Shilling to weaken further by end of 2016

Central Bank of Kenya Governor Dr Patrick Njoroge.

The shilling could touch 107 against the dollar by the end of 2016, as the demand for the greenback from importers continues to grow, an analyst at Citi Bank has said.

Citi Bank chief Africa economist David Cowan, however, has urged policymakers to focus on making the unit more predictable.

“A lot of African countries have this thing like the Kenyan shilling should not cross 100. Investors are interested in exchange rate predictability and not nominal stability,” Mr Cowan said during a presentation on East African and Kenyan economic trends in Nairobi on Tuesday.

The local currency will come under pressure in the last half of this year to close the year at 103 against the dollar, he added.

RELATIVE STABILITY

He said that if Kenya lets its currency depreciate further import substitution will happen. For instance, when food imports become more expensive, Kenya will start to produce locally.

The shilling has achieved relative stability after Central Bank of Kenya (CBK) tightened liquidity in the market.

In its recent Monetary Policy Committee meetings, the regulator raised the Central Bank Rate (CBR) by a cumulative three percentage points, up from 8.5 per cent. However, even with the absorption of excess liquidity from the market, the shilling has kept depreciating against major world currencies.

At an emergency meeting on Thursday last week, however, the CBK decided to leave its interest rate unchanged at 11.50 per cent. The governor, Dr Patrick Njoroge, had noted that whereas the by name"> foreign exchange market was volatile in early July, it had stabilised in part due to the impact of its monetary policy measures.

On Monday, the shilling closed at 101/05 to the dollar but traders warned that volatility remains since the stability is being propped up by the rise in interbank rates that may not be sustainable for the long term.

Mr Cowan says a sharp increase in the fiscal and current account deficit will continue to pile pressure on the shilling in the coming months.

He said that although the CBK would be reluctant to tighten the monetary policy further, it will have little option but to push it to 12 or 13 per cent in the next 12 months.

Source: Daily Nation