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Traders should prepare to buy a dollar at more than 15 units above the official rate till October as the parallel exchange rate market flourishes.

On Tuesday morning, the Central Bank of Kenya quoted the dollar at Sh143.11 but various banks and forex bureaus in Westlands and Nairobi CBD were exchanging at 149-153, ten units more.

A spot check by the Star yesterday noted lenders were selling the dollar at a range of 148 to 151, way above the CBK average rates that are expected to go further up.

I & M Bank, for instance, was selling a dollar at Sh151.05, while Absa was selling at Sh150.30.

Other lenders were offering a dollar at least 148, above CBK's daily average of 143.11.

Equity, Co-operative, NCBA, Bank of Africa and Ecobank were selling at 149.2, 148.70, 148.40, 148.80 and 148, receptively. The average rate by forex bureaus was 153 units.

More fall is expected, with money market analysts at ICEA Lion saying the local currency will hit an official rate of between 148 and 150 units against the greenback by October and 165-170 in banks and exchange bureaus.

"Exchange rate policies and short-term measures put in place to insulate the local currency seem to have backfired and resultant effects seem to be overwhelming,'' the financial service provider said in its market outlook for Kenya.

The report adds that although some measures like government-to-government oil importation, the raising of base lending rate and a new foreign exchange code are good, the market is still sceptical.

"Something is not adding up. None of those measures seem to yield dividends. The high demand for dollars is either artificial or as a result policy leaks,'' financial markets analyst Benson Kiema told the Star.

He wondered why the demand for the dollar was still high despite the first consignment of credit-based oil arrangement landing into the country, hence delaying the usual monthly dollar demand by oil marketers.

Announcing the government-to-government oil importation deal in April, President William Ruto said the shilling that was then trading at Sh12o to the dollar would soon fall to Sh115.

Last month, the government set up an interest-bearing escrow account into which the proceeds from the sale of fuel sourced through the government-to-government deal are deposited in an effort to cushion itself from foreign exchange risk.

This measure is in preparation for a dollar-based payment to be made once the window for credit-based fuel importation under the deal lapses on December 31.

Under this plan, oil marketers are given six months to pay the imported oil in dollars. This was driven by the heavy demand for the greenback estimated at $500 million monthly.

"We have a month for oil marketers to assemble enough dollars to repay the first consignment of oil under the government-to-government deal. The sector, manufacturers and Kenya Power account for over 68 per cent of dollar demand in the country,'' financial expert Jacob Mavisi said.

He added that the current drop witnessed is expected to intensify in the coming days as oil marketers compete with other sectors to consolidate.

Last week, bankers asked the regulator not to retain the base-lending rate at 10.5 per cent as they monitor effects on inflation and the shilling.

Even so, some analysts want the apex bank to further tighten the credit market to avert an oversupply of shilling.

"We have seen the US raise the federal rate eight consecutive times since last year. Although CBK recently hiked the rate by 100 basis points, a further squeeze and good FX management will go a long way,'' Mavisi said.

Year-to-date, the shilling has lost about 20 per cent of its value against the dollar, with experts projecting it to drop by almost 50 per cent into the last quarter this year.

Apart from ICEA and Renaissance Capital, Jeff Gable, the head of FICC Research and chief economist for Absa, early this year said the shilling could hit a low of 150 by December, despite the slight ease in global economic constraints.

Since it started weakening in early 2020, the shilling has lost about 47 per cent in value, meaning importers are now incurring an extra Sh47 to buy a single dollar, compared to the period before the shilling started depreciating.

Kenya being a net importer, consumers will remain exposed to hiked commodity prices even though inflation fell within the regulatory levels of 7.3 per cent last month.

The monthly inflation had hit a high of 9.2 per cent in February this year, on the back of increasing food prices which continued to put households under pressure and raise the cost of living.

Economists have recently projected that it would Kenya at least three years to recover from the output losses occasioned by the weakening shilling against the US dollar.

The IMF in a recent external sector assessment report said the economic contraction occasioned by the appreciating dollar on emerging economies such as Kenya is deeper and will take much longer to ease.

“Output in advanced economies recovers three quarters after the appreciation while emerging market output remains depressed 10 quarters out,” IMF says.

Over the weekend, the lender called out central banks in Africa for selling forex reserves to manage currencies, terming it counterproductive.

IMF African Department director Abebe Selassie said those exchange rate policies are not flexible.

"Central banks have for the most part responded to the pressures they faced by selling reserves and not as much by allowing exchange rate depreciation. These will not ease inflation nor stabilise currencies,'' he said.