The shilling is unlikely to weaken significantly against the greenback this year due to support from regional investment inflows and a proactive CBK stance in ironing out volatility, a top economist at global lender Citi has said.
The domestic currency has so far bucked the depreciation trend of African currencies against the dollar, strengthening to a 10-month high of 100.03 to the greenback.
Citi chief economist for Africa David Cowan on Tuesday said analysts have consistently overestimated the shilling’s depreciation against the dollar based on the twin deficits, current and fiscal.
In the process they have failed to account for other unique capital inflows into the country that prop up the currency, courtesy of Kenya’s position as an economic safe haven in an unstable region.
“Although Kenya is running large deficits, there are large capital flows into the country to offset the effect; the kind that are not seen elsewhere in Africa,” said Mr Cowan.
“While foreign direct investment and portfolio inflows remain rather low, the country has continued to get other flows—of more than $2 billion in our estimates— that are coming from regional countries into the local property and some into the stock market.”
Kenyans living abroad have also been sending in significantly higher amounts back home, hitting a record Sh270 billion ($2.7 billion) in 2018, which has helped the shilling amid flat export growth.
Citi is now projecting the shilling to stand at around 102.30 to the dollar by the end of the year, which—discounting the recent gain—would be nearly at par with the level at which it opened the year.
Central Bank has also been seen to quickly iron out volatility in the exchange rate, and possesses a substantial forex reserve war chest with which to defend the shilling.
Mr Cowan said although there are limits to which a regulator would be willing to use up reserves in currency management, the CBK is unlikely to face this problem in the short term due to potential dollar inflows from the government’s foreign loan proceeds.