The Kenyan Shilling has been on a downward trajectory against the US Dollar, depreciating by 0.5% to start the week at Ksh.152.46, from Ksh.151.7 recorded the previous week.
This depreciation is not a new phenomenon; on a year-to-date basis, the shilling has depreciated by 23.3% against the dollar, adding to the 9.0% depreciation recorded in 2022.
Factors Influencing the Depreciation
Current Account Deficit
One of the significant factors contributing to this depreciation is an ever-present current account deficit. The deficit stood at 3.7% of GDP in Q2’2023, a decrease from 6.0% recorded in a similar period last year. A current account deficit means the country is spending more on foreign trade than it is earning and is borrowing capital from foreign sources to make up the difference. This situation puts pressure on the shilling as demand for foreign currency increases.
Government Debt Servicing
The need for government debt servicing continues to put pressure on forex reserves. As of June 2023, 67.1% of Kenya’s external debt was US Dollar-denominated. This high percentage means that the government needs more US Dollars to service its debt, increasing demand for the dollar against the shilling and leading to depreciation.
Dwindling Forex Reserves
Forex reserves are essential for maintaining the country’s financial stability and in Kenya’s context, these reserves are dwindling, currently at USD 6.7 billion (equivalent to 3.6 months of import cover), which is below the statutory requirement of maintaining at least 4.0 months of import cover. This decrease in forex reserves means that the country has fewer reserves to stabilize the shilling against the dollar.
High Cost of Living
The depreciation of the shilling is having a direct impact on the cost of living, where imports make up a significant portion of goods in the market.
As the shilling depreciates, the cost of these imports in shilling terms have been skyrocketing, leading to inflation and a higher cost of living.
The high cost of living is further exacerbated by the fact that wages and salaries are not increasing at the same rate as inflation.
This discrepancy means that Kenyans are finding it increasingly difficult to afford basic goods and services, leading to a decrease in the standard of living.
A single person’s estimated monthly costs are $423.1 (Ksh.64,435.6) without rent.
These costs are significantly high considering the average salary after taxes in Kenya is $3462.
The depreciation of the shilling, coupled with the high cost of living, could potentially lead to inflationary pressures as imports become more expensive.