The Kenya Shilling has experienced a significant depreciation, losing at least 100 basis points of its value against the US dollar. This sharp decline has erased some of the gains made over the previous three months, marking a tumultuous period for the Kenyan currency.
As of the close of business on Thursday, the shilling’s value against the US dollar stood at 132.5, representing the quickest depreciation since February. In February, the shilling had remarkably appreciated against the dollar from a point where it had fallen to Ksh. 160 per dollar, recovering to as low as Ksh. 125 by the end of the first quarter. This period of stability brought some certainty to the exchange rate. However, the recent rejection of the Finance Bill due to nationwide protests has led to a Moody’s rating downgrade, exacerbating the shilling’s decline.
Data from the Central Bank of Kenya highlights the shilling’s downward trend since the protests began. On June 18th, the first day of the protests, the shilling stood at 128.77 to the dollar. This value dropped to 129.52 by June 27th, further to 130.46 by July 19th, and then to 131.05 by July 24th. The shilling continued to slide, reaching 132.21 a day later.
Economists and market analysts are now warning that the shilling could slide further following the rejection of the controversial Finance Bill, which has made investors uneasy about Kenya’s fiscal stability. “The protests did contribute to disruption in areas such as tourism and trade, so we do expect that these are some of the reasons contributing to the weakening of the shilling,” said economist Ken Gichinga on Citizen TV. Rufus Kamau, a Research & Markets Analyst at EGM Securities, added, “This basically demonstrates a lack of confidence in the Kenya shilling’s performance as a result of the protest that we have seen. So one thing is quite clear: the finance bill didn’t pass, so the government may not be able to meet the projected revenue.”
Additional pressures on the shilling include a reduction in diaspora inflows into the country, which puts Kenya at risk of depleting its forex reserves to meet the demand for the US dollar. Other challenges include maturing debt and under-subscription of government securities by investors. Kamau noted, “We have seen investors under-subscribe to government bonds basically because they are not very confident that the government will be able to pay when the bonds mature.” Gichinga also highlighted the decline in diaspora remittances, stating, “We are seeing diaspora remittances coming down. If you look at the June numbers, they are significantly below what we saw in May, so that is definitely affecting the supply side. And by the fact that Kenya is a net importer means our currency is almost necessarily under pressure.”
In light of these challenges, experts suggest potential solutions for the government to mitigate further depreciation of the currency. One possibility is an increase in M2 money supply, which could lead to more Kenyan shillings in circulation but would further weaken the currency. Kamau suggested, “One possible way forward in the next one to two years could be an increase in M2 money supply, meaning we could see an increase in Kenya shillings in circulation, which would weaken the Kenyan shilling further.”
Looking ahead, experts agree that the shilling could slide further, potentially trading at 140 or above by the end of the year. Gichinga predicted, “We expect it to move to the 138 to around 140, but it will be mitigated by the Fed cutting rates so FDI will be coming back.” Kamau added, “In the informal sector, you find that the Kenya shilling adopts much faster. CBK rate today is 132, but forex bureaus are at 134, 135. This is usually a leading indicator. So as for the outlook, I expect that we should be seeing 140 by the end of the year.”
The continued volatility of the Kenya shilling underscores the significant economic challenges facing the country amidst ongoing protests and fiscal uncertainties.
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