Shilling drops to two-month low on high dollar demand

The shilling was on Wednesday trading at between 85.05 and 85.55 units to the dollar. FILE 

By John Gachiri
 

 

The shilling has dropped to a two-month low weighed down by heavy demand for dollars from oil marketers and other major importers. The shilling was Wednesday morning trading at between 84.50 units and 85.60 to the dollar, according to Bank of Africa currency dealers.

“There is more than the usual demand from the market,” said Peter Mutuku, a currency trader at Bank of Africa.

The weakness started from beginning of the week and when it began crossing the Sh85 level.

The Central Bank of Kenya (CBK) has had to intervene to prevent an even bigger slide. “The Kenya shilling extended its losses against the dollar on Tuesday, pressured by increased demand for dollars from importers,” said a report by ABC Bank’s Treasury department.

On Tuesday it was trading at between 85.05 and 85.55 units to the dollar. There was mixed reaction to the accelerated depreciation. Manufacturers said that they were already feeling the sudden increase in costs due to weakening of the shilling.

“They (costs) have only increased in the last two weeks, up to then it was okay,” said R & R Plastic Ltd chief executive Prashant Raval.

The flower industry, which is affected by the currency swings as a major exporter and importer, said that it was yet to feel effect of the softening shilling.




The Kenya Flower Council (KFC), the industry lobby group, said hedging had reduced its members’ exposure.

“In previous years it was a concern but we have come with ways to manage. We have not yet heard any major complaints from our members,” said KFC chief executive Jane Ngige.

Economists said that political and security uncertainties were likely to heighten the country’s risk profile and further weaken the shilling.

Dr Nelson Wawire, chairman of Kenyatta University’s macroeconomics department, said that Kenya is at the moment a melting pot for insecurity and political uncertainty.

Increased insecurity in western and north east Kenya, lobbying to pull out of the International Criminal Court at the African Union, a possible political stalemate between parliamentarians and the Salaries and Review Commission are all sending wrong signals to the market.

“There is no clear-cut information that the economy is stable,” said Dr Wawire.

Old Mutual Securities analysts had earlier also said noisy politics remained the shilling’s main mover.

“Going forward, we expect the shilling to remain under pressure because of the underlying economic and political conditions. This could see the shilling depreciate to above Sh90 to the dollar levels this year,” said Old Mutual Securities in their 2012 economic outlook for Kenya.

The shilling touched a historic 107 units low against the dollar in late 2011. This resulted in the CBK tripling the base rate to 18 per cent. The effect was an increase in the cost of borrowing, which slowed down uptake of credit and slowed economic growth in 201
 
 

Kenya’s GDP grew by 4.6 per cent in 2012 from 4.4 per cent in 2011, which is far below the 10 per cent annual growth target under Vision 2030.