The shilling on Thursday hit an all-time low against the dollar, signaling inflation and higher cost of imported goods.
The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which is set to become a political headache for the new government.
Kenyans suffered an economic blow on Wednesday midnight when fuel prices jumped to a record high after the new government ruled out resurrecting fuel subsidies that were dumped as too expensive.
The depreciating shilling now threatens to pile fresh pressure on the fuel prices, which have stoked public anger.
Central Bank of Kenya (CBK) data shows the Kenya shilling exchanged at an average of 120.4106 yesterday, setting up the country for more expensive imports, electricity and debt servicing distress.
The continued weakening of the local currency is expected to push up living costs, hurting households already subjected to high fuel and food prices, experts said.
“The costs of every imported input will rise,” said Deepak Dave of Nairobi-based Riverside Advisory on the expected impact of the economic fallout from a weaker shilling. “Coupled with the withdrawal of subsidies means the true drop in living standards for wananchi start now.”
The shilling has been on the back foot in recent weeks on the combination of weak inflows and strong dollar demand across sectors, traders said.
The continued loss of the shilling against the dollar had seen the CBK intervene to cushion further loss.
A weak shilling is harmful to Kenya given it is an import-driven economy.
The CBK says it does not seek to influence the direction of the exchange rate, but only steps in to smooth out volatility.
Latest data from the CBK shows Kenya’s foreign currency reserves held by CBK dropped to 7.346 billion dollars (equivalent to 4.19 months of imports) as at September 8, from 7.375 billion dollars as at September 1 (which was equivalent to 4.2 months of imports).
“The shilling was artificially cushioned till now, but from here on, Kenya’s consumers will have tough choices to make on balancing needs versus wants. Frankly, the same applies to the State as well,” Dave said.
Kenya imports various goods including cars, petroleum, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing and shoes.
Kenya’s inflation — a measure of annual changes in the cost of living— hit 8.5 per cent in August from 8.3 percent in July, the Kenya National Bureau of Statistics (KNBS) reported. This is above the 7.5 per cent target by the CBK.
The International Monetary Fund (IMF) in July this year flagged the surge in inflation as a key concern.
It warned that the rise in food and energy prices will spill over to other goods and services —known as second-round effects— particularly fuel prices that have a big pass-through or multiplier effect on transport costs.
The cost of servicing the public debt which stood at Sh8.5 trillion at the end of May, is also set to rise with a weakened shilling piling pressure on the public purse.