The Central Bank of Kenya had spent more than $300 million in about a month trying to slow the shilling’s fall against the dollar. Market watchers said the currency could end the year at 105 to the dollar if pressure persisted.
The CBK has been stepping into the market from time to time to limit sharp moves in the exchange rate. Those interventions helped push Kenya’s foreign currency reserves down to $8.15 billion at the end of last week, from $8.45 billion at the start of October, with further declines expected after another difficult week for the shilling.
On Thursday, the local currency touched a near 10-month low as import demand intensified, especially from oil companies. Commercial banks quoted it at 103.05/25 in early trade, a level last seen in mid-January 2018, when it traded at 103.15/25, according to Refinitiv data.
A senior trader at one of the Tier One commercial banks said excess shilling liquidity was helping banks buy dollars, while importers were also stepping up purchases ahead of the festive season.
Kenya’s import bill rose to $13 billion in the nine months to September 2018, compared with export earnings of $4.71 billion, according to Kenya National Bureau of Statistics data released a fortnight earlier. On the same day, Fitch Solutions warned that growth could slow and inflation could rise.
“We forecast the shilling to weaken to 103.5 against the dollar by end of 2018, down from 100.9 at the time of writing this report,” Fitch Solutions said in its report on regional currencies.
Over the previous month, the shilling had already lost 1.35 per cent. Renaissance Capital said it expected the currency to weaken further to 105 against the dollar by the close of 2018.
The International Monetary Fund had also raised concern in its staff review the previous month, saying the Kenyan currency could be overvalued by as much as 17.5 per cent and risked being viewed as managed rather than left to demand and supply.
The pressure on the shilling came at a costly moment for the government. A weaker currency increases the amount needed to service external debt, especially obligations falling due at the end of the month. National Treasury Cabinet Secretary Henry Rotich was therefore under pressure to keep the exchange rate stable, after the shilling had remained steady for the previous 27 months.
External debt repayments were projected at $3.6 billion in the financial year ending June 2019, with much of Kenya’s foreign debt payable in dollars. Capital Economics, the London-based research consultancy, said early in November 2018 that Kenya’s exposure to currency risk had risen because authorities had increasingly borrowed from international markets, leaving almost half of public sector debt denominated in foreign currency.
In September 2018, 30 of the 40 commercial banks polled by the CBK said they expected the shilling to weaken over the following 12 months, citing higher imports as economic activity recovered.
