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Shilling remains under pressure as oil importers' dollar demand rises

By Lee Mwiti | Published Thu, January 12th 2017 at 00:00, Updated January 11th 2017 at 23:05 GMT +3

High demand for the US dollar by Kenyan oil importers has been blamed for the continued pressure on the Kenyan shilling as markets closed yesterday.

Commercial banks quoted the shilling at 104 units to the greenback, the lowest since weakening to 105.65 to the dollar in September 2015, according to a Reuters report.

The global news agency reported that oil prices yesterday edged up, driven by reports of Saudi Arabia’s supply cuts. This added to strong demand by Kenyan oil importers for dollars to further weaken the shilling.

At the same time, Reuters again quoted Kenyan traders saying that the Central Bank of Kenya (CBK) has embarked on a strategy to fight the shilling’s depreciation by increasing their operations in the market through selling dollars to support the local unit.

However, analysts have dismissed the idea of an increased demand for the greenback by oil importers as the sole reason for the weakening shilling.

A Forex exchange trader who requested anonymity, after the CBK banned traders from making any comments about the shilling worth, linked the shilling’s fall to the Government’s action of loosening its monetary and fiscal policies.

“It is misleading to say that demand for dollars from oil importers is the reason for the weakening shilling. We have been importing oil for a long time now without such a drastic depreciation of the shilling. I figure out that a loosening monetary policy to finance our budget deficit is the reason for the weak shilling,” the trader said.

Banking ACT

He explained that since the banking amendment act came into place, CBK has been reluctant to tell the country about the money supply in the market.

“Before the act came into effect, especially during the Kibaki era, we could easily tell the amount of money supply in the market. I remember in the last year of the Kibaki presidency, it was 21 per cent. But now, CBK is yet to give us the current rate. It is possible the money supply is high in the market in order to finance the deficit, hence weak shilling,” the trader said.

Francis Mwangi, an investment analyst from the Standard Investment Bank said that currently, as the CBK falls under heightened pressure, even after kicking up its operations in the market, its time the $1.5 billion (Sh1.53 trillion) it holds in reserve from the International Monetary Fund (IMF) is released to combat further depreciation.

IMF had provided the money in dollars in order to use during extreme spells to shield the shilling from sharp depreciation.