June 10 (Bloomberg) -- Kenya’s shilling snapped two days of gains and headed for a second week of declines against the dollar on concern inflation will accelerate as the government plans to increase spending, widening its budget gap.
The currency of East Africa’s largest economy depreciated 0.2 percent to 87.70 per dollar by 12:31 p.m. in the capital, Nairobi, extending its retreat this week to 1 percent.
Kenya will boost spending by 15 percent to 1.15 trillion shillings ($13.1 billion), Finance Minister Uhuru Kenyatta said on June 8. The deficit will widen to 236.2 billion shillings, or 7.4 percent of gross domestic product, he said. The inflation rate jumped to a 25-month high of 13 percent in May and price growth is expected to advance further this year as dry weather curbs agricultural production, central bank Governor Njuguna Ndung’u said on June 6.
“If Kenyans are importing goods at the current exchange rates then you expect inflation to go up,” Solomon Alubala, a trader at Co-operative Bank of Kenya Ltd., said in a phone interview today. “One of the measures to check inflation is removal of taxes on certain goods. It waits to be seen what impact this will have on lowering inflation.”
The budget deficit has expanded every year since at least 2005, the International Monetary Fund said in April, partly due to stimulus spending during the global financial crisis and poor tax revenue. Kenya’s monetary policy committee raised the benchmark interest rate by a quarter percentage point to 6.25 percent and the cash reserve ratio by the same amount to 4.75 percent, central bank said on May 31.
This week, the central bank has sold 1.5 billion shillings of repurchase agreements to curb supply of the local currency, according to Bloomberg data.
In a repurchase agreement, an investor agrees to sell a security to another trader, while at the same time arranging to buy it back at a future date and at a pre-determined price.
--Editors: Ana Monteiro, Linda Shen
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