The risk of the Kenyan shilling depreciating is high in the short-term due to dollar demand as the Central Bank of Kenya (CBK) removal of old Sh1,000 currency notes from the circulation draws to a close.
An analysis by Sterling Investment Bank indicates that Kenyans are seeking to hold more of foreign currency.
At the same time there has been an increase in the amount of currency in Kenyan shillings in circulation, which in turn weighs against the value of the unit.
Banks gained Sh25 billion in new deposits after the demonetisation exercise began.
Already the Kenyan shilling has seen its value fall in the past month to exchange at an average of 103.83 units to the US dollar as of last Friday.
On July 15, the local currency was exchangeable with the US currency at an average of 102.95 units before falling to 103 units and touching 104 units at some point.
“The biggest risk to the stability of the local currency in the short-term in our view is demonetisation which has led to increased demand for foreign currency,” said Sterling Investment Bank in its latest report.
The demonetisation was announced on Madaraka Day on June 1 when the CBK also said that new notes would go into circulation and would be legal tender alongside the old ones except for the Sh1,000 note that would cease being acceptable from October 1.
The Kenyan shilling then stood at about 101 units to the dollar — with the June 3 level at 101.19 units — but steadily lost value to the international currency afterwards.