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Brace yourself for tougher times as the Kenyan shilling loses more ground against dollar

By Moses Michira | August 12th 2015

Kenyans should brace for tougher times through a much weaker shilling that is forecast to slide to Sh103.50 against the US dollar by year-end, according to economists at Citi Bank. They say heavy imports not matched by foreign exchange inflows are projected to depress the local currency until mid next year.

"...this could get worse in the first half of 2016," said David Cowan, the Africa economist at Citi. Should the projections turn out to be accurate, Kenyan households would be exposed to higher costs for goods caused by the more expensive imports.

Open market

Cowan said the Central Bank of Kenya (CBK) does not have the capacity to reverse the fall of the shilling through open market interventions as reserves were already stretched.

Already, Kenya has drained its dollar reserves, which are critical because they are used to pay for most imports, to just about $6.4 billion – enough to pay for 4.1 months worth of imports. CBK has offloaded more than $450 million into the market since May to prop up the shilling.

"We think CBK will be reluctant to tighten monetary policy much further, but will have little scope to ease monetary policy," the economists said in the forecast where they described the decline of the shilling as the 'real test' for Governor Dr Patrick Njoroge.

That prediction could, however, offer some relief for borrowers who have already been slapped with higher interest rates on bank loans.

Banks have adjusted lending rates by up to 3 per cent, following tightening of the monetary policy by CBK, which raised the benchmark rate to 11.5 per cent last month.

Shoppers at a local supermarket. Kenyan households are likely to be exposed to higher costs of goods caused by more expensive imports. (PHOTO: ANDREW KILONZI/STANDARD)

However, economists at the bank praised the fast interventions taken by CBK officials to protect the shilling, adding that the 2011 slump of the local currency was avoidable had the right measures been taken in time. The higher rates were taken to discourage consumption in a longer-term measure of battling inflation. The spike in the cost of living, Citi Bank said, was likely to be moderated partly by low food prices and oil.

Food crops

"Sufficient rains have been received this year to enable a good harvest of the main food crops in the country, while the prevailing low oil prices regime will ensure inflation to remain within the comfortable band," the added in the forecast.

Citi Bank has also forecast recovery in the tourism sector that has been worst affected owing to terror threats at the main towns along the Coast. Heavy investment in security including deployment of more personnel is thought to have thwarted possible terror attacks while the structure of the Al Shabaab insurgents has been weakened after the elimination of several top leaders incise Somalia.

It is on this premise that the upswing in visitor arrivals is built and would possibly overturn the losses reported last year. Visitor numbers were down 25 per cent last year, according to official statistics.

The various aspects of the economy are all expected to help it expand by 5.5 per cent this year, the economists said, which is faster than the 5.3 per cent reported in 2014. Tanzania is forecast to grow at 6.8 per cent and Uganda at 5.4 per cent – Kenya's biggest export market.

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