Kenya shilling tipped to weaken further this month
By Noel.Wandera, November 6, 2023
The shilling is expected to depreciate against the dollar by between 1.6 and 2.3 per cent this month, further exerting pressure on the government coffers and increasing the cost of living in the country, KCB Bank economists have predicted.
They ay the depreciation will be driven by continued government debt servicing and higher demand for foreign (Forex) exchange to finance fuel bills.
Shilling started its free-fall in January when it closed at Sh123.4 against the greenback and has a year-to-date depreciation of 24-25 per cent, closing October 2023 at Sh153 – 154 to the US dollar. During the week ending November 2, it exchanged at Sh150.86 per US dollar compared to Sh150.27 per US dollar on October 26. The government is spending an estimated 34 per cent of its budget on debt servicing, with public debt repayment accounting for 48.6 per cent of the revenue this fiscal year.
A significant portion of Kenya’s external debt is denominated in US dollars, meaning that with a steadily depreciating shilling, the government is spending more shillings to pay back the same amount of debt, translating to higher foreign loan repayment costs, a factor that is exerting pressure on the forex reserves.
Forex reserves
According to Central Bank of Kenya’s latest data released for the period November 2, the public debt stood at Sh10.5 trillion as of August, up from Sh10.4 trillion in July, while usable forex reserves decreased to $6,814 million as of November 2 from $6,836 million.
The increased demand for US dollars has been fuelled by oil and energy as well as the manufacturing sectors. This increased demand, coupled with a low supply of dollar currency, can lead to a shortage of US dollar in the Kenyan market, and likely to contribute to the continued depreciation of the Kenyan currency.
This is even as the latest Purchasing Managers’ Index (PMI) deteriorated markedly in October, with the cost of living pressures and cash flow difficulties resulting in customer demand declining, while weaker output and lower workloads led to an increased rate of job cuts.