Save our shilling: What needs to be done

The depreciation of the shilling against major currencies has largely been blamed for the high cost of living.

A weak shilling has been attributed to a general increase in prices of essential commodities like food, transport and energy.

Consumers have less purchasing power than before and as a result, they are being forced to consume less of everything each passing day.

Kenyan borrowers have not been left out, as they are also struggling to meet their debt obligations.

The US dollar has risen from an average exchange rate of Sh125 against the shilling in the first quarter of 2023 to Sh162 posted in January 2024.

On January 15, the shilling officially crossed the 160 unit points against the US dollar, the lowest level on record.

Generally, with a weak shilling Kenyan products become cheaper, which is a benefit for local producers.

Further, a weak shilling promotes domestic investments that create employment and also discourages the final consumption of luxury imports.  

However, for a developing economy like Kenya that has a huge oil import bill, weakening of the shilling may eventually cause inflationary pressures. Kenya has been importing too much and exporting too little, making the country vulnerable to shocks.

What needs to be done

Edwin Dande, Managing Partner, Executive Director and Chief Executive Officer at Cytonn Investments Management said the shilling could be stopped from depreciating further if certain measures are put in place.

Dande said the government could formulate policies to encourage Foreign Direct Investments (FDIs).

“The government should prioritise creating an attractive investment environment for foreign investments by improving transparency in all required regulations as well as reducing hurdles in the process,” he said.

A report of the Parliamentary Budget Office- The Quarterly Economic and Fiscal Update (July-September 2023)- said there has been a weak business environment occasioned by the depreciation of the shilling.

“The shilling has lost 23 per cent to the US Dollar, 38 per cent to the Sterling Pound, 33 per cent to the Euro, 21 per cent to the Uganda Shilling and 12 per cent to the Tanzania Shilling between September 2022 and September 2023,” the report says.

It added that the pressure on the shilling is fuelled by sustained demand for imports, subdued recovery in capital inflows as foreign interest rates remain elevated, enhanced dollar demand, and persistent strengthening of the US dollar globally.

Cotu report

A report released by the Central Organisation of Trade Unions (COTU) on January 24, 2024, noted that the Kenya shilling has seriously depreciated against major currencies, especially the US Dollar.

“This has seriously drained the purchasing power of workers as well as workers’ savings,” COTU Secretary General Francis Atwoli said in the report, “Turning the tide on Kenya’s economy: Recovery and prosperity through the workers’ lense.”

The report said the cost of imports has ballooned over the year making it difficult for importers to pay for their products due to the high exchange rates.

“Kenya being a net importer therefore losses in the international trade making the economy to be persistently in deficit and prone to external shocks such as the war between Russia and Ukraine and between Israel and Hamas,” the report added.

President Ruto's cure

President William Ruto has said that his administration has laid out three ways in which they can strengthen the Kenyan currency.

Speaking at a media round table at State House, the Head of State on December 17, 2023, Ruto pointed out that he introduced the importation levy on some items.

Secondly, the President said the Kenyan shilling weakened because the government had not paid attention to the agriculture sector.

Ruto revealed that Kenya was importing Sh500 billion worth of food commodities annually.

Lastly, President Ruto also stated that to address the weakening shilling, his administration has focused on employment.

He noted that Kenya Kwanza has ensured they are getting foreign exchange into Kenya by connecting Kenyans to opportunities outside the country.

More solutions

Speaking to the Star Dande noted that building an export-driven economy would also strengthen the shilling.

He said the government could make this possible by formulating and implementing robust export-oriented policies and manufacturing to increase exports.

He said the country should reduce overreliance on imports to preserve the country’s foreign exchange reserves.

He added that the government should work in close conjunction with banks and other investment institutions to allow for favourable accounts for diaspora citizens, which will encourage them to remit more money back to the country hence cushioning the shilling against further depreciation.

Central Bank Governor of Kamau Thugge believes the shilling has depreciated to the maximum.

He has counted on a decision to increase the CBK rate by 200 basis points to 12.5 percentage points by the Monetary Policy Committee (MPC) in December last year as a solution to the problem.

Thugge said stringer measures will be taken if the exchange rate does not stabilise.

He has also warned Kenyans against hoarding dollars for investment purposes.

The strongest currencies are often highly sought after, such as the most valuable currency of the Kuwaiti dinar or monies of influential economies, such as the US dollar.

Weak currencies

A weak economy will often dictate a weak currency, but often a weak currency is because the currency in question is not in demand.

Conflict, isolation and high inflation are often what contribute to a currency’s rapid depreciation.

Political tensions with the USA, and the Iran-Iraq war rendered the Iranian Rial officially the weakest currency in the world.

The Islamic Revolution of 1979 caused a rapid decline in the value of the Iranian Rial due to the huge amount of capital flight from the country.

Estimates are that around $30-40 billion left the country during the revolution.

Since then, more recent events have also contributed to the weakness of the Iranian Rial. By June 2020, the Rial had fallen by more than five times what it was in 2018, which many attribute to the government printing too much money.

In Africa, Sierra Leone has the weakest currency.

The Sierra Leone was introduced in 1964, replacing the British West African pound.

For a brief period, Sierra Leone was worth more than a US dollar in the 1980s, before it began to suffer huge depreciation.

The civil war in Sierra Leone solidified the trajectory of inflation, and several variations of the Leone have been introduced to stabilise the currency.

According to the Parliamentary Budget Office, a weak shilling cost Kenyan taxpayers an extra Sh65 billion monthly in the year to June 2023, constituting more than two-thirds of the Sh1.2 trillion increase in the public debt stock.

Sustainable debt

The weak unit added Sh809 billion to the public debt stock in the 12 months from July 2022.

While the government borrowed Sh310.76 billion from external financiers to fund the budget during the 2022-23 financial year, the external public debt stock rose by Sh1.12 trillion, a scenario the PBO attributes to the fall of the Kenyan shilling against major currencies from which the country has borrowed against.

Dande said the government needs to maintain a sustainable debt level.

“The government should find a harmonious equilibrium between engaging in foreign borrowing to boost foreign reserves and preserving a favourable credit standing with creditors,” he said.

He added that the government could also reduce commercial loans to reduce debt-serving costs.