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The shilling hit an all-time low against the dollar on Wednesday, March 8, signalling inflation and higher cost of imported goods.
The weakening of the local currency also sets up the country for a higher cost of electricity and debt servicing distress.
According to Central Bank of Kenya (CBK) data, the shilling exchanged at an average of 128.3618 against the dollar even as retail dollar buyers paid up to Sh140 per unit in banking halls as the demand for the greenback continues to surge.
This has seen the margin between the US dollar's printed rate by CBK and the market rate for customers quoted by banks and foreign exchange bureaus continue to widen.
The scramble for the dollar means that buyers - both for trading and hedging purposes - keep bidding higher for the currency.
Manufacturers recently complained that a shortage of the greenback was forcing them to buy it at a premium compared to the CBK's official average exchange rate, a situation they warned could disrupt their manufacturing activities and subsequent product shortages if this is not addressed.
Fuel marketers have also complained of the inability to secure sufficient US dollars to pay for fuel and gain access to their stocks at the Kenya Pipeline Company (KPC) depots, leading to fuel shortages in some Petrol stations across the country.
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More petrol stations yesterday reported dry pumps, echoing the scenario in March last year, which developed into a full-blown crisis.
Several large banks are now selling the dollar at between Sh137 and Sh140 per unit, while buying the same at between Sh127 and Sh133, with bankers and forex bureaus saying the higher prices have been driven by demand and the cost of accessing the hard currency on their part.
Standard Chartered Bank Kenya and Equity Bank quoted the greenback at Sh140 and Sh139.4 per unit respectively yesterday while buying the same at Sh129 and Sh127.4 respectively, according to a spot check by The Standard.
Co-operative Bank, on the other hand, was selling the US currency at Sh138.5 per unit and buying at Sh127.8 per unit, while Stanbic Bank was selling at Sh138.7 and buying at Sh128.3 per unit. Family Bank was selling the dollar at Sh137 per unit and buying at Sh133 per unit as most foreign exchange bureaus bought it at Sh133 and sold at Sh137.
The higher effective rate for those buying dollars in the market was highlighted last year by importers.
Access to the greenback previously also proved difficult due to banks being unwilling to sell to each other, which made it hard for smaller players to fulfil their orders from clients.
The volatility in the forex market has slowed dollar trading among lenders, causing a scarcity of the US unit.
Investors are known to hoard dollars for speculation purposes in the wake of forecasts showing that the shilling would remain weak against the US currency. With the expected decline, those holding dollars later convert their money to shillings at a gain or do not suffer conversion losses when importing.
By the end of December, foreign deposits in local banks stood at the equivalent of a still elevated Sh921.1 billion, albeit 0.2 per cent lower than the Sh922.9 recorded earlier in November, according to CBK data.
Industry insiders told The Standard earlier they have been unable to buy adequate dollars from commercial banks and other sources for the last week.
Fuel marketers say they spend an average of $24 million (Sh3.1 billion) daily to buy and stock fuel for various outlets across the country. "Yes, most of the manufacturers are encountering the struggle of getting their forex requirements," said Kenya Association of Manufacturers (KAM) Chairman Rajan Shah.
"We have had several engagements with CBK, yet no solution available. It is necessary to have free interbank trading without restrictions on rate to be traded to have a better flow of foreign exchange."
The continued weakening of the local currency coupled with forex shortages, according to the manufacturers' lobby, is expected to push up living costs, hurting households already reeling from high fuel and food prices, experts said.
The depreciating shilling now threatens to pile fresh pressure on the prices of essential commodities, which have stoked public anger.
Kenya's inflation, a measure of annual changes in the cost of living, hit 9.2 per cent in February from 9.0 per cent in January, the Kenya National Bureau of Statistics (KNBS) reported in what is further squeezing consumers hard.
The rise, mainly driven by significant increases in the prices of vegetables following dry weather conditions during the period, is above the 7.5 per cent target by CBK.
Food inflation during the period increased to 13.3 per cent from 12.8 per cent in January, while fuel inflation remained elevated at 13.8 per cent.
The shilling has been on the back foot in recent months on the back of weak inflows and strong dollar demand across sectors, traders said.
The continued loss of the shilling against the dollar has seen CBK intervene to stem further losses.
A weak shilling is harmful to Kenya, given it is an import-driven economy.
CBK says it does not seek to influence the direction of the exchange rate but only steps in to smooth out volatility.
CBK's top policy-making organ - the Monetary Policy Committee (MPC) - is expected to meet on March 29 to assess the situation, the regulator said earlier this week.
The regulator earlier dismissed the possibility of a parallel exchange rate developing in the country, saying the market has enough dollars to meet demand from importers and corporates.
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