Import lull, inflows push shilling to an 8-month high

The Shilling has strengthened to an eight-month high, trading at 100.85 against the dollar as importers took a recess and Kenyans living abroad send in more money for the festivities.

The last time the Shilling was that strong was on April 12 this year. “Yesterday, commercial banks quoted the shilling at 100.65/85 per dollar, compared with 100.95/101.15 at Wednesday’s close. The shilling last traded at its present level on April 12.

News agency, Reuters, quoted traders who said the strengthening of the local unit was due to increased inflows from tourism and diaspora remittances amid slow demand from importers.

Churchill Ogutu, a research analyst at Genghis Capital said the situation “seems a unique one from the historical time series basis.”

Mr Ogutu noted that the banking sector has witnessed the interbank rate steadily edge up, a signal that most banks are locking in their cash holdings ahead of the cross over to the new year.

“As such, the ensuing liquidity tightness in the interbank has strengthened the local unit,” said Ogutu, adding that the healthy diaspora inflows as a result of Kenyans sending cash home ahead of the upcoming festivities might also have had an effect on the rally of the local currency.

Recently, the local unit has been steady, supported by inflows of diaspora remittances, improved tourist receipts as well as inflow of debts.

There have been a few upsets, especially around the period when the old Sh1,000 notes were being withdrawn from circulation with the local unit taking a knock following what some analysts suspected was increased demand for the greenback by Kenyans who wanted to dispose the condemned note.

The demonetisation exercise also coincided with the period when the Government settled part of its pending bills, with excess liquidity weakening the Shilling.

On August 1, the Shilling weakened to an 11-month low exchanging at Sh104 to the dollar. As a result, the cost of living edged up slightly, with the cost of electricity spiking due to a sagging exchange rate. The high cost of power, food and transport pushed up the cost of living in July as prices of products increased by 6.27 per cent compared to 5.7 per cent in June.

However, the Shilling has since regained some ground against the dollar, partly due to the Central Bank of Kenya’s (CBK) intervention.

CBK insisted that the move was aimed at dealing with volatility in the market.Unfortunately, Kenya’s improved external position has not been supported by a surge in its exports with what the country sells to the outside world remaining virtually stagnant for the last five years.

The price of oil, one of the country’s largest import bill, has been declining, helping the country’s current account deficit narrows.

The current account deficit narrowed to 4.2 per cent in the 12 months to July this year from five per cent in the same period last year.

However, a disagreement between the International Monetary Fund (IMF) and CBK on the true value of the local currency might steal the thunder from Shilling’s stellar performance.

While an IMF report last year said the local currency is overstated by 17.5 per cent, CBK report released last week put the misalignment at 2.6 per cent.

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