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Shilling to come under pressure as the year ends


The shilling has been shedding its value. FILE PHOTO | NMG

The shilling is expected to continue losing ground against the dollar by the end of the year according to economists at Commercial Bank of Africa (CBA).

The latest update by the lender’s researchers says the shilling will continue to depreciate to cap the close of the year at Sh103 but the Central Bank of Kenya (CBK) is expected to step in and slow the fall.

“The shilling lost 0.5 per cent to the US dollar to trade at 102.50 levels in November,” they said.

“Persistent pressure in spite of the squeeze in liquidity could suggest genuine underlying demand and potentially push the unit closer to 103.00 by year-end.”

The CBK has sold dollars in the market to arrest a drop in the shilling’s value. The shilling is currently trading at the Sh102.35-102.50 level against the dollar having strengthened from Sh103.1 a month ago.

“The apparent bias for smooth exchange rate depreciation has necessitated heightened intervention from the regulator, using a combination of foreign exchange reserves and outright shilling liquidity mop-ups using repos,” said CBA researchers.

Repo rates have risen to 8.9 percent presently, dragging the interbank rate above eight percent, beyond the yield on the 91-day T-bill currently at 7.343 percent.

“The tightness, a clear depar. ture from the MPC guidance, may persist through December as central bank seeks to contain excess volatility on the currency,” said CBA. Kenya’s official foreign exchange reserves have fallen to the lowest level since March as the CBK fights to maintain them above five months of import cover.

The reserves fell by Sh7.6 billion ($74 million) in the week to December 6 to stand at Sh816 billion ($7.965 billion), equivalent to 5.27 months of import cover. This is the lowest amount since March 8 when it stood at Sh733 billion ($7.155 billion).

The CBK uses the reserves to intervene in the forex market, repay foreign currency-denominated debt or pay for government-related foreign purchases.

The reserves have been high since the borrowing of Sh200 billion ($2 billion) through a Eurobond early this year. They jumped sharply to Sh905 billion or $8.831 billion, covering nearly six months of imports, as at March 1.