NAIROBI, Kenya, Jan 4 – The Kenya Shilling depreciated by 7.7 percent against the US Dollar to close at Sh109.2 in 2020, compared to Sh101.3 at the end of 2019.
This is according to a report by Cytonn Investments which reveals that the shilling was under pressure from increased dollar demand as people preferred holding onto hard currency owing to the coronavirus pandemic
The depreciation was also on account of a decline in dollar inflows from both exports of goods and services like tourism.
“Consequently, the county’s foreign exchange reserves have been on the decline but despite this, we are still well 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,” the report says.
The Central Bank, however, was active in the market to help support the currency.
The Kenyan government instituted various measures to cushion the shilling; according to the report, it agreed to a USD 2.3 billion credit drawdown facility with the IMF, Kenya targeting an initial disbursement of about USD 725.0 million in this fiscal year.
The facility will be a welcome relief to the currency as it will aid in boosting the forex reserves and help improve market sentiments. This was after the IMF completed its virtual mission to Kenya identifying that the country has suffered unprecedented shock from the pandemic and held discussions with the authorities on a program to support the next phase of their COVID-19 response.
CBK’s supportive activities in the money market, such as repurchase agreements and selling of dollars also cushioned the local unit.
Inflation
The inflation rate remained relatively low in 2020 with the average monthly inflation rate coming in at 5.2 percent.
The December numbers were 5.6 percent up from November 5.5 percent and lower than the December 2019 number of 5.8c percent.
The low inflation can be attributed to the low fuel prices experienced during the first half of the year, coupled with the favorable weather conditions experienced at the tail end of the year which has ensured that food commodity prices remained low through most of the year.
“Going forward, we expect the inflation rate to remain within the government’s set range of 2.5% – 7.5% with the key risks being drought in the first quarter of the year, high fuel costs due to increased crude prices globally as economies recover and further depreciation of the currency.
Monetary Policy
During the year the Monetary Policy Committee met 8 times. They lowered the Central Bank Rate (CBR) twice, in the meetings held on 27th January 2020 and 23rd March 2020, from 8.25 percent at the beginning of the year to 7.00 percent.
In their last meeting held on 26th November 2020, MPC retained the CBR at 7.0 percent for the fifth consecutive time, indicating that the previous cuts were having the intended effect on the economy. The committee concluded that the current accommodative monetary policies together with the fiscal measures are still being transmitted and continue to support the economy.
Additionally, the Cash Reserve Ratio was reduced to 4.25 percent, from 5.25 percent in their March 2020 meeting, to inject liquidity to banks for onward lending to businesses and households that have been adversely affected by the Coronavirus pandemic.
