The Kenya Shilling hits a historic low on Tuesday to trade at 108.55 units to the US dollar, indicating high costs of imports of raw material and finished products.
Shilling has been under pressure in recent months as demand for dollars surged and supply reduced due to ask of tourists and reduction of exports.
The local currency fell by 5.7 percent from March 12 – the same data country recorded its first case of Covid-19 – when it traded at 102.3 units.
The Shilling has also been affected by the demand for hard currencies from importers resuming business after the government began easing coronavirus containment guidelines.
“This was likely a result of increased dollar demand with less supply. The demand was been driven by two forces; the first one being the Central Bank of Kenya (CBK) communication of the intention to buy $300 million from commercial banks for three months (March, April, and May),” the Parliamentary Budget Office (PBO) said.
“The second one was, the possible buying and hoarding of dollars as a result of panic in the market caused by uncertainty due to the Covid-19 pandemic.”
The rich and bigger companies who seek to haven their wealth, stockpiled a record Sh45.5 billion in the three months from May when Kenya Covid-19 containment measures.
Central Bank Of Kenya (CBK) indicates that foreign currency bank deposits held by Kenyans hit a historic high of Sh671.4 billion, an increase from Sh625.9 billion in February, one of the largest three-month jumps.
This shows that rich people are protecting the value of their money holding.
Partly the jump was also caused by the weakening of the shilling, which inflated dollar accounts when converted to the Kenya Shilling.
The PBO said the local currency could weaken further in the short term as import rise and various parts of the economy remain subdued.
“Going forward, the value of the Kenya shilling is expected to decline further as importation picks up, pushing the dollar demand upwards,” the PBO said.
“The tourism sector, which is expected to alleviate the pressure by earning foreign revenue for the country, may not earn much in the second half of the year due to reduced international travel on account of COVID 19.”
If shillings weaken inflation in the country which dropped to 4.46 percent in August will raise, largely due to suppressed consumer demand.