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By Steve UMIDHA
The Kenyan shilling weakened to a new low against the dollar on Monday hitting a low of 149.35/55 per U.S. dollar, compared with Friday’s closing rate of 149.20/40.
The shilling, which has lost 17.4% of its value against the dollar since the start of the year, touched an all-time low of 149.40/60 earlier in the session. Ordinarily, demand for dollars comes from the energy and manufacturing sectors.
An increased import bill, investment portfolio outflows, and servicing of existing foreign debt have also resulted in the reserves falling below the statutory minimum of four months of imports, with the Kenya shilling depreciating to an all-time to the US dollar.
What’s worse a host of commercial banks are breaching Ksh150 threshold, intensifying the strain on the Kenyan shilling and setting the stage for potential price hikes across various imported items, ranging from electronics to vehicles.
This was however expected given that the National Treasury had in June this year projected the shilling could weaken further to 150.76 by the time it is repaying its debut Eurobond in June next year, signalling unabated pressure on the country’s exchange rate.
In February 2020, just before the outbreak of the coronavirus pandemic, the Kenyan shilling was trading at 100 against the US dollar. Since then, the greenback has strengthened by 50 percent to trade at 150 as at August.
Inflation and Purchasing Power
A significant drop in the value of the Kenyan shilling (KES) against other major currencies could lead to higher inflation. Imported goods become more expensive, which can increase the overall cost of living for the citizens. This can impact people’s purchasing power and their ability to afford essential goods and services.
Import Costs
A weaker currency can make imports more expensive, including critical items like fuel, machinery, and raw materials. This can affect various sectors of the economy, potentially leading to higher production costs and reduced competitiveness for local industries.
Investor Confidence
A sharp decline in the currency’s value might undermine investor confidence, both domestic and foreign. Uncertainty about currency stability can deter foreign direct investment and lead to capital flight, further weakening the currency.
Government Debt
If a significant portion of the government’s debt is denominated in foreign currencies, a weaker Kenyan shilling could increase the cost of servicing that debt, putting additional pressure on the government’s finances.
Central Bank Intervention
If the currency is weakening rapidly, the central bank might intervene in the foreign exchange market to stabilize the exchange rate. This can involve selling foreign reserves to buy back the local currency, aiming to slow down or reverse the depreciation.