By: JOSHUA MASINDE
The shilling weakened Wednesday, a day after the Central Bank said efforts to tame the rapid decline of the currency will take time to bear fruit.
Yesterday, increased dollar demand, especially from the energy sector, and sentiments from Central Bank Governor, Dr Patrick Njoroge, on limitations in preventing the local unit from continued weakening, saw the currency close trading at 102.75/85. This was weaker than the 101.75/85 at which it closed trading on Monday.
Analysts said the interbank rate, which is at 18 per cent, had offered short-term support due to illiquid markets, but they saw the shilling coming under pressure from continued demand by importers.
“The high interbank rate, which has made the markets very illiquid, will in the short term continue offering support to the shilling. But, for the high interbank rate and the tight liquidity, the shilling should have been exchanging at 105 or even 110 units to the dollar,” said a currency dealer at a local commercial bank.
Risks to the shilling still persist, owing to the widening current account deficit, a strong dollar in the international market and slowdown in forex inflows into Kenya on account of dwindling returns from the tourism sector and other key foreign exchange earners such as coffee and tea.
“As it is now, the Central Bank can’t do much to stem further weakening as we are continuing to see demand coming in, especially from the energy sector,” said another forex dealer.
Last week, the CBK directed banks to limit foreign exchange transactions to 10 per cent of their core capital. Coupled with increased mop-up of excess liquidity in the market, this measure was aimed at providing support to the shilling, which has depreciated by about 12 per cent to the dollar.