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Broken promise? Weak shilling haunts Kenyans, deals blow to Ruto's economic recovery plan

The steep decline in the value of the Kenya Shilling is causing negative ripples throughout the economy, dealing a blow to President William Ruto's economic recovery pledge.

The weakening currency has raised the prices of a wide range of consumer goods, bursting hopes of a soft landing for millions of Kenyans who expected the cost of living to ease this year.

A strengthening US dollar has seen the shilling weaken for more than a year now, contributing to the skyrocketing prices of most basic commodities despite bullish projections by the Kenya Kwanza administration of stability in the currency.

This is compounding financial distress for many Kenyans at a time when they are already facing higher food and energy costs tied to Russia’s invasion of Ukraine.

Some of the measures that the government has put in place to stop the decline include a deal with Gulf countries to import fuel on credit that has not stopped the fall.

At the same time, a shock monetary policy therapy by Central Bank of Kenya Governor Kamau Thugge appears not to be able to stem the fall of the shilling.

The governor said in December that he is committed to keeping a free-floating exchange rate, adding that he will not be keen to burn dollars and intervene to smooth out excess volatility.

During a Monetary Policy Committee meeting on December 5, CBK raised its benchmark lending rate by a significant 200 basis points, from 10.5 per cent to 12.5 per cent.

Dr Thugge said that the aggressive monetary policy stance had put on notice individuals stockpiling dollars in the hope they would cash in from the shilling fall at a later date.

“The actions that we have taken to raise the CBR (Central Bank Rate) by 200 basis points, that should reduce pressure on the exchange rate,” he said during a press conference in Nairobi.

The surprise move aimed at stabilising the exchange rate would dissuade those hoarding dollars and bring more greenbacks into the banking system, he added.

“We do believe that once those holding dollars know that we are serious and determined to stabilise the exchange rate, we should see a flow of foreign exchange back into the interbank foreign exchange market.”

The local currency, however, has continued to depreciate against the dollar and other major currencies, more so the UK pound and Euro.

CBK data showed the shilling exchanged at an average of 160.1875 against the dollar yesterday. However, some traders were exchanging it for nearly 170 to the dollar.

A weak shilling is harmful to the country given it is an import-driven economy.

Kenya imports numerous goods, including cars, petroleum, machinery, medicine and pharmaceutical products, vegetable oil, wheat, clothing and shoes.

A weaker shilling will keep the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further pushing up inflation which is expected to remain elevated in the first half of this year, according to the International Monetary Fund (IMF).

Economists now say the government must go back to the drawing board to come up with new strategies to address the shilling's depreciation.

Nairobi based economic analyst Deepak Dave of Autonomi Capital termed the currency crisis "a spiral" that is difficult to come out of.

He warned that there is a possibility if the government panics "to impose controls which will create even more problems and long term harm."

"The critical issues are a shortage of available dollars, and more importantly a fear in the market that the shortage will get worse," Mr Dave said in an interview with The Standard yesterday.

"The recent scramble to tax everything everywhere all at once is backfiring; businesses are so tangled in rules they are not being competitive."

He said the short-term option for the Kenya Kwanza administration is to announce a "properly structured plan" to address the market's fear of debt restructuring and avoid "bombastic assurances that have not helped".

"The government has to next announce at least two fully-baked privatisations, making clear it is serious about cleaning its finances."

"They should, finally, announce a thorough clearing of the tangled taxation system to allow employment to grow and business to thrive," said Dave.

"The sad alternative to all this is hoping for more miracle loans from the West, that will simply push us further into long term debt, though it will help short term exchange rate issues."

XN Iraki, a lecturer at the University of Nairobi's School of Business, questioned why some of the government's policies are not working.

"G2G (the oil import deal), the terms of which we had requested to be made public, ended up being a mere deferral of a problem. Eventually, we had to settle the oil payment in dollars," he said in a recent article in the Sunday Standard.

"It’s plausible that as the due date approached, the demand for dollars to pay for oil increased, leading to the depreciation of the Kenyan shilling."

Prof Iraki said a stable exchange rate would facilitate better economic decisions. 

"Governments often allow the currency to depreciate to make exports more competitive, leading to economic growth. My only concern is the lack of a targeted exchange rate, akin to inflation.

"What is the expected stable exchange rate for the shilling against the dollar, euro, or British pound?" he posed.

The weakening of the shilling poses a headache for Ruto's top money men as restless Kenyans have been asking the Ruto administration to put measures in place to shield consumers and companies from surging energy and food costs.

Yesterday, Kenyan workers demanded that the government stabilise the shilling to lower the cost of living.

Central Organisation of Trade Unions (Cotu) Secretary General Francis Atwoli asked the National Treasury and Central Bank to craft ways of stabilising the shilling to save Kenyans from harsh economic times.

"The depreciation of the Kenya Shilling is not a good thing, we as labour leaders are asking the governor of the Central Bank of Kenya together with the Cabinet Secretary of the Treasury to put a stop to the depreciation of our shilling," Mr Atwoli said during a meeting in Nairobi that brought together general secretaries of workers unions affiliated to Cotu to share the findings of its economic report.

"It does not reflect the actual economic activities of the country unless they are answerable to the IMF and the World Bank, and this will be dangerous to the Republic of Kenya."

Atwoli said the report, titled Kenya's Economy: Recovery and Prosperity Through Workers' Lenses, has been presented to President Ruto for consideration.

He warned that if the depreciation of the shilling is not arrested, prices of every commodity will go up and the public will rise against the government.

"If the IMF and World Bank are indeed helping the government of Kenya Kwanza, they must stop further depreciation to our shilling."

"They must tell them that we had a taste during the structural adjustment programmes and we said no. Let those institutions not push us to where we came from."

The IMF has urged Kenyan authorities to let market forces determine the level of the shilling, arguing that a flexible exchange rate will help Kenya insulate its economy from the external shocks facing its local currency.

“The exchange rate should be allowed to respond flexibly to market conditions,” said the IMF in a recent report on its credit facilities to Kenya.

“Recent measures at facilitating greater exchange rate flexibility should help ease FX (forex) market dysfunction and support a buildup of FX (forex) reserves.”

However, the local instability in the exchange rates means that with Sh1,000, many Kenyan families can no longer buy as much as they used to get a few months back.

Christine Muthoni, a retired teacher, has earned a living renting out her single and one-bedroomed housing units in the sprawling low-income Ndumberi neighbourhood of Kiambu County for over 10 years.

Despite her meagre earnings, she was always able to provide for herself and her sickly also retired husband with medicine and two or three meals a day. But not anymore.

The 67-year-old is feeling the pinch of the high cost of food and other commodities, which have skyrocketed thanks in part to the weakening shilling.

"I am unable to buy essentials like maize flour and cooking oil because their prices have gone up beyond my reach," she told The Standard, capturing the feeling across many Kenyan households that have been pushed into a tight corner by ever-rising costs of goods.

“Some of my tenants have not been paying on time as they have lost jobs while for others their salaries are delayed, and my income has been affected.”

 [Additional reporting by Emmanuel Kipchumba] 

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