The shilling is projected to depreciate further against the US dollar and may come under additional pressure from a slowing economy and tighter global economic conditions, a new study says.
According to the African Development Bank (AfDB), the tightening global financial conditions are set to continue destabilising the foreign exchange markets of most African countries including Kenya.
"Most African currencies, especially in commodity-exporting countries, lost substantial value against the US dollar in 2022 due to monetary policy tightening in the United States," says the AfDB in its latest Africa's Macroeconomic Performance and Outlook. The AfDB's biannual publication is released in the first and third quarters of each year.
"While depreciation rates are projected to slow in 2023 and 2024, currency weaknesses in Africa's more globally integrated economies (Algeria, Kenya, Nigeria, and South Africa) are expected to persist in 2023, due largely to continuing tight global financial conditions and weak external demand," explained the lender.
The report says high-frequency leading indicators of economic activity, such as the Purchasing Managers' Index (PMI), also suggest subdued activity in Kenya alongside four of other Africa's top six economies, which account for at least half of the continent's GDP.
"The PMI values for Egypt and Kenya, and to less extent for Nigeria and South Africa, have generally been on a downward trend since March 2022, suggesting sustained softening economic activity in these countries, reinforcing their growth slowdowns.
The continued weakening of the local currency is expected to push up living costs, hurting households already subjected to high fuel and food prices.
The shilling has been on a free fall hitting an all-time low against the dollar, signalling inflation and higher costs of imported goods.
This has set up the country for more expensive imports, electricity, and debt servicing distress.
A weak shilling is harmful to Kenya given it is an import-driven economy.
Kenya imports various goods including cars, petroleum, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing, and shoes.
Central Bank of Kenya (CBK) data shows the shilling exchanged at an average of Sh124.1265 yesterday.