Subdued Dollar Demand Keeps The Shilling Unchanged

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The money markets remained liquid during the week, with the average interbank rate increasing marginally to 2.7 percent, from 2.6 percent recorded the previous week, mainly supported by government payments.

The average interbank volumes declined by 11.7 percent to 11.1 billion shillings, from 12.6 billion shillings recorded the previous week.

According to the Central Bank of Kenya, commercial banks’ excess reserves came in at 9.6 billion shillings in relation to the 4.25 percent Cash Reserve Ratio.

At the same time, the Kenyan shilling remained unchanged against the US dollar, to close at 108.4 shillings mainly attributable to subdued dollar demand from importers.

On a YTD basis, the shilling has depreciated by 7.0 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.

Though there has been a decrease, the high levels of forex reserves, currently at USD 8.9 million, above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover will shield the shilling.

There is a relatively strong Diaspora remittance that increased by 23.4percent to USD 277.0 million in July compared to USD 225 million in July 2019.

The current diaspora remittance is, however,  4.0 percent lower than the USD 288.5 million in June 2020, leading to the narrowing of the country’s current account deficit to 4.7 percent of GDP in the 12 months to July 2020, compared to 5.0 percent of GDP in the 12 months to June.

However, in the longterm, the shilling is expected to be weighed down by demand from merchandise and energy sector importers as they beef up their hard currency positions.

The shilling will also be hurt by a deteriorating current account position, with the current account deficit deteriorating by 10.2percent during Q1’2020, to 110.9 billion shillings, from 100.6 billion shillings recorded in Q1’2019.

There is a 0 percent decline in the secondary income (transfers recorded in the balance of payments whenever an economy provides or receives goods, services, income, or financial items) balance, to 124.1 billion shillings, from 128.0 billion shillings in Q1’2019.

There is a 67.0 percent decline in the services trade balance (the difference between the imports and exports of services) to 20.4 billion shillings, from 61.9 billion shillings.

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