Shilling Continues to Weaken Against the US Dollar

Shilling Continues to Weaken Against the US Dollar

As per Central Bank of Kenya data, on July 20th, 2023, the exchange rate was recorded at KSh 141.70 per US Dollar, compared to KSh 141.29 per US Dollar on July 13th, 2023.

The continuous weakening of the local currency against the US Dollar poses challenges for importers, who are now facing higher costs for raw materials, machinery, and other foreign-sourced products. Conversely, exporters are benefiting from increased revenue in terms of Kenyan Shilling, due to higher earnings in foreign exchange.

Shilling Down by 13.94% vs USD in H1

Available data shows that at the end of the first six months of this year, the Kenya Shilling depreciated by 13.94% against the US Dollar to close at KSh 140.52 compared to a 4.16% decline or KSh 117.83 against the US$ at the end of H1, 2022.

Several factors have contributed to the local currency’s diminishing value against the US Dollar. Firstly, the US Dollar has strengthened against emerging market currencies, including the Kenyan Shilling. Additionally, the surge in global commodity prices has amplified the demand for the US Dollar, exerting further pressure on the Shilling. Furthermore, a reduction in Dollar earnings from Kenya’s agricultural exports has also played a role in weakening the country’s currency.

The dwindling foreign exchange reserves are also straining debt servicing capabilities, making it more challenging for Kenya to meet its external debt obligations. Moreover, the higher import bill caused by the weakened Shilling puts additional economic pressure on the country.

AIB-AXYS Expectation for the Shilling

According to the H2 2023 Outlook by AIB-AXYS Africa, a Nairobi-based brokerage house, the Kenya Shilling is projected to face further depreciation in the second half of this year. The country’s foreign-denominated debt repayments are expected to exert additional pressure on the foreign exchange reserves, further weakening them.

Moreover, in Q3’23, dividend repatriation in the equities market is predicted to increase the demand for the US Dollar, adding to the challenges faced by the local currency.

However, there are also potential factors that may support the Kenya Shilling. The inflow of dollar investments through Foreign Direct Investments, the Nairobi Securities Exchange (NSE) Market, and other capital inflows are anticipated to supply more dollars into the economy, which could help in stabilizing and supporting the value of the Kenyan Shilling.

Fitch Ratings View

According to the latest Fitch Ratings for Kenya, while external official and commercial disbursements helped CBK reserves to recover in June 2023, it projects that these reserves will decline to US$7 billion at the end of 2024, reflecting financing constraints and persistent depreciation pressures on the Kenya Shilling.

Kenya’s Gross international reserves fell to US$7 billion in March from US$8 billion at the end of 2022.

The Kenyan Shilling is expected to trade at 141.72 by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. Looking forward, the think tank estimates the Shilling to trade at 142.82 to the US$ in 12 months’ time.

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