Kenya Shilling Seen Weakening Further as Forex Reserves Drop

NAIROBI (Capital Markets in Africa) – The Kenyan currency could weaken at a much faster pace this year, compared with 2016, as falling foreign-exchange reserves impede the central bank’s ability to intervene in support of the shilling.

Kenya’s central bank, which has been selling dollars to boost the shilling, has stayed away from the market this year after frequent intervention throughout 2016 that kept the unit fairly stable, according to Faith Atiti, an economist at Commercial Bank of Africa.

Foreign-exchange reserves in East Africa’s biggest economy declined to $6.97 billion at the end of December, the first time they have fallen below $7 billion since January 2016. The nation can also rely on a $1.5 billion precautionary facility with the International Monetary Fund to guard against exogenous shocks.

“They don’t have sufficient muscle to keep intervening in the market,” Atiti said by phone on Wednesday. “If you cannot beef up your reserves then it means inevitably the shilling depreciates at a much faster rate.”

The shilling dropped 0.7 percent to 103.55 against the dollar by 3:52 p.m. in the capital, Nairobi, heading for the biggest drop in 16 months.

The central bank may have to tap the standby IMF loan to boost its reserves and defend the shilling against the strengthening dollar, as demand for the greenback is expected to pick up ahead of Kenya’s presidential elections in August, according to Atiti.

“They have several options, either let the shilling depreciate, and if the shilling depreciates you’re talking about inflation so you need to sort of raise interest rates, which doesn’t seem like an option right now,” she said.