This is what stronger shilling has done for Kenya

A stronger shilling leads to cheaper or more affordable goods. [iStockphoto]

The appreciation of the Kenya shilling is great news. Because the country relies on raw materials for its domestic production, a stronger shilling leads to cheaper or more affordable goods.

A favourable exchange rate means interest rates are either held constant or lowered. Inflation is also easier to contain within the desired limits. Further, foreign investors are attracted when the shilling provides them more bang for their buck.

These are those who peddle falsehoods to the effect that there is a behind-the-scenes manipulation of the country’s currency for the benefit of nefarious characters. Regarding the rallying of the shilling, these are the facts that obtain.

First, Kenya’s effort to repay its USD2 billion Eurobond has precipitated a wave of investor confidence. The Treasury has bought back Sh210 billion out of the outstanding Sh291 billion of its 2014 Eurobond. This has been through the utilisation of the entire amount raised from the issue of a new bond to retire part of the old.

Jitters that existed over Kenya’s ability to service its external debt have been calmed. In fact, an infrastructure bond recently floated has been oversubscribed. This has led to foreign exchange inflows that have strengthened the Kenya shilling considerably.

Second, locals hedging on a shortage of dollars in the market are now ditching the same in favour of the shilling. The value of dollar deposits held by Kenyans in local banks rose by 68 per cent to a record Sh1.55 trillion in the 12 months to December 2023. Kenyans now realise that speculation of a shortage of the greenback was unfounded. Consequently, they are now selling their dollars as all indications point to the continued appreciation of the shilling against foreign currencies in the coming days.

Third, institutional investors are trooping back into the country. It is anticipated that the US Federal Bank will start cutting interest rates from May this year. For investors, Kenya will offer a more attractive investment proposition, especially with the current tightening of its monetary policy and the assurance that the country is not headed towards debt default.

These are some of the immediate benefits of a strong shilling. Most evident is the fact that petroleum product prices have come down considerably. This is because the trade in petroleum products in the international market is denominated in US dollars. Energy and Petroleum Regulatory Authority used an exchange rate of Sh148.02 to the dollar on February imports. This was a drop from the 164.42 previously used in January. This drop has reflected at the pump where prices have dropped by up to Sh7 per litre.

Inflation dropped to 6.3 per cent in February. This is the lowest it has been in 23 months. The drop has been informed by a decline in the prices of major staples and the Central Bank of Kenya’s tightening of its monetary policy. The latter has not only stabilised the shilling but also aided its current appreciation.

A stronger shilling is lowering public debt service costs. The Treasury says changes in currency by a single unit impact debt by Sh40 billion. So far, public debt has reduced by close to Sh1 trillion on account of the resurgence of the shilling.

Mr Khafafa is a public policy analyst