EFG Hermes Research on Friday, July 17, indicated that the Kenyan Shilling will continue weakening against the dollar hitting Ksh150 by December 2023.
In what signifies tough times for the country still recovering from international economic shocks, EFG Hermes explained that the currency was mainly weakening due to Kenyans hoarding the dollar.
Insufficient dollar supply in the market dragged the shilling 15 per cent lower in 2023 to Ksh141.44 in Nairobi according to the report.
Ronak Rasiklal Gadhia, the director of frontier banks at EFG Hermes Research, noted that the Central Bank of Kenya had tried to strengthen the shilling by raising rates but it had not worked entirely to expectation.
“We have not seen that dollarisation reverse because there is still some uncertainty as to whether the shilling has stabilised,” Gadhia stated noting that some depositors were still not letting go of their forex holdings.
In an earlier interview, Professor Fred Ogolla disclosed that the government had to act quickly to prevent the downward spiral of the shilling.
“There is a common misconception that the US dollar is getting stronger. What is happening is that the shilling is getting weaker,” he told Kenyans.co.ke.
Prof Ogolla added that with Kenyans hoarding the dollar, the cost of living was bound to increase sharply as this was the main currency for foreign exchange.
The economist indicated that fuel will be the first product to be affected which will cause an increase in prices for many basic commodities.
“Despite earlier communication by the government that fuel will be bought using Kenya shilling, the three contracted oil exporters must be paid using dollar and then they can sell in other currencies,” Ogolla explained the dollar effect.
In an earlier interview with Kenyans.co.ke, Economist Vincent Kimosop noted that the Kenyan shilling was put under a lot of pressure due to the imbalance of trade.
He noted that Kenya was forced to import most of its agricultural produce unlike neighbouring countries like Tanzania and Uganda which were relatively food secure.
Kimosop explained that this put huge pressure on dollar demand leading to a weakening of the shilling and a subsequent rise in the cost of living.
EFG Hermes Research showed that despite the dollar shortage, it was imperative that Kenya pays a Ksh283 billion Eurobond that will be maturing in June 2024.
“It is absolutely critical they pay it up because that would send a strong signal that Kenya’s dollar situation is not as bad as it was perceived to be earlier this year,” Gadhia noted adding that a default would raise borrowing costs, resulting in losses for local-currency investment portfolios.
"Significant inflows of foreign currency from a syndicated loan, funding from the World Bank and the International Monetary Fund, as well as a potential new Eurobond issuance will raise enough cash for Kenya to make the payment," Gadhia noted how the economic crisis will be averted.
