Making Sense Of Kenya’s Weakening Currency
The shilling has been performing poorly against the US dollar and has reached three and a half year lows. This downward spiral of the Kenyan currency has been mainly attributed to the strengthening of the dollar against most currencies.
Since April, the shilling has been on a dwindling spiral and recently reached lows of 103 against the greenback.
Nonetheless, the strengthening of the dollar is not the only factor contributing to the weak shilling. The country has faced a shortfall in its foreign exchange reserves from the tourism and agriculture sector that have been performing poorly.
The tourism sector that has been the jewel in the crown for the East African country has been hit by terror attacks resulting in travel advisories by key tourist markets. Meanwhile, the agricultural sector, a backbone to the economy, has recorded mixed performance predominantly attributable to unreliable rains with some regions experiencing depressed rainfall.
As a result of the weakening of the shilling, the Central Bank of Kenya (CBK) has mopped up excess liquidity from the money markets to keep the currency afloat. In addition, CBK’s Monetary Policy Committee held an emergency meeting in June to discuss a way forward to stem the shilling. The committee raised its key lending rate by 150 basis points to 10 per cent for the first time since 2013. Nevertheless, this move did not tame the shilling and the committee met again to increase the benchmark lending rate by another 150 basis points.
The shilling has led to the increase of fuel prices in East Africa’s biggest economy, the rise in inflation figures albeit still with the government target of 2.5 to 7.5 per cent, which in turn has resulted to the rise in cost of living.
With this in mind, CBK recently released a statement reassuring its commitment to dampen volatility in the market.
“The central bank is monitoring the situation very closely and is taking appropriate measures to eliminate disorderly market developments…The CBK stands ready to enhance its open market operations and other measures, including intervening through direct sales of US dollars to commercial banks,” the bank said in a statement.
Moreover, CBK has implied that it has adequate foreign exchange reserves to prevent any further weakening of the shilling for the short term.
In 2011, the CBK was unable to tackle internal and external shocks shaking the economy and pushing the currency to its highest mark of 107 Kenya shillings against the dollar.
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