- The Kenyan shilling has fallen to a new low of 140.04 against the US dollar.
- Central Bank of Kenya data shows the unit is also losing to other major currencies including British Pound and Euro.
- Last year, the Kenyan shilling depreciated by about 7.5 per cent against the US dollar, the UAE dirham (7.5%), Saudi Riyal (7.4%) and the Chinese Yuan (3.1%), the Kenya Economic Survey 2023 shows.
As developing market currencies continue to suffer from the worldwide increase in interest rates, which is being spearheaded by the US Federal Reserve, the Kenyan Shilling has dropped to a historic low in relation to the US Dollar.
The Fed has increased the benchmark rate ten times in a row, or a total of five percentage points, since March of last year. In the last 40 years, these increases are the most abrupt. In an effort to combat US inflation, interest rates were raised. The superpower’s economy saw an increase in inflation last year, reaching 9%.
According to data from the Central Bank of Kenya, the Kenyan Shilling hit a new low of 140.04 against the dollar on June 19. The local currency is also losing to other major currencies including the British Pound and the Euro.
Last year, the Kenyan shilling depreciated by about 7.5 per cent against the US dollar. It lost 7.5 per cent to the UAE dirham, Saudi Riyal (7.4 per cent) and the Chinese Yuan (3.1 per cent), the Kenya Economic Survey 2023 shows.
Within the EAC, the Kenyan shilling lost ground to the shillings of Tanzania and Uganda by 7% and 4.5%, respectively. Since mid-2018, when it was exchanging at 101.29 to the king dollar, the currency has been in decline. In the beginning of this year, it had fallen to 124.49.
Cost of living in Kenya
The free fall of the local currency is pilling pressure on households due to its diminishing purchasing power. While manufacturers are passing on higher costs to consumers, importers are reporting a rise in commodity prices. The jump in commodity prices will remain as Kenya is a net importer.
While CBK has quoted the shilling at a mean of Sh140, commercial banks are expected to sale a dollar at above the rate hence increasing spending by importers and local manufacturers.
According to the Kenya Association of Manufacturers (KAM), raw materials imported by local players are among goods most affected, increasing the cost of production. “Any extra cost has to be passed to the consumers on the final prices. Manufacturers have no choice,” KAM notes.
Also affected by the weak shilling and a strong dollar is petroleum products which are key in the transport sector, farm production and electricity among others.
Prices of food products such as cooking oil, wheat, sugar, maize and inputs such as fertilizer are also expected to increase, as the country remains a net importer mainly from Asia.
Read also: Kenya’s Central Bank raises key lending rate to fight inflation
Kenya’s growing trade deficit
Kenya has a huge trade deficit which widened to and any extra costs on the dollar go a long way in affecting its import bill. According to the 2023 Economic Survey released by the government last month, the country’s import bill rose by 17.5% to $17.8 billion last year.
This is against $6.2 billion earned from exports, hence a trade deficit $11.6 billion.
China remains the biggest import source for Kenya. Other key sources are Saudi Arabia and UAE (for petroleum products). Previously, India has for long been the second top source until last year when the Arab nations overtook it.
With high demand for dollars by importers and measures to tame inflation globally, the shilling will remain under pressure. Its impact translates to a rising inflation in the country. Kenya’s inflation hit eight per cent last month from 7.9 per cent in April.
According to the Kenya National Bureau of Statistics, the increase in inflation was largely due to increase in prices of commodities under food and non-alcoholic beverages (10.2 per cent); housing, water, electricity, gas and other fuels (9.7 per cent); and transport (10.1 per cent) between May 2022 and May 2023.
“These three divisions account for over 57 per cent of the weights of the 13 broad categories,” KNBS said in the May release.
Kenyan Shilling projected to remain weak
Prices of commodities under personal care, social protection and miscellaneous goods and services recorded an increase of 8.1 per cent over the period. The CPI increased by 0.9 per cent from an index of 131.83 in April 2023 to 133.01 in May 2023. The month-to-month food and non-alcoholic beverages index increased by 1.4 per cent between April 2023 and May 2023.
The shilling is expected to remain weak with projections of further drops in the medium-term amid persistent forex demand from importers, as well as the impact of rising inflation, according to trading solutions provider–AZA Finance.
“We expect the shilling to continue depreciating in the near term,” said Terry Karanja, senior treasury associate at AZA Finance.
Renaissance Capital has also projected a further slide on the shilling. “The dollar is expected to continue with its charm offensive in the coming months, a move likely to further hurt weak currencies, piling pressure on already high inflation,” the financial service advisory firm said.
Analysts at Absa Bank last month indicated the shilling could hit a low of 150 by December, despite the slight ease in global economic constraints.
According to Jeff Gable, the head of FICC Research and chief economist for Absa, the local currency was projected sometime last year to continue weakening to a better part this yea. This is on the back of hiked interest rates by global lenders in efforts to curb inflation.
Read also: African currencies under pressure on US interest rates
Measures to stabilise Kenyan Shilling
CBK has been putting measures to stabilise the shilling and tame inflation. For instance, there has been a steady increase on local interest rates.
According to IMF, the Kenyan Shilling should be allowed to find its own balance. The IMF says CBK and other central banks in sub-Saharan Africa should let their currencies to depreciate until they reach their balance point. Leaders and policymakers have also been calling for export-oriented business.
It encouraged central banks to just tame inflation by tightening monetary policies to encourage capital inflows and implement austerity measures to tame the growth of debt.
As for non-pegged regimes, in most countries, letting the exchange rate depreciate is necessary to facilitate adjustment to external shocks that are durable, such as changes in terms of trade and higher interest rates in advanced economies, IMF noted.
Non-pegged countries are those where the exchange rate is not fixed to another currency on a legal basis.
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Meanwhile, Kenya is hoping loan disbursements from the World Bank and IMF will boost its forex reserves. The Kenya-IMF loan programme also helps ease concerns over a dollar shortage in the country. The country has already received proceeds from a syndicated loan totalling $500 million.
Additionally, the World Bank in May approved a $1 billion Development Policy Operation. Additionally, an agreement reached between the IMF and Kenya may allow for the release of approximately $1 billion in new cash.
This will increase Kenya’s foreign exchange reserves, which in the first quarter of this year fell to a 10-year low of $6.49 billion. According to CBK, they have, however, increased to above four months of import coverage as of last week.
Kenya’s forex reserves
“The usable foreign exchange reserves remained adequate at $7.459 billion (4.11 months of import cover) as at June 15. This meets the CBK’s statutory requirement to maintain at least 4 months of import cover,” CBK said on June 16.
Remittance inflows in May 2023 totaled $352.1 million compared to $320.0 million in April 2023, an increase of 9.9 percent. The cumulative inflows for the 12 months to May totaled 3.9 billion, increasing by 0.1 per cent.
“The remittance inflows continue to support the current account and the foreign exchange market. The US remains the largest source of remittances to Kenya, accounting for 54 percent in May 2023,” CBK said.
Earnings from rebounding tourism sector will boost the country’s foreign exchange earnings.
With tightening monetary policies globally, many African economies that are struggling with falling forex reserves. Policymakers are exploring ways on how to cut overreliance of the dollar on international trade. President William Ruto of Kenya is pleading with other African nations to find a balance in intra-African commerce that is less reliant on US dollars.
De-dollarization is not a recent occurrence, but analysts say it is a complicated approach. In light of the US dollar’s continued dominance as the primary global trading currency, it necessitates well considered economic decisions.
Promoting intra-Africa trade to firm up currencies
For over a decade, China and Russia have sought to reduce use of the US dollar business. The move seeks to shield themselves from US sanctions. By cutting dollar use, China and Russia hope to reduce exposure to the effects of US monetary policy, and assert global economic leadership. And while they both have somewhat reduced their dollar use, their economies still rely heavily on the dollar.
During an African Continental Free Trade Area (AfCFTA) forum in Nairobi last month, President Ruto called for more intra-Africa trade. He proposed creating a system that will allow payments using local currencies, rather than depending on the dollar.
“It is imperative that we proactively seek a resolution to the disparities in currencies and the consequential impediments it poses to intra-African trade. Trade cannot take place without efficient and unified payment systems,” President Ruto said.
Across Africa, there has been efforts to introduce several regional payment infrastructures. However, there lacks a single system that seamlessly facilitates trade among nations, eliminating the obstacles posed by varying currencies.
Read also: Kenya amplifies dedollarisation call at Nairobi AfCFTA talks
