Kenya could be heading the Zimbabwean way over currency crisis

Kenya is facing the worst currency crisis, a scenario last witnessed in 2012 even as the Central Bank of Kenya (CBK) remained positive.

In 2022, constrained external financing led to Kenya suspending plans to tap international capital markets, forcing it to draw more extensively on its forex reserves to meet its external debt repayments.

The effect is trickling down on the shilling today, which has lost value to the US Dollar, currently trading at 128.8 units, according to the latest CBK data.

This has also seen the Forex Reserves fall to Ksh.846.5 billion, equivalent to 3.84 months of import cover as of March 3, 2023.

Forex has fallen below the East African Community’s (EAC) statutory threshold of 4.5 months of import cover.

However, CBK noted that the reserves continue to provide adequate cover and a buffer against any short-term shocks in the market.

Kenya’s currency status risks pushing the country into the league of loan defaulters like Turkey, Zambia, Ghana, Sri Lanka, Greece, Somalia, Sudan and Zimbabwe.

In 2015, Zimbabwe’s government discard the Zimbabwean dollar. Hyper-inflation had rendered it near worthless, making the US dollar the most widely used currency, then.

The southern African country started using foreign currencies like the US dollar and the South African rand in 2009 after the Zimbabwean dollar was ruined by hyper-inflation, which had hit 500 billion percent in 2008.

At the height of Zimbabwe’s economic crisis in 2008, Zimbabweans had to carry bagfuls of banknotes to the shops to buy basic goods like bread and milk. Prices were rising at least twice a day.

The ongoing currency crisis is also likened to an increasing imbalance in the economy, caused by surging import rates against the exports – or better known as the current account deficit.

The gap between imports and exports needs to be financed by financial inflows other than export earnings. The import Bill takes up almost a third (73.45 percent of Ksh.3.39 trillion) of the original budget for the year ending in June.

Heavy fluctuations in the stock and foreign exchange market, increase in inflation and unemployment, a downturn of the economy, adverse changes in monetary policy, and heavy reliance on foreign investment, are also playing major factors on the currency crises.

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