Source: THE EXCHANGE
- Kenyan Shilling to Reach Sh138 this month as effects of global rates and heavy rains come alive
- Additionally, the minor decline in the foreign exchange reserves between April and May signals interventions in the forex market by the CBK.
- The CBK is expected to leave rates unchanged at 13 per cent at its June meeting to support these dollar inflows and provide positive yields to investors.
Financial experts are now predicting that the Kenyan shilling will depreciate to Sh138 against the US dollar by the end of June 2024.
The analysist from pan African market insights firm Stears, say that the Kenyan shilling witnessed large swings in May, after appreciating 2.09 per cent between May 2 and 16. This saw the local currency resume a consistent depreciation to close the month at Sh133.37 against the dollar.
Stears notes that although the currency remained relatively unchanged compared to April, on average, the movements of the shilling in the month will be a major concern for the apex bank at its upcoming June meeting.
“By the end of Q2 2024, we predict the currency will trade at Sh137.95 against the dollar, 8.73 percentage points above the Sh149.99 against the dollar average in Q1’2024. This indicates moderate currency risks in Kenya ahead of when the final interest payments on the $2 billion Eurobond issuance will be paid in June,” says the experts
Like the South African rand, Egyptian pound and Ghanaian cedi, the performance of the currency was largely driven by the movements in the US dollar, the lingering global interest rate environment and escalating geopolitical tensions, making the Kenyan economy susceptible to external shocks.
Additionally, the minor decline in the foreign exchange reserves between April and May signals interventions in the forex market by the CBK. The experts expect this trend to continue in the upcoming month should sharp currency volatility occur.
Inflation and interest rate decisions
The movements of the currency hint at an upward revision of energy prices (petrol, diesel, kerosene and electricity costs) that declined in May.
This, combined with rising food inflation risks due to El Nino effects triggering floods in coastal areas responsible for food production, exacerbates inflation pressures.
However, favourable base effects are still expected to slow the headline inflation rate in the coming months. Stears predicts Kenya’s inflation rate to be between 3.59 per cent and 5.44 per cent.
Kenyan Shilling to Reach Sh138
In May, the annual and month on month headline inflation rates rose to 5.10 per cent and 1 per cent, respectively.
“As we approach June, the impact of implementing the 2023 Finance Act, which doubled the value-added tax (VAT) on petroleum products by 16 per cent, will wear off,” Stears said.
Meanwhile, the 2024 finance bill is currently in parliament for debate. This new bill proposes a wide array of tax changes likely to support economic growth in the near term.
A major change is the cancellation of fines for companies in Export Processing Zones (EPZs) that should further encourage FDIs and the production of key export commodities, supporting the government’s coffers.
The IMF predicts Kenya’s economy to grow by 4.97 per cent in 2024, outperforming the regional growth of 3.80 per cent.
In addition to future growth prospects, the Kenyan government is curtailing spending and increasing revenue to narrow its budget deficit.
The country recorded a budget surplus in the April 2024 budget performance review, with tax revenue climbing by 17.13 percentage points compared to a year ago. The improvement in revenue is a green light for the international community to invest further in Kenya.
The CBK is expected to leave rates unchanged at 13 per cent at its June meeting to support these dollar inflows and provide positive yields to investors.
“Leaving rates unchanged will aid the central bank’s forward guidance approach to hedging against inflation risks while monitoring output growth. It will also support the Kenyan shilling that witnessed volatility in May,” the experts said.
Overall, Kenya remains a bright spot amongst the top African countries. In June, the economy will be characterised by slowing currency pressures, lingering inflation risks, cautious consumer spending and a tight monetary policy environment.
THE AUTHOR: Jack Oduor
