Hope for end to economic pain as shilling sustains dollar rally

The shilling has rallied against the US dollar. [iStockphoto]

The Shilling sustained its rally against the US dollar on Friday raising optimism among traders and consumers on the for a lower cost of living.

Data by the banking regulator showed the shilling exchanged at an average of 145.8551 against the dollar on Friday, stronger than the 153.2039 mean rate to the dollar on Thursday's opening.

A spot check by The Standard showed commercial lenders were selling the dollar at between 147 and 155 underlining the strengthened shilling.

The development raises fresh hopes of an end to a currency crisis involving the steep decline in its value, which has been causing negative ripple effects throughout the economy.

The shilling is on a roll at a time when Kenya’s pool of critical foreign exchange reserves fell by over Sh15 billion to $7.03 billion on Thursday from $7.13 billion a week earlier, the Central Bank of Kenya (CBK) weekly statistical supplement showed on Friday last evening.
The central bank says it only intervenes to smooth out volatility when the shilling is moving too fast in either direction.

The CBK normally can sell these reserves when it wants to boost the value of the shilling and even out volatility. It was not immediately clear by press time the impact of the CBK had this week in possibly burning the critical reserves to prop up the shilling.

“The Kenya Shilling strengthened against major international and regional currencies during the week ending February 15. It exchanged at Sh153.20 per US dollar on February 15, compared to Sh160.09 per US dollar on February 8,” said the CBK in its weekly bulletin.

“The usable foreign exchange reserves remained adequate at $7.031 billion (3.8 months of import cover) as of February 15. This meets the CBK’s statutory requirement to endeavour to maintain at least 4 months of import cover.”

Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.

The CBK keeps these stashes of US dollars, euros, Japanese yen and other currencies as a financial safety net.

The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as the devaluation of the shilling, thus giving confidence to investors.

The dramatic shift was highlighted this week however even as Kenya booked billions from global investors to pay off an upcoming Eurobond signalling easing inflation and lowering the cost of imported goods.

The move averted a potential full-blown crisis in June this year – just five months away - when the 10-year Eurobond worth Sh306 billion ($2 billion) at Friday’s exchange rates is due for repayment.

Early in the week, Kenya sold a new $1.5 billion Eurobond maturing in 2031 which it will use to buy back via a tender offer a large chunk of the $2 billion bond due in June.
The government also sold a Sh70 billion infrastructure bond, receiving over Sh288 billion in bids.

“Given that Kenya liberalized its capital account in the 1990s, the exchange rate is expected to move in either direction to reflect the forces of supply and demand at any given time,” said Kenya Bankers Association chairman and NCBA Group managing director John Gachora earlier on Thursday evening

“Today’s move is rightly attributable to growing confidence in Kenya’s macro-economic performance and outlook, including the recent floatation and successful pricing of a $1.5 Eurobond and the successful issuance and sale of an 8.5-year Infrastructure Bond.”
Ruto had previously sought to assure global investors that Kenya will not default on its debt.

“I can now state with confidence that we will and shall pay the debt that has become a source of much concern to citizens, markets and partners,” he had said.

The strengthening of the local currency also sets up the country for a lower cost of electricity and reprieve from debt servicing distress.

On Thursday, the President’s economic advisor David Ndii attributed the strengthening of the shilling to the reduced risk of Eurobond default following the successful issuance of a new bond on Monday.

“Markets have opened. Eurobond default risk has evaporated. Speculative dollar positions unwinding,” he tweeted.

The surging energy and food costs have forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from COVID-19 economic hardships and confront the Ukrainian war’s global economic fallout.

A weak shilling has been keeping the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further pushing up inflation, which went up to 6.90 per cent in January from 6.60 per cent in December of 2023.

The continued strengthening of the local currency is therefore expected to lower the cost of living, further easing pain for households already subjected to high fuel and food prices.

By AFP 5 hrs ago
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