Shilling at lowest since 1994 but CBK adamant

September 26, 2011

, NAIROBI, Kenya, Sep 26 – The Kenya shilling has become the worst performing currency in the world this year, as it breached the Sh100 psychological mark to the dollar in Monday’s opening trade.

The local unit fell to Sh100.60 to the greenback and has lost 19.70 percent of its value this year.

Closing the day at 101.69, was the lowest level it has hit since the forex trade was liberalised in March 1994 and analysts concur that there appears to be no let-up in this deterioration at least in the next few weeks.

The African Development Bank for instance has predicted that the shilling, which has been under attack from factors such as the euro debt crisis, the country’s current balance of trade deficit and a bit of speculation, might touch a fresh low of Sh110 level to the dollar.

Despite the alarming plunge, the Central Bank of Kenya (CBK) has expressly maintained that it will not intervene.

On Friday, CBK Governor Prof Njuguna Ndung’u said that as long as the fundamentals were right, they would leave the exchange rate to market forces.

“The current monetary policy stance will continue with consequential effects on inflation, interest rates and exchange rates. The Central Bank remains committed to a market determined exchange rate for as long as it is supported by fundamentals,” a statement signed by the governor read.

This declaration has however not stopped it from intervening directly through injecting more dollars into the market as well as undertaking measures such as marginally raising the Central Bank Rate.

These moves have however been fairly ineffective as the currency has continued to head south.

Coupled with the twin problem of soaring inflation – which is expected to peak at 22 percent – and the country’s balance of trade deficit, many economists have continued to downgrade 2011 Kenya’s economic growth rate.

From an initial projection of between 4.5 percent and 5.3 percent this year, organisations such as AfDB and the World Bank have cut their growth forecasts to 3.5 percent and 4.5 percent.

Genghis Capital Research and Investment Analyst Evans Kamau added that the plummeting currency does not spare corporates either as it might jeopardise their planning and expansion programs.

“Due to the volatility of the shilling, it makes it hard for corporates to plan. For those that depend on importing inputs, you expect that since their profit margins are being squeezed, it leads to a decrease in output and maybe lay-offs,” he opined adding that this will result in a vicious cycle of weak economic performance and a depreciating shilling.

While there is no ceiling to how low the shilling can fall, Kamau has however exuded confidence that the market will at some point correct itself.

When a reversal of this current trend begins, he predicts the shilling will first strengthen towards the Sh92.95 mark with further pressure expected to push the unit towards the Sh88.93 levels.

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