Shilling continues good form, traders hope for cheaper wares

President William Ruto and Central Bank of Kenya Governor Dr. Kamau Thugge during the launch of Central Securities Depository digital platform, CBK, Nairobi on September 11, 2023. [PCS, Standard]

The shilling continues to sustain its rally against the US dollar weeks after the successful Eurobond buyout, boosting newfound optimism among traders and consumers for a lower cost of living.

Data by the Central Bank of Kenya showed the shilling exchanged at an average of 137.49 against the dollar on Thursday, underlining the strengthening of the local currency in under a month.

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

On February 14, Kenya booked billions from global investors to pay off a Eurobond due in June, signaling easing inflation and lowering the cost of imported goods.

The move averted a potential full-blown crisis when the 10-year $2 billion (Sh276 billion at current exchange rates) is due for repayment.

Analysts at the time said the successful issue of a new sovereign bond was a boost for the Kenya Kwanza administration's efforts to stabilising the exchange rate.

The move is said to have dissuaded those hoarding dollars and subsequently got them to bring more greenbacks into the banking system.

Kenya sold a new $1.5 billion Eurobond maturing in 2031 for buying back via a tender offer a large chunk of the $2 billion bond due in June.

A weak shilling has been keeping the price of imports such as fuel elevated, pushing up the cost of goods and services. The cost of living measure cooled off to 6.30 per cent last month from 6.90 per cent in January.

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.

The shilling has been on a roll at a time when Kenya's pool of critical foreign exchange reserves has fallen by over Sh40 billion to $6.919 billion on March 7 from $7.22 billion on February 22, the CBK weekly statistical report showed.

CBK says it only intervenes to smooth out volatility when the shilling is moving too fast in either direction.

The CBK can normally sell these reserves when it wants to boost the value of the shilling and even out volatility.

It was not clear how much the CBK had used of the critical reserves to support the shilling.

"The usable foreign exchange reserves remained adequate at $6.919 billion (3.7 months of import cover) as of March 7.

"This meets the CBK's statutory requirement to endeavour to maintain at least four months of import cover," said the CBK bulletin.

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

CBK keeps the reserves 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.