The year the shilling took a major beating - Beaking Kenya News

Beaking Kenya News

Where It All Happens

Breaking Kenya News


Thursday, 24 December 2020

The year the shilling took a major beating


The shilling opened the year well against major international currencies, consolidating its gains with hopes it would strengthen past 100 units against the US dollar in February. 

However, in March, coronavirus struck and the acceleration stopped. The downward trend is on and the local currency is now trading at the lowest level against almost all regional and international currencies. 

Until early December, the shilling was threatening to close the year at 115  against the US dollar, having shed almost nine per cent since March. 

The local currency, whose volatility is solely managed using forex reserves at CBK in absence of the International Monetary Fund (IMF) cautionary facility that expired in 2018 has shed seven per cent against the Starling Pound and almost six per cent against the Euro.

It has also lost considerable ground against regional currencies. It was being bought at 20.75 units against the Tanzanian shilling compared to the pre-Covid 19 rates of above 22.

The Kenyan shilling exchanged at 32.98 against the Uganda shilling compared to Sh34 in March before the local currency started to tumble. 

The continued drop of the shilling continues to hurt importers who are likely to pass the high bill to consumers, pushing up the cost of living in the country as families prepare for Christmas festivities. 

Although CBK has been releasing a sizable chunk of dollars in the market to iron out volatility, the drop is on, depleting forex reserves.

Kenya’s forex reserves fell by over 12 billion in the week ended Friday, December 11 as the Central Bank chipped in support of the shilling that continues to lose ground against major currencies.

According to the CBK weekly bulletin, the reserves fell to $7.84 billion (Sh905.5 billion) from $7.96 billion (Sh919.4 billion) the previous week, a  Sh13.88 billion drop.

Although the drop was the highest in past six months, the regulator said the available reserves are adequate to cover 4.82 months of import cover and meet the statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover.

The drop in forex reserve is worsened by the diminishing returns from the tourism sector, diaspora remittances and agricultural exports. 

The tourism sector which contributed approximately 1.3 per cent to Kenya’s GDP in Q3’2019, is facing hard times due to lockdowns after major economies where tourists originate.

Tourism CS Najib Balala projects the industry's income to drop over 70 per cent by the end of the year. 

Remittances to sub-Saharan Africa are forecasted to drop to $44 billion this year, down nine per cent compared to 2019.

This prediction by the World Bank is attributed to the pandemic currently hitting global economic activity.

Apart from high inflation, the drop in shilling's value is likely to worsen the country's debt obligation that currently stands at just over Sh7 trillion.

At least 70 per cent of Kenya's debt is denominated in the greenback. 

According to the annual Public Debt Management report by the National Treasury, the currency composition of Kenya's external debt stock comprise of the US dollar at 71.7 per cent, Euro at 14.9 per cent and Chinese Yuan at 6.17 per cent.

Others are the Japanese Yen at 4.3 per cent and the Sterling Pounds (GBP) at 2.6 per cent, while other currencies account for 0.3 per cent of the portfolio.

The International Debt Statistics 2021 by World Bank shows Kenya's external debt grew to $34.2 billion (Sh3.6 trillion) last year compared to $8.5 billion (about Sh900 billion) in 2009, mostly comprised of long term bonds. 

Even so, summer bunny dollars are positively changing the tide for the shilling as the year comes to a close. 

Yesterday, it opened 109.60 against the greenback, having strengthened two units since last Friday. 

Terry Magomere, a money market expert told the Star that Kenyans living abroad who have jetted into the country for Christmas festivities have splashed sizable dollars into the market, easing the shortage that saw rates spike. 

''Summer bunnies are here with their dollars. There is also low demand for the greenback by importers who have already brought in Christmas stock. The two factors are likely to see the shilling rise to 107 levels by December 31,''Magomere said. 

Apart from dollars coming in, last week, CBK is said to have used the small size of its forex stock to iron out volatilities in the market. 

According to CBK weekly bulletin, the size of forex reserves shrunk marginally to $7.83 billion (Sh853.5 billion) in the week ending December 17 compared to $7.85 billion (Sh856 billion). 

No comments: