Shilling could suffer further shocks and drop further against the dollar

The shilling is expected to come under renewed pressure this week with analysts predicting it may breach the 96 level to the dollar.

On Friday, the currency closed trading at 95.35/95.50 as demand for the dollar increased from energy and machinery importers, as well as corporates paying dividends to foreign shareholders.

Earlier on Thursday, the local currency closed trading at 95.30/95.40 to the greenback.

A report by in April Renaissance Capital warned the local currency could weaken to 97.5 units to the dollar before year-end, a prediction that is becoming reality faster than expected.

Tourism, a major source of foreign exchange, continues to decline due to persistent insecurity concerns perpetrated by Al-Shabaab.

Drought, coupled with falling global commodity prices, has slashed dollar inflows from coffee and tea exports.

High dollar demand to fund the import of capital goods for construction of infrastructure projects and the increased import of consumer goods have not help the shilling.

UNDER PRESSURE

Equatorial Commercial Bank head of treasury Benard Omenda says the local currency continues to come under pressure from increasing dollar demand for imports and a worsening current account deficit.

“High demand by importers and a widening current account deficit do not augur well for the shilling and, by extension, the country’s economy. If we don’t do something fast, the shilling could weaken to 100 units against the dollar before the end of the year,” he told the Nation.

This year, the shilling has weakened by at least 5 per cent, and analysts say the currency is not out of the woods yet.

The current weakening trend is reminiscent of the second half of 2011 when rising imports and increased borrowing in the market put pressure on the shilling, pushing it to a historic low of 107 units against the dollar.

Inflation, on the other hand, peaked at 19.72 per cent towards the end of the year. The developments prompted CBK to raise the rate at which it lends to commercial banks by 7 percentage points to 18 per cent in the last half of 2011 to ensure macro-economic stability.

Last Wednesday, the CBK’s Monetary Policy Committee (MPC) defied market sentiments and retained the key lending rate at 8.5 per cent, arguing that the shilling’s weakening was due to seasonal demand.

Some analysts, however, argue that the MPC may have deliberately decided not to raise the benchmark lending rate in order not to create a difficult situation for the yet-to-be-named incoming CBK governor.

In defending its decision to retain the rate at 8.5 per cent, the CBK also said it was within the government’s target range.

It said the shilling continues to be supported by sustained diaspora remittances averaging $121.38 million per month in the first quarter of 2015 and a lower petroleum product import bill attributed to the decline in international oil prices.

President Uhuru Kenyatta has not yet named a new CBK governor after Njuguna Ndung’u retired at the end of March and three weeks after the Public Service Commission handed him names of potential successors.

Sources say the President is likely to name Haron Sirima, the current deputy governor who chaired the MPC meeting, to the position of governor.