6 August 2017

Kenyan Shilling Largely Unaffected By Elections

The Kenya shilling is holding firm as the country goes to the elections.

The central bank has been mopping up excess liquidity from the money markets on an almost daily basis, while occasionally selling dollars to banks to maintain stability.

Data shows that the shilling was firmer towards the end of last week as dollar supplies improved, boosted by a selloff of hard currency by commercial banks looking to cope with a liquidity squeeze.

Commercial banks quoted the shilling at between Ksh103.75 and Ksh104.05 to the dollar, compared with the previous week when they quoted it at between Ksh103.80 and Ksh103.40

The Central Bank of Kenya is increasingly intervening in the market through the sale of dollars to withdraw liquidity and ease depreciation pressure on the shilling.

The Kenyan shilling in mid-July touched a six-month low due to dollar demand from oil companies, food importers and firms that were paying dividends to investors abroad.

The shilling had lost 1.2 per cent against the greenback to touch close to a one-year low of Ksh104 with commercial banks quoting it at Ksh104.15 to the dollar. It was last near this level mid-January, when it touched Ksh104.20.

Shilling to remain firm

According to market analysts, even after elections, the shilling will remain firm as the present level of the central bank's usable foreign exchange reserves of $7.9 billion or 4.6 months of import cover, still give confidence that there is ample currency to stave off any wild swings by the local unit.

"Bearing in mind the central bank's intervention, we feel that we should remain just about this level," a trader at one commercial bank said.

The Central Bank of Kenya's usable foreign exchange reserves have been declining from the $8.3 billion high witnessed in May 2017, the present level of $7.9 billion.

Campaign money

During elections, cash in circulation increases as campaign money swarms into the economy leading to inflation.

During the last election, the shilling was relatively stable after the CBK intervened by selling dollars directly to the market to prop up the local currency.

Economists say that in this election, strengthening or weakening of the shilling will primarily be determined by events on the political field, which have a direct bearing on the flow of capital.

The peaceful general election of 2013 buoyed the optimism of the business community, which in turn steered the economy on a strong growth trajectory.

Uganda and Tanzania

The Ugandan shilling was largely stable as at the past week after the Bank of Uganda mopped up excess liquidity from the money market. If left unchecked, the excess could have led to higher short-term exchange rates and dampened the case for holding dollars.

The previous week had the Uganda shilling forecasted to weaken due to dollar demand from the energy sector.

Commercial banks quoted the local unit between Ush3,608 and Ush3,618, which was weaker than the previous week where it traded between Ush3,605 and Ush3,615 to the greenback.

"We will see significant activity by energy importers and manufacturers on the demand side," the Reuters news agency reported.

The Tanzanian shilling is expected to remain firm, helped by dollar inflows from the mining sector and month-end sales of the greenback by companies seeking to pay taxes and salaries in local currency.

The country is experiencing demand for dollars from the energy and construction sectors.

The shilling saw stable trading between Tsh2,234 and Tsh2,244 last week against the dollar.


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