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Kenya Inflation December 2021

Kenya: Kenya’s shilling falls to fresh record low in early December, spelling trouble for foreign debt servicing

The shilling continued its downward trend against the USD in recent weeks, hitting a fresh record low on 8 December, largely due to a stronger dollar amid limited domestic supply from the Central Bank. On 14 December, the KES traded at 112.9 per USD, depreciating 0.9% from the same day in the prior month and weakening 3.3% compared to the same day last year.

The shilling has been hitting new record lows on a daily basis since early November, largely weighed on by a stronger greenback. Accelerating inflation in the U.S. over the past few months and the Fed’s increasingly hawkish tone have raised expectations of a sooner-than-anticipated rate hike. Jerome Powell’s reappointment as chair of the Fed and news that U.S. inflation reached an over 30-year high in November have further increased speculations. This has resulted in a notable drop in interest in emerging market currencies, prolonging the shilling’s freefall. Meanwhile, strong domestic demand for the greenback, amid short supply with the Central Bank limiting itself from excessive market interventions, combined with persistently high inflationary pressures and declining foreign reserves, has exerted further downward pressure on the KES.

Commenting on the FX outlook, analysts at the EIU noted:

“The depreciating trend will continue in 2022, amplified by election-related uncertainty, which typically saps confidence, taking the shilling to KES 116.7 per USD by year-end. We expect the pace of decline to moderate over the remainder of the forecast period, helped in part by monetary tightening, leading to an average exchange rate of KES 126.5 per USD in 2026. The rate of nominal shilling depreciation will, nonetheless, be outpaced by inflation.”

FocusEconomics panelists see the KES ending 2022 at 113.9 per USD and 2023 at 116.6 per USD.

The depreciation also spells trouble for the country’s external debt levels, with nearly half of the total amount denominated in foreign currencies. Last fiscal year, the G20 suspended the country’s bilateral government debt repayments between January and June 2021 to help it address the impact of the Covid-19 pandemic. After a six-month pause, the country has now been called upon to continue its foreign debt servicing. In light of a weakened KES, this is bound to weigh on public finances.

FocusEconomics panelists expect foreign debt to end 2022 and 2023 at 42.5% and 43.7% of GDP, respectively.

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