Most commercial banks are now selling dollars past Sh150 to customers as the local unit continues to register an unchecked free-fall against the green buck.

While only a handful of banks were selling dollars past Sh150 a month ago, nearly all commercial banks including tier-one lenders have now matched the jump in price for the world’s reserve currency.

For instance, a spot check by The Statesman BusinessWeek shows Equity Bank sold dollars at Sh152.35 each on Monday while NCBA quoted the green buck at Sh150.6.

Similarly, I&M Bank, which sold dollars past the Sh150 mark a month earlier, quoted the dollar at Sh152.80 while Stanbic Bank Kenya priced the currency at Sh150.

The higher dollar costs coincide with the depreciation of the official exchange rate with the Central Bank of Kenya (CBK) quoting the shilling at Sh146.22 against the dollar last Friday in contrast with Sh142.53 on August 1.

Banks have historically sold dollars at spreads of between six and 10 units from the official exchange rate informing the correlation between the depreciation of the official rate and the rate quoted by lenders.

Dwindling reserves

Weakness in the local unit has been attributed to the amalgamation of factors, including a stronger dollar globally from monetary policy tightening by the US Federal Reserve, a weakened foreign exchange reserve position and a persistent current account deficit.

The Kenya shilling has been on a free-fall against the US dollar for a second year running, shedding more than 14 percent of its value on a year-to-date basis to follow last year’s nine percent dip.

Analysts expect the shilling to remain volatile against the green buck to exchange by as much as Sh160 by year’s end.

“A confluence of slackening interest rate differentials, dwindling forex reserves and a deteriorated balance of payments account has strained the shilling’s capacity to function as a shock absorber.

We expect the shilling to remain volatile and oscillate between Sh143.50 and Sh161.40 levels against the dollar by December 2023,” noted analysts at Genghis Capital.

A weaker shilling has meant costlier purchases for the importers of goods and services and merchant traders while the external debt load has swelled on a local currency perspective.

The rise in import expenses has, however, been masked by a lower import bill across seven months to July with the costs falling marginally to Sh1.429 trillion from Sh1.459 trillion a year earlier.

The lower import costs amid the weaker local currency are partly due to reduced demand in the economy and the government-to-government deal on fuel imports, which postponed/staggered payments for fuel consumed locally.

From a debt perspective, Kenya’s stock of public and publicly guaranteed assets was quoted at a higher Sh5.137 trillion at the end of May from Sh5.092 trillion in April.

This is despite the stock falling in hard currency terms from $37.47 billion to $37.09 over the same period.

At EFG Hermes, a financial services firm, analysts expect the local unit to close the year at around Sh155 against the dollar on continued volatility.

“The shilling has been on a weakening spree for nearly three and a half years now. We think further weakness is warranted considering the wide current account deficit, thin level of FX buffers and global monetary tightening,” EFG Hermes lead economist Abu Basha told the Business Daily.

The CBK has let the shilling float freely with minimal interventions in a move backed by multilateral lenders such as the World Bank and IMF to cushion the economy from external shocks.

Minimal interventions

By letting the local unit find its level with minimal interventions, the CBK has saved up on foreign exchange which would have been previously used to defend the Shilling, freeing up the resources for alternative uses including external debt redemption.

Despite recent liquidity support from multilateral lenders, Kenya’s gross official reserves have declined to return below the statutory threshold of four months of equivalent import cover.

Last week, CBK placed the reserves at an equivalent of 3.83 months of import cover or Sh1.033 trillion ($7.08 billion).

In July, CBK governor Kamau Thugge indicated the apex bank had stepped back from making active interventions in the local currency.

“We of course pursue a flexible exchange rate system and sometimes intervene, although we have not been intervening as much lately. We intervene when we think there is excessive volatility, otherwise, we allow the exchange rate to find its own level through demand and supply,” he said.