The Kenya shilling weakened slightly to Sh109 yesterday having strengthened last week to  Sh108 to the dollar from Sh112 the previous week.

Consequently, commercial banks sold dollars following rising supply caused by a US stimulus package.

The US President Donald Trump had approved $900 billion (Sh99 trillion) stimulus package flooding the world with dollars to lift sinking currencies.

“Locally, nothing has happened in the last few weeks to warrant the recovery of the shilling, it is all tied to the US stimulus package,” said Cytonn Analyst Rodney Omukhulu.

Last week, commercial banks quoted the shilling at 108.80, giving a reprieve to policy holders who had been working hard to stop the currency fall.

The more than 8-month long devaluation caused by the Coronavirus pandemic put a strain to Central Bank of Kenya (CBK) reserves as open market operations failed to shore up the currency.

Tighter markets

“The money markets tightened pushing interbank rate up from 5.8 last week to 6.2 per cent and from as low 2 per cent in the past months. “This tight liquidity has also lent support to the currency,” said Omukhulu. 

“We expect to see an extension in the dollar weakness going ahead on further quantitative easing from the U.S.

Fed which will support emerging market currencies going forward,” said Cristian Maggio, head of emerging markets strategy at TD Securities to Reuters.

This means there will be reduced prices of imported commodities such as oil and farm inputs like manure as importers will need less shillings to purchase a dollar worth of merchandise. 

The advent of the Coronavirus pandemic closed Kenya’s export markets while shutting the door for tourists leaving the shilling exposed  due to lack of hard currency infloors.

The sharp turn of events sent the shilling on its longest losing streak falling from Sh101 to Sh 112 to the dollar and even lower.

Central Bank open market operations failed to salvage the situation as currency dealers quoted the currency to as a low as Sh114 to the dollar. 

The reduction in imports due to the virus helped improve the balance of payment but Kenya’s over reliance on food and energy imports continued to pile pressure on the currency. The demand for dollars to service foreign debt weighed heavily.

Currency dealers weary of central bank reprisal started quoting a stronger currency to the media but admitted was much weaker than reported. 

Low dollar demand

The currency is also being supported by low Christmas dollar demand for imports as corporates have closed their orders until next year.

A weak shilling translates into higher fuel prices and other imports such as food stuffs, fertilisers, electronics and machinery imports. It raises the cost of medicine and even second hand clothes.

CBK’s usable foreign currency reserves for instance fell slightly by Ksh.1.3 billion ($12 million) even as the reserves cover for imports remained unchanged at 4.8 months.

Analysts maintain that the shilling remains exposed until all foreign exchanges sources fully recover and debt is brought down to manageable levels.

With opening of businesses this week demand for dollars could increase as corporates out in orders to honour their foreign obligations and imports.