Kenya shilling depreciates further against USD as demand for dollars from oil, energy sectors rise

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  • The Kenyan shilling depreciated by 0.3 per cent against the US dollar between July 18 and 22, 2022, to close the week at KSh 118.6, from KSh 118.3 recorded the previous week
  • Analysts from Cytonn Investments attributed the depreciation to increased dollar demand from the oil and energy sectors against a slower supply of hard currency
  • On a year-to-date basis, the shilling has depreciated by 4.8% against the dollar, higher than the 3.6% depreciation recorded in 2021

The Kenyan shilling depreciated by 0.3 per cent against the US dollar between July 18 and 22, 2022, to close the week at KSh 118.6, from KSh 118.3 recorded the previous week.

Analysts from Cytonn Investments attributed the decline to increased dollar demand from the oil and energy sectors against a slower supply of hard currency.

On a year-to-date basis, the shilling has depreciated by 4.8% against the dollar, higher than the 3.6% depreciation recorded in 2021.

The analysts said they expect the shilling to remain under pressure in 2022 because of several factors, including high global crude oil prices on the back of persistent supply chain bottlenecks, which the Russian-Ukrainian geopolitical pressures have further exacerbated.

The rise in prices comes when demand is picking up with the easing of COVID-19 restrictions and as economies continue to recover.

“Key to note, risks abound the recovery following the resurgence of COVID-19 infections in the country and the country’s trading partners.”

The shilling also declined because of increased demand from merchandise traders as they beef up their hard currency positions in anticipation of increased demand as economies gradually recover.

It also depreciated because of an ever-present current account deficit due to an imbalance between imports and exports. Kenya’s current account deficit is estimated to come in at 5.3% of GDP in the 12 months to May 2022 compared to the 5.0% for a similar period in 2021.

“The wider deficit reflects a higher import bill, particularly for petroleum products, with the imports for Q1’2022 increasing by 14.5%, 5.7% points higher than the 8.8% increase in export,” the analysts noted.

The decline was also a result of the aggressively growing government debt, with Kenya’s public debt has increased at a 10-year CAGR of 18.2 per cent to KSh 8.6 trillion in May 2022, from KSh 1.6 trillion in May 2012, thus putting pressure on forex reserves to service some of the public debt.

“The average GDP growth over the same period has been 3.9%, an indicator that the increase in debt is not translating into GDP growth.”

However, the shilling will remain supported by several factors, such as high Forex reserves, currently at USD 7.7 billion (equivalent to 4.5-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.

In addition, the reserves were boosted by the USD 750.0 million World Bank loan facility received in March 2022 and are expected to be boosted further by the USD 235.6 million funding from the International Monetary Fund (IMF).

The shilling will also receive support from the improving diaspora remittances evidenced by a 6.6 per cent year-on-year increase to USD 326.1 million as of June 2022, from USD 305.9 million recorded over the same period in 2021.

In the recently released June 2022 diaspora remittances figures, North America remained the largest source of remittances to Kenya, accounting for 59.1% in the period, followed by Europe at 18.2%, while the rest of the world accounted for 22.7% of the total.

Kenya Shilling depreciates by 0.7pc against USD in July

In a separate story, Equity Group grew the volume of diaspora remittances it processed by 39 per cent in 2021 compared to the corresponding period in 2020, leveraging on the growing popularity of digital channels for sending money home from abroad.

The lender handled Ksh383.5 billion in remittances from 12 months to December, up from Ksh279.4 billion in 2021.

The Group’s Chief Executive Officer and Managing Director, James Mwangi attributed this to linkage with multiple digital platforms, which have helped widen the geographical reach in the remittances segment.

Equity partners with over 10 money transfer platforms, including Western Union, PayPal, WorldRemit, MoneyGram and Hellopaisa, Equity Direct, and a new platform – Thunes – among others.

“Using fintech capabilities has given us a global presence, and as a result, we have become a major processor of remittances payments around the world including across currencies, reflecting on forex trading across the region,” said Mr Mwangi as he announced the full-year financial results.

As a result, the amount in commissions earned by the bank for handling remittances rose from Ksh1.5 billion in 2020 to Ksh1.6 billion in 2021, recording a 10 per cent rise as the forex inflows income rose by 33 per cent from Ksh6.2 billion to Ksh8.3 million.

Diaspora Kenyans stuffed Equity Bank accounts 9% more in 2021

Wanjiku Njuguna is a Kenyan-based business reporter with experience of more than eight years.

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