On Monday, Kenya shilling fell to a historic low of KES 124 against the U.S. dollar as forex traders blamed the shilling’s depreciation on increased dollar demand from oil retailers and general goods importers.
The depreciation comes when the Central Bank of Kenya reports that the country’s usable foreign exchange reserves remained adequate as of January 12 at USD 7.415 billion (KES 919 billion).
Remittances to the country reached a record high of KES 497.1 billion in 2022, an 8.3 per cent increase over KES 458.9 billion sent in 2021, despite global economic headwinds such as the Russia-Ukraine war.
According to a recent International Monetary Fund (IMF) report, Kenya is experiencing a period of tight forex demand, reduced liquidity in the interbank foreign exchange market, and a depreciation of the local currency due to the war in Ukraine.
“Liquidity in the interbank forex market has dried up and shifted to the bank-client market where forex transactions are executed at a more depreciated rate, “said IMF.
The shilling had opened the year at 123.42, shedding about 10 per cent of its value to the dollar in 2022.
Because Kenya’s economy is import-dependent, the continued depreciation of the local currency is expected to raise the cost of living in the country.
Petroleum products, machinery, medicine, vegetable oil, pharmaceuticals, automobiles, wheat, and clothing are essential imports into the country.
This means traders who import the goods will pay more for them, passing the cost on to consumers.
Throughout 2022, the dollar rose dramatically as the Federal Reserve raised interest rates to combat sky-high inflation.
According to Forbes investment, the U.S. Dollar Index, which measures the greenback against a basket of other currencies, will be up more than 17% in 2022.
Kenyans should brace themselves for tough economic times ahead, with the shilling weakening and inflation skyrocketing.
Kenya’s inflation rate jumped to 9.1% in December as the effects of the Russia-Ukraine conflict continued to wreak havoc on the economy.