Since the new leadership at the Central Bank of Kenya (CBK), prudent monetary policies have been aligned to salvage the Shilling which has been on a losing streak.
On a year-to-date basis, the shilling has depreciated by 14.9 percent against the dollar, adding to the 9 percent depreciation recorded in 2022.
Under the reign of Kamau Thugge, the apex bank has adopted a flexible exchange rate regime, allowing market forces to influence the currency’s value.
This approach has helped prevent speculative attacks on the shilling and allowed it to find its equilibrium value based on the supply and demand dynamics.
By building and maintaining adequate foreign exchange reserves, the CBK can intervene in the currency markets when necessary, smoothening excessive volatility and supporting the shilling’s value.
Favourable Trade Balance
Kenya’s trade balance has also been favourable, contributing to the shilling’s resilience.
Over the weekend, the shilling value had dropped to 142.15 units against the Dollar. At the start of the week on July 24, it proved resilience to trade at 142 units.
This is on the back of the export of variety of products, including tea, coffee, flowers, and horticultural products which have been in demand in international markets.
Foreign Direct Investment
Kenya has been an attractive destination for Foreign Direct Investment (FDI). The influx of foreign capital has provided a boost to the economy and enhanced the demand for Kenyan Shilling.
Between 2015 and 2021, Kenya’s total stock of FDI stood at Ksh.1.7 trillion ($10.4 billion), with major investors including the UK (13.5%), Mauritius (11%), the US (10.3%), South Africa (9.8%) and France (5.2%). FDI stock is predominantly concentrated in finance and insurance (around 33%), information and communication (16.1%), wholesale and retail (15.4%) and manufacturing activities (14.8%). Kenya has traditionally been one of the largest recipients of FDI in Africa.
The World Economic Forum’s country competitiveness report also ranked Kenya as Africa’s number one country in terms of human capital quality and the availability of research and innovation.
Despite its robust performance, the Kenyan shilling is not without risks and challenges. External factors, such as fluctuations in global oil prices or shifts in international trade dynamics, can impact the currency’s value.
Additionally, Kenya’s high levels of public debt and fiscal deficits pose concerns, as they could lead to increased borrowing and inflationary pressures, potentially affecting the shilling’s stability.
As Kenya continues to develop and diversify its economy, maintaining a stable and strong currency will be vital for sustaining economic growth, attracting investment, and ensuring the welfare of its citizens.