Shilling hits historic low as fuel deal fails to stop slide

A government-backed deal to import fuel on credit failed to stem the depreciation of the Kenyan shilling against the dollar as the local currency fell to a new low of 137.06 units on Friday, a month after the first shipment landed in the country.

When imported fuel on credit fell in the middle of last month, the government-brokered deal was expected to ease pressure on dollar demand from oil marketers and support the shilling.

is reading: The Kenyan shilling hits an all-time low against the dollar

But an analysis of the exchange rate shows that the shilling fell 1.8 percent in the month to last Friday, which was, however, slower than the 3.9 percent in the month to April 18.

A bank executive attributed the continued decline to pent-up demand for dollars from sectors such as manufacturing and other importers, adding that the shilling could take at least three months to start feeling the impact of fuel imports on credit.

“It (fuel on credit transaction) was not expected to address the problem immediately. “There is still pent-up demand from other importers and remember the oil companies did currency swaps last year and they have to unbundle,” said the official, who asked not to be identified.

“I’ll give him two to three months to start feeling the impact of this deal.”

Continued weakness of the shilling makes imports more expensive, promising to raise the cost of living given Kenya’s huge import orders.

Kenya signed an agreement with the governments of Saudi Arabia and the United Arab Emirates for a deal that would see Kenya receive fuel supplies on credit for six months. The first shipment landed in the country on April 14.

Under the agreement, the first payment will be made to Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company Group in September.

The three Kenyan oil companies that imported the goods are paid in shillings by local oil companies.

The deal eased the monthly demand for dollars by oil marketers to pay for goods, helping to stem the flow of dollars out of the economy, which in turn is expected to support the battered shilling.

Petroleum imports (fuel and lubricating oils) account for 28 percent of the monthly dollar demand.

But the first fuel payments in the next four months, along with a redistribution of profits by multinationals and listed companies, will drive up demand in what could negate the small gains being made in helping to stabilize Kenya’s unity.

Significant foreign shareholding in multinational companies such as Safaricom, Stanbic Bank and Equity Bank will see the companies seek hundreds of millions of dollars to pay dividends to foreign investors.

The shilling has been in free fall since last year, prompting the government to push through a fuel import deal and the banking regulator to read a riot bill on banks suspected of manipulating the forex market.

Last month, the Central Bank of Kenya (CBK) introduced a new Code of Practice in the Foreign Exchange Market that includes severe penalties for those caught manipulating the exchange market.

The new forex law prohibits banks from engaging in trading practices, quoting prices or making transactions with the aim of manipulating price movements or disrupting the functioning of the market.

A combination of the fuel deal and the CBK move is slowly helping the shilling find a foothold, says Moadhi Kilonzo, managing director and head of Kenya equities at EFG Hermes.

“What we are seeing is a function of the fuel deal, the reopening of the interbank market, as well as the global weakness of the dollar against other currencies,” Kilonzo said. The daily business.

Banks are expected to self-assess their level of compliance with the new law and submit a detailed compliance implementation plan approved by their boards of directors by June 30, 2023.

The Central Bank of Kuwait has been watching the forex market closely amid concerns that some players are seeking to manipulate the market.

But experts considered this one of the reasons for banks’ reluctance to trade dollars with each other, for fear of making the regulator’s mistake if prices exceed the expected range.

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President William Ruto had warned those holding the banks to release them days before the fuel deal was to begin.

The problems of the shilling against the dollar come amid calls from the International Monetary Fund not to support the local currency, but to allow it to find its real value.

The International Monetary Fund has in the past accused the Central Bank of Kuwait of managing the country’s currency, stating that Kenya’s exchange rate should act as a shock absorber.

“For unpegged systems, in most countries, allowing the exchange rate to fall is necessary to facilitate adjustment to permanent external shocks, such as changes in terms of trade and interest rate hikes in advanced economies,” the IMF said in a press release. Note the last month.

Non-correlated countries are those in which the exchange rate is not fixed to another currency on a legal basis.

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