whose costs are rising.