- The Kenya shilling fell drastically to hit a new historic low at 108.55 units to the US dollar
- The loss in currency value will impact import costs of raw materials and finished goods
The Kenya shilling fell drastically to hit a new historic low at 108.55 units to the US dollar. The loss in currency value will impact import costs of raw materials and finished goods such as petroleum products, wheat, vegetable oil and motor vehicles. The depreciation of the local currency started from March 12 – the day the country recorded its first case of coronavirus— when it traded at 102.3 units to the Dollar. It was further impacted in recent months as demand for dollars rose while supply fell due to lack of tourists and a reduction in commodity exports. The demand for hard currencies went up from importers after the State started to ease coronavirus containment measures in July.
Observers point out that the demand was also driven by two factors such as the Central Bank of Kenya (CBK) communication of the intention to buy $300 million from commercial banks for three months and the possible buying and hoarding of dollars as a result of panic in the market caused by uncertainty due to the Covid-19 pandemic. It was reported that wealthy individuals and big companies stockpiled a record Sh45.5 billion in dollars in the three months to May when Kenya imposed restrictions to curb the Pandemic. Foreign currency bank deposits held by Kenyans hit a record of Sh671.4 billion, against Sh625.9 billion in February.
Reports indicate further weakening of the local currency as imports rise pushing the dollar demand upwards. The tourism sector, which is a major foreign revenue earner is not expected to contribute much in the second half of the year due to reduced international travel on account of Covid 19.
The shilling’s weakening risks raising inflation, which dropped to 4.36 percent in August, largely due to suppressed consumer demand.
Businesses have reduced their capital spending while consumers’ wallets have been battered by a mix of retrenchment, pay cuts and unpaid leave cutting across diverse sectors, including tourism, trade, education and entertainment.
Kenya imports a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery whose costs are rising.
