Shilling now hits Sh90 to the dollar easing firms forex losses

The Central Bank building in Nairobi. Photo/FILE

The shilling touched the Sh90 mark in Monday's trading against the dollar, its strongest performance since August 1 this year.

Forex traders on Monday quoted the shilling at 90.60/80 against the dollar stronger than Friday’s performance of 91.00/20.

This is a 15 per cent gain from the historic Sh107 mark it touched on October 11.

The gains are a shot in the arm for the Central Bank of Kenya which was forced to increase its key lending rate to its highest point ever to tame inflation, a decision that has been costly to short term economic growth.

The regulator raised the Central Bank Rate by 9.5 percentage points to 16.5 per cent, in two historic consecutive increases, to contain runaway inflation which hit 18.9 per cent in October and stabilise the shilling.

Players in the financial markets attribute the extended gains of the home currency to CBK’s tighter monetary stance and increasing dollar inflows from tea exports and are upbeat that the current gains will continue into the new year.

“Demand for the dollar is still quite low as the inflows from Non Governmental Oganisations and the tea sector continue,” said Peter Mutuku, a forex dealer at the Bank of Africa (BOA).

“By the end of the year, the shilling could trade at Sh88 against the dollar,” Mutuku added.

Ideal stability

“Buyers are becoming more and more reluctant as they expect the shilling to strengthen further,” said Duncan Kinuthia, a forex dealer at the Commercial Bank of Africa (CBA).

The strengthening currency will see importers and manufacturers breathe easier after the weak shilling meted unprecedented pain on their operating costs.

“It is good news to have a stronger shilling, but better news to have a stable shilling,” said Betty Maina, the chairperson of the Kenya Association of Manufacturers (KAM).

Ms Maina says the gains will translate into lower costs of production that will in turn reverse the rising cost of basic commodities.

“We need to have an ideal stability of about 80 – 90 per cent to allow a give and take margin for importers and exporters,” Ms Maina said.

But consumers of petroleum products will have to wait untill next year to feel the impact of the stronger shilling when the Energy Regulatory Commission announces its monthly price guidelines.

The volatile shilling had pushed Kenya Airways and a host of electronics firms to start quoting their prices in dollars as a risk aversion measure.

Safaricom and Athi River Mining who had booked Sh1.4billion and Sh681million in their books as unrealised forex losses now have the head room to revise these losses positively, boosting their profit outlook.

However, borrowers will still have to suffer the high cost of borrowing following interest rate hikes by commercial banks from 13 per cent to 25 per cent in reaction to the high CBR rate of 16.5 per cent.

Analysts reckon that a strong and stable shilling will bring down inflation to a single digit by early next year.

“If the shilling strengthens and attains stability at this point, it would ease inflationary pressure resulting from high cost of petroleum products, electricity power generation and electricity,” said Robert Shaw, an economic analyst.