• On Monday, it closed trading at 137 against the dollar, and at the time of writing, the rate is only one cent away from 138.
• And this dip is not showing any signs of slowing down as the shilling has sunk further.
Image: FILE
Significant low points mark the year 2023 for the Kenyan shilling as it reaches its all-time low. Earlier this month, the country experienced a drop to a low of 136 against the dollar. And this dip is not showing any signs of slowing down as the shilling has sunk further. On Monday, it closed trading at 137 against the dollar, and at the time of writing, the rate is only one cent away from 138.
Data on the Central Bank of Kenya (CBK) website reveals that it was trading at 123.5 to the Dollar at the beginning of the year. It means that the dollar’s value has increased by over 12% compared to the currency of the East African nation.
The strong dollar
While many quickly point out the strong dollar as the cause of the weakening currency pair, the shilling is not performing well against other major currencies. Even locally, the Kenyan Shilling has lost over 12% of its value. So, there are a myriad of factors at play here.
But it’s true; a strong dollar is but one reason. Like many emerging market currencies, the shilling took a hit from the global interest rates hike by major economies, led by the Federal Reserve in the US. The move made the US dollar and Euro more attractive to foreign exchange traders and made currencies, like the Kenyan shilling, lose their appeal.
There is also the issue of the interest rate gaps between Kenya and the West. With higher US and European rates, the shilling has become less attractive.
Rebounding global economic activities have also played a part in all these. In the post-COVID-19 period, international trade has picked up, increasing the demand for the US dollar.
The country is experiencing a shortage of US dollars, and its foreign exchange reserves are at their lowest point over the last decade. Insufficient dollar reserves and a stronger dollar, combined with the expensive dollar-denominated debt, are not helping.
As the shilling loses more ground against the dollar, Kenya pays higher interest on its loans, making it even more expensive for the country to repay the debt. And with these concerns about debt repayment in the challenging economic climate, investors fear Kenya may default on its public debt.
Poor government policies and political unrest
President Ruto’s government is not also helping make things work. His expensive government policies, such as the “Hustler Fund,” while the country is on the brink of defaulting on its international obligations, leave much to be desired.
The opposition, too, is to blame. The high level of political instability, with frequent demonstrations, has put the country’s risk profile on bad books in the eyes of international investors who could bring in more foreign currency to ease the pressure on the weakening shilling. These anti-government protests and business disruptions have led to dwindling tax revenues, reducing the government’s ability to meet its obligations.
The country’s trading deficit and reliance on food imports priced in dollars have made food imports more expensive as the shilling weakens. Additionally, global food prices have risen due to disruptions in grain and wheat supplies.
The future prospects
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It’s true, the Kenyan shilling could experience recovery and sustain gains against the dollar. However, that would require a lot of conditions to improve significantly.
The Renaissance Capital global chief economist, Charlie Robertson, says the country should hope for a substantial decrease in US interest rates in the fourth quarter of 2023 and lower oil prices. Renaissance Capital is a prominent investment bank specializing in emerging and frontier markets, offering unparalleled access to more than 50 global markets.
Kenya can also revive its tourism sector to increase foreign exchange earnings and a bumper harvest to reduce agricultural imports. The rate may stabilize at around KSh135-40/ $.
It is worth noting that a weaker currency can potentially yield positive economic outcomes, such as stimulating diaspora remittances and enhancing the competitiveness of industries like tourism. However, there are limited indications that such a favourable outcome will materialize.
Robertson points out a “worst-case scenario” where the government defaults on its debt, significantly weakening the shilling. This scenario could potentially lead to the shilling depreciating by 20-30% below its long-term average rate, reaching approximately 168-182/$ by the end of 2023.
Considering the current circumstances, it appears unlikely that the Kenyan shilling will be able to regain its footing throughout 2023. The US Federal Reserve remains committed to raising interest rates and has recently adopted a hawkish stance, strengthening the dollar.
And while a bipartisan committee is in place to help ease the political tension, it’s unclear if it will succeed. But if the demos resume, the government will continue pursuing high-spending policies. Consequently, there is no getting the shilling out of this hole any time soon.