The Kenya shillings hit a new record low on Tuesday when it traded at 108.55 units against the US dollar. The decline is attributed to rising costs of imports of raw materials and finished products.
The Kenyan currency has been under pressure recently due to increased demand for dollars and supply that has gone down due to lack of tourists as well as a reduction in commodity exports.
The local currency has depreciated 5.7% from when the country reported the first coronavirus case in March when it traded at 102.3 units against the dollar.
Experts also point at the demand for hard currencies from importers who are resuming business after the government began relaxing covid-19 containment measures.
“This was likely a result of increased dollar demand with less supply. The demand was been driven by two forces; the first one being the Central Bank of Kenya (CBK) communication of the intention to buy $300 million from commercial banks for three months (March, April and May),” the Parliamentary Budget Office (PBO) said.
Wealthy people and big companies that needed to secure their wealth, stockpiled a record Sh45.5 billion in dollars just after Kenya imposed restrictions to stem the spread of coronavirus.
Data from the CBK shows that deposits (in dollars) held by Kenyans hit a record high of Sh671.4 billion in May. This was up from Sh625.9 billion in February.
The jump signals that the wealthy opted to protect the value of their cash holdings rather instead of seeking new areas to invest their money.
The jump is also blamed on the weakening of the shilling, which inflated dollar accounts when converted to local currency.
Investors always find the dollar as safe haven whenever there is global economic turmoil when currencies of frontier and emerging countries lose their value.
The PBO further warned that the shilling may weaken further in the short term as imports rise and some parts of the economy remain subdued.
“Going forward, the value of the Kenya shilling is expected to decline further as importation picks up, pushing the dollar demand upwards,” PBO stated.
Continued weakening of the shilling will raise inflation, which dropped to 4.36% in August, due to reduced consumer demand.
Businesses have reduced their capital spending while consumers have been left broke due to retrenchment, pay cuts and unpaid leave that has been experienced in many sectors, including tourism, entertainment and education.
