Oil supply chain bottlenecks to weaken Shilling further as it drops 0.1% against dollar

The Kenya shilling slumped 0.1 percent against the United States dollar at the close of the week ended September 23.

Data from the Central Bank of Kenya (CBK) indicates the shilling traded 120.6 from Ksh.120.4 in the past week, owing to the increased dollar demand from the oil and energy sectors against a slower supply of the currency.

On a year to date basis, the shilling has depreciated by 6.6 percent against the dollar, higher than the 3.6 percent depreciation recorded in 2021, according to a report by Cytonn.

The shilling is expected to slump even further due to high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand as most economies gradually recover.

Another contributing factor will be an ever-present current account deficit due to an imbalance between imports and exports, with Kenya’s current account deficit estimated at 5.1 percent of the Gross Domestic Product (GDP) in the 12 months to July 2022 compared to the 5.2 percent within a similar period in 2021.

The shilling will also weaken due to aggressively growing government debt which is not translating into GDP growth thus putting pressure on forex reserves to service some of the public debt.

Kenya’s public debt has increased at a 10-year CAGR of 18.2 percent to Ksh.8.6 trillion in May 2022, from Ksh.1.6 trillion in May 2012 while the average GDP growth over the same period has been 3.9 percent.

Despite the headwind factors, however, the shilling is expected to be supported by two factors including sufficient Forex reserves currently at Ksh.829.5 billion (equivalent to 4.2-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover.

It will also be shielded by sufficient diaspora remittances evidenced by a 14.7 percent year on year increase to Ksh.481.4 billion cumulative remittances as of August 2022, from Ksh.419.8 billion recorded over the same period in 2021.

Lawrence Baraza

Lawrence Baraza is a prolific writer with competencies in Digital Media, Print, and Broadcast. Baraza is also a Communication Practitioner currently spearheading Digital content on Metropol TV's Digital Desk.

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