The shilling is likely to depreciate further this year on local and global factors including rising oil prices, according to financial services firm EFG Hermes Kenya.
The local currency had already depreciated 3.6 percent last year to trade at 113.1 units to the dollar.
A weaker shilling makes imports more expensive, contributing to inflation. It, however, boosts earnings of exporters and those whose salaries are paid in hard currencies such as the dollar and euros.
“The Kenyan shilling is currently trading at USD/KES 113.5 but given recent increases in the global oil price, the US Federal Reserve’s intention to stop its quantitative easing programme in March 2022 and the possible risk of a drought, the shilling could depreciate further,” said Muammar Ismaily, the Vice President and Research Analyst at EFG Hermes Kenya.
Higher oil prices mean more demand for dollars, with Kenya being a major importer of petroleum products.
Brent Crude prices have jumped to highs of $93.1 per barrel from lows of $65 in August last year, inflating the country’s import bill.
The decision by America’s central bank to cut back on the amount of cash it injects into the economy and raise interest rates is also expected to lift the value of the dollar relative to other currencies including the Kenya shilling.
The Federal Reserve expects to raise benchmark interest rates from the current range of zero to 0.25 percent in March to slow down inflation.
The increase will lift the interest rate on securities including mortgages, making dollar-denominated assets more attractive.
Other risks for the local currency are potential drought after a poor rainy season in last year’s fourth quarter. EFG Hermes added that the pressure on the shilling will continue despite the growing economy, noting that the August General Election will be a key event to watch out for.
“Forex pressure is likely to continue in 2022 as the economic recovery gains pace. We expect the recovery, though, to be tamer than peers, given the build-up to presidential elections in August,” the firm said.
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