Kenya Shilling Faces Challenges as It Slips in Currency Rankings

The Kenya Shilling has found itself in a tough spot, securing the sixth position among the worst-performing African currencies this year. Its value has plummeted by over 15% against the US Dollar, reflecting a complex economic landscape. At the close of the latest forex trading session, the Kenya Shilling landed at KSh 145.15 against the dollar, a dip from its previous session’s value of KSh 144.99. A year-to-date analysis reveals a 17.65% depreciation against the dollar, compared to the 9.04% drop witnessed at the close of 2022.

Economic Measures Contribute to Decline

This downward spiral comes as Kenya grapples with the implementation of the Finance Bill 2023, an effort that has brought forth new taxation policies including the Housing Levy and Digital Tax. Additionally, the country has introduced fresh income tax bands, predominantly affecting higher-income earners.

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Half-Year Progression

Examining the first half of 2023, the Kenya Shilling experienced a 13.94% depreciation against the US Dollar, closing at KSh 140.52. This contrasted with the 4.16% decline registered during the first half of 2022, when the exchange rate stood at KSh 117.83.

Drivers of Decline

Several factors contribute to the Shilling’s devaluation. The strengthening of the US Dollar against emerging market currencies, the escalation of global commodity prices resulting in heightened dollar demand, and reduced dollar earnings from agricultural exports all play a role.

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Challenges with Reserves and Projections

Foreign exchange reserves have been teetering near the Central Bank of Kenya’s (CBK) statutory requirement of maintaining at least four months’ worth of import cover. This precarious balance is due to increased dollar outflows in debt servicing.

Experts at AIB-AXYS Africa, a Nairobi-based brokerage, forecast that the Kenya Shilling’s downward trajectory against the US Dollar will persist, surpassing the 9.04% depreciation recorded in 2022. The Dollar’s ongoing strengthening against frontier currencies, combined with the need for foreign denominated debt repayment, is anticipated to further strain forex reserves.

The impending dividend repatriation in the equities market during Q3’23 will contribute to an elevated dollar demand. However, the inflow of dollar investments through FDI, the NSE Market, and other capital inflows might provide some support for the Kenyan Shilling.

Wider Currency Landscape

Comparing currency performances in Africa for 2023, Nigeria’s naira takes the undesirable lead with a depreciation of more than 40% against the US Dollar. This challenging situation stems from efforts to mend the country’s fragile foreign exchange regime and halt the fuel subsidy program.

Following the naira, the Angola Kwanza faces a 39.5% decline against the US dollar, followed by the Egyptian Pound (20.6%), Congolese Franc (18.9%), Liberian Dollar (18.6%), Kenya Shilling (15.7%), Sierra Leone’s Leone (13.8%), Ghana’s Cedi (11.9%), Rwanda Franc (11.6%), and the South African Rand (9.6%).

Conclusion

As Kenya navigates these economic challenges, the fluctuation of its currency serves as a reminder of the intricacies involved in maintaining a stable financial ecosystem. While the Kenyan Shilling’s journey has been rocky, the nation’s commitment to effective economic policies and resilience remains central to its future financial endeavors.