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Shilling’s 129 peg at risk as Iran war volatility rattles market
A prolonged Middle East war would threaten the current liquidity in the dollar market that has protected the shilling from further erosion, as costlier imports increase the pace of dollar outflows.
Before the US and Israel went to war with Iran on February 28, the shilling had traded at Sh129.02 against the dollar for 19 straight days.
This remarkable run that saw the local unit sit at the Sh129 level to the dollar for more than a year was shaken by the war, pushing the rate to the 130 level by April 7, the highest in 20 months.
The creeping volatility is partly attributed to rising demand for the greenback by importers who were wary of the impact of a weakening shilling on their costs.
It forced the Central Bank (CBK) to stabilise the market with dollar sales that have contributed to a decline in the country’s forex reserves by $1.36 billion (Sh175.8 billion) to $13.24 billion (Sh1.71 trillion) since March 5.
Although the shilling has regained ground to trade at Sh129.27 versus the dollar, economists said that the CBK will face growing test over whether to keep intervening on the market, while allowing the currency to move away from the Sh129 peg to the dollar.
“There is no gain for an African economy in having a strong, overvalued currency. But Kenya has managed liquidity well and built up its reserves, so we do see some equilibrium in the market,” said David Cowan, the Africa Economist at global lender Citi.
A prolonged Middle East war would threaten the current liquidity in the dollar market that has protected the shilling from further erosion, as costlier imports increase the pace of dollar outflows.
The CBK has always maintained it does not seek to influence the direction of the exchange rate, and that it only intervenes to ward off volatility in the market.
In addition to stabilising the shilling, the CBK also deploys its reserves to service the government’s external obligations, including debt repayments.
