The shilling has declined to a nine-month low as the Treasury stepped up foreign debt payments out of pocket.
The Controller of Budget says Kenya has spent Kes183 billion to pay debt in the first nine months this year despite enjoying debt holiday from Paris Club of countries under the Debt Service Suspension Initiative (DSSI).
This means there is a high demand for dollars in the market as the Treasury buys foreign exchange for settling loans explaining the high appetite for the greenback even when the sluggish economic recovery is not driving the demand.
Analysts have been unable to pinpoint why the Kenya shilling is plummeting even when dollar flows from multilateral debts and remittances have been on the rise.
Favorable dollar inflow from debts and strong remittances have failed to stem the decline as the shilling continued to fall.
Kenya’s forex reserves have grown increasingly reliant on external debt receipts and diaspora remittances.
Remittance inflows totaled to Kes34.4 billion ($312.9 million) in August 2021 compared to Kes30.1 billion ($274.1 million) in August 2020, a 14.2 per cent increase.
Earlier this year, the reserves got a boost from more than $2 billion worth of concessional loans from the World Bank and the International Monetary Fund (IMF), and also a $1 billion Eurobond issuance in June.
Last week massive dollar flows chasing the tax free infrastructure bond has pushed up forex reserves 8.3 per cent to Kes1 trillion.
Additional dollars are expected in November when the multilateral institutions are expected to release a second tranche under the IMF programe.
“US dollar against Kenya shillings has now moved to the highest level this year: Supply of USD has tightened despite the big inflows of USD from the IFB auction,” Meridian Partners said in a note to investors.
Despite the dollar flows the shilling has not stabilized indicating the market expectations that they may not cover outflows.
The analysts said CBK have burned through $469mm in reserves over the past month while overall reserves from their peak in mid-July.
“The Central Bank has intervened listlessly and infrequently which has allowed the market to remain well offside and banks have often declined to quote markets. It seems like a repeat of last year’s mistakes which almost broke the KES are set to be repeated,” Meridian Partners said.
Decline of the shilling is likely to lead to imported inflation where the prices of goods may rise as traders need more local currency to buy imports.
The decline also piles pressure on the already unsustainable debt levels requiring more units of the Kenyan shilling to service dollar debts. Kenya holds Kes4 trillion in dollar denominated debt.