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Shilling dips further as it approaches 16-month low

The shilling yesterday ceded more ground to the US dollar triggering alarm bells it could be heading for the biggest drop in 16 months. Yesterday, the local unit touched a mean of Sh103.60 against the dollar against Tuesday close of Sh102.80/103 on account of increased demand by manufacturers, importers and firms in the energy sector.

The shilling last traded at its present levels in mid-October 2015, when it hit a low of 103.50/60 on October 13. In 2011 the local unit touched an all-time low of Sh107. Analysts also attribute the slide to the pressure to higher prices of oil in global markets and looming interest rate hike by the US Federal Reserve Bank.

Johnson Nderi, head of corporate finance and advisory at ABC Capital told People Daily the shilling was also taking a beating from the country’s foreign debt which is paid in foreign currency and a spike in imports which are not in tandem with exports.

“Kenya imports food items ranging from wheat to maize and sugar, leaving it exposed to external shocks,” he said. Analysts now fear the local currency could weaken at a much faster pace this year, compared with 2016, as the country’s foreign-exchange reserves declined to $6.97 billion (Sh718 billion) at the end of December, the first time they have fallen below $7 billion (Sh721 billion) since January last year.

“The stability of the shilling last year was attributed to the high levels of foreign exchange reserves, increased diaspora remittances that rose from $1.5 billion in June 2015 to $1.7 billion in June las year, said Maurice Oduor, Cytonn investment manager.

Central Bank of Kenya (CBK) has this year been selling dollars to boost the shilling as it frequently did last year to keep the unit fairly stable, said Faith Atiti, an economist at Commercial Bank of Africa.

“They have several options, either let the shilling depreciate, and if the unit depreciates you’re talking about inflation so you need to raise interest rates, which doesn’t seem like an option right now,” she said.

Atiti said CBK has the option to tap the standby IMF $1.5 billion (Sh154 billion) precautionary loan to boost its reserves and defend the currency against the strengthening dollar, as demand for the greenback is expected to pick up ahead of the General Election in August.

“If you cannot beef up your reserves then it means inevitably the shilling depreciates at a much faster rate,” she said. Additional reporting by Bloomberg

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