Dollar inches to Sh150 as market defies CBK rate, Ruto optimism

Retail dollar buyers are paying up to Sh150 per unit in Kenyan banking halls as the demand for the greenback continues to surge.

This is as the margin between the US dollar's printed rate by the Central Bank of Kenya (CBK) and the market rate for customers quoted by banks and foreign exchange bureaus continues to widen.

This bucks the trend and projections by the State that it would trend downwards on the back of the recently rolled out interbank market reforms and a State import oil deal.

President William Ruto said in April he expected the shilling currency to strengthen to under 120 per dollar "in the next couple of months", citing the oil import deal that will cut demand for dollars.

"In the next month or so you will see the exchange rate coming down in a very phenomenal way. In fact in my estimation, in the next couple of months, the dollar will come below Sh120, maybe Sh115, you never know," Ruto said in a televised government meeting.

CBK data showed the shilling exchanged at an average of Sh138.6088 on Friday.

But several large banks are now selling the dollar up to Sh150, 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.

A spot check by The Standard showed I&M Bank was selling the dollar at Sh148 per unit and buying at Sh135 per unit.

Standard Chartered and Equity Bank quoted the selling price of the dollar at Sh144 and Sh140 per unit respectively on Friday, while buying at Sh131 and Sh128. Family Bank was selling the US currency at Sh141 per unit and buying at Sh137, as per quotes listed in its banking halls.

Kenya had previously experienced hard currency shortages, weakening the shilling, as importers scrambled for reliable supplies.

Kenya signed an oil import deal with companies in the United Arab Emirates (UAE) and Saudi Arabia recently, putting in place a longer credit period, and altering the structure of the deal to stagger the demand for dollars in the market.

A weak shilling is harmful to Kenya given it is an import-driven economy.

Kenya imports various goods including cars, petroleum, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing, and shoes.

The shilling has been on a free fall hitting an all-time low against the dollar, signalling inflation and higher costs of imported goods.

This has set up the country for more expensive imports, electricity, and debt servicing distress.

This comes as bad news for the already hard-pressed consumers who are contending with a worsening cost of living crisis.

The continued weakening of the local currency is expected to push up living costs, hurting households already subjected to high fuel, electricity and food prices. The shortage also creates a black market for the US currency with buyers being at the mercy of sellers.

In recent months, the depreciating value of the Kenyan shilling against the US dollar has seen the value of the country's foreign reserves erode significantly. This has been attributed to the effects of the war in Ukraine, the aftershocks of the pandemic and raising of interest rates by the US Federal Bank to curb rising inflation.

Yet the shilling is projected to weaken further according to a new study by the African Development Bank (AfDB).

The lender in the study projected that the shilling will depreciate further against the US dollar this year due to additional pressure from a slowing economy and tighter global economic conditions.

In its African Economic Outlook 2023, the AfDB said the tightening global financial conditions are set to continue destabilising the foreign exchange markets of most African countries including Kenya.

"Currency weaknesses in some of Africa's major economies-Kenya, Nigeria, and SouthAfrica-are expected to persist in 2023, due largely to tighter global financial conditions and weak external demand," says the African Economic Outlook 2023.

The study said the worsening currency pressure will strain Kenya's public coffers due to maturing debt obligations denominated in foreign currency.

"For most of Africa's dollar-denominated debt, currency depreciations pose a significant downside risk for debt management and sustainability in a continent where external debt stock-including bonds, syndicated loans, and bilateral borrowing-surged to $466 billion in 2022," says the AfDB backed study.

"This wave of depreciation could be contained if countries continue to strengthen their monetary policies in the face of tighter financial conditions in advanced countries, though further tightening could exacerbate the already high cost of capital and halt economic recovery."

The cost of servicing the public debt which stood at Sh9.39 trillion at the end of March, is also set to rise with a weakened shilling piling pressure on the public purse.

Any further depreciation of the shilling now threatens to pile fresh pressure on fuel prices, which have stoked public anger.

To alleviate the economic fallout from the shilling fall, Kenya should build adequate forex buffers and also tap regional trade pacts to boost trade and cut reliance on foreign currency, according to AfDB.