Currencies

Why Kenya Shilling Can't Hold Grip Against Dollar for Long

The shilling had shown signs of strengthening over the past two months, a phenomenon linked to the February Eurobond buyback.

Kenya has witnessed a significant shift in its currency dynamics, with the Kenyan Shilling depreciating against the US Dollar – once again.

Latest figures from the Central Bank of Kenya (CBK) show the shilling is trading at 135 units to the dollar.

It last exchanged at 135 on March 19.

It marks a stark contrast from the highs of 163 units before the issuance of the new Eurobond.

The current exchange rate reflects unfavourable conditions for the shilling within the credit market, as the dollar appears to regain strength, potentially due to Kenya’s lower export-to-import ratio.

Why The Shilling is Falling Again

As a net importer, Kenya’s reliance on imported goods, including basic commodities, has made it challenging to exert control over the dollar.

This imbalance has necessitated government borrowing to sustain import bills, which are predominantly dollar-denominated, pushing high the sovereign debt.

This borrowing trend has a cascading effect on the economy, influencing the purchasing power of commodities and contributing to inflationary pressures.

What this means is that importers, facing the need to purchase commodities in dollars, exert additional strain on the Kenyan currency.

The Eurobond Buyback and Its Implications

The shilling had shown signs of strengthening over the past two months, a phenomenon linked to the February Eurobond buyback.

Also Read: Kenya’s Eurobond Issue Attracts Over $5 Billion

However, Ben Mulwa, an economic analyst who spoke to a local media outlet said the move is unsustainable in the long run.

The February Eurobond buyback was a strategic move by the Kenyan government to manage its debt obligations.

The buyback led to a temporary appreciation of the shilling, which gained value against the dollar5.

This appreciation reduced the overall debt and debt service costs, saving Kenya over Ksh.800 billion in debt.

However, Kenya’s persistent deficits have led to a climbing public debt, which stood above 70% of GDP in 2023, with interest payments consuming nearly 30% of government revenues.

The Ripple Effect on Inflation and Purchasing Power

The depreciation of the shilling has a direct impact on inflation.

As importers pass on the higher costs of purchasing dollars to consumers, the general cost of living rises.

It is fuled by Kenya’s status as a net importer, where even basic commodities are bought from abroad.

While the Eurobond buyback has provided temporary relief, the long-term sustainability of a strong shilling hinges on increasing exports and improving the trade balance.

Why Kenya Shilling Cant Hold Grip Against Dollar for Long
Central Bank of Kenya CBK building along Haile Selasie Avenue in Nairobi
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Lawrence Baraza

Lawrence Baraza is a dynamic journalist currently overseeing content at Metropol TV Digital. With a keen focus on business news and analytics, Lawrence guides the platform in delivering insightful, data-driven content that empowers its audience to make informed decisions. Lawrence’s commitment to quality and his ability to anticipate market trends make him a key figure in the digital media landscape. His work continues to shape the way business news is consumed, making a significant impact in the field.

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