The Kenya Shilling has hit a new low of 129 Kenya Shillings (KES) against the US dollar as concerns mount over scarcity of the US currency and its impact on the East African economy.
Over the last 12 months, inflation in Kenya has increased causing degradation of the Kenya Shilling by nearly 12% from KES 114.35 to nearly KES 130 to the dollar, as illustrated in the chart below:
The increased expense of the dollar means commodity prices abroad continue to become expensive for Kenyan importers and manufacturers contributing to further economic deterioration. According to local reports, importers are currently buying a dollar at up to 147 causing an increase in commodity prices with inflation likely to increase again after rising to 9.2% in February 2023 from 9% in January 2023.
The inflation rate of 9.2 percent was said to be the third-highest recorded since last year when Kenyans started experiencing the impact of high commodity prices and put the rate back in the ‘red zone’ surging beyond the Central bank’s upper limit of 7.5%.
Analysts point to the higher interest rates in the US as one reason driving up the Shilling.
“A strong recovery in the dollar index is likely to push the USDKES to 130 as demand for US treasuries continues to rise because of higher interest rates,” said Kenyan financial analyst, Rufus Kamau.
But a recent Bloomberg report says Kenya’s foreign reserves have been facing mounting pressure due to the impact of high oil prices, resulting in a decline to $6.57 billion as of March 9 2023, which is equivalent to 3.67 months of import cover.
Central Bank of Kenya however has put this figure slightly higher, in a weekly update.
“The usable foreign exchange reserves remained adequate at USD 6,560 million (3.66 months of import cover) as at March 16 2023. This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover.”
Kenya relies primarily on tea exports, tourism receipts, diaspora remittances, and horticulture shipments, to generate the foreign currency necessary to pay for imports and service external debt.
On the domestic side, the East African nation is said to be experiencing dry weather conditions coupled with severe drought in certain parts of the country that have caused reduced yields on farm produce leading to an increase in prices.
Local analysts also point to external debt repayment obligations as contributing to the overall scarcity of foreign exchange.
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