The Shilling on Thursday hit an all-time low against the dollar, signalling higher inflation and the cost of imported goods.
Central Bank of Kenya (CBK) data shows the shilling exchanged at an average of Sh138.1324 against the greenback.
The continued weakening of the local currency is expected to push up living costs, hurting households already reeling from high fuel, electricity and food prices.
It came as a new study by the African Development Bank (AfDB) projected that the shilling would depreciate further against the US dollar this year due to additional pressure from a slowing economy and tighter global economic conditions.
In its African Economic Outlook 2023, AfDB said the tightening global financial conditions are set to continue destabilising the foreign exchange markets of most African countries, including Kenya.
Expected to persist
“Currency weaknesses in some of Africa’s major economies - Kenya, Nigeria, and South Africa - are expected to persist in 2023, due largely to tighter global financial conditions and weak external demand,” said AfDB in the report.
The study published on Wednesday said the worsening currency pressure will strain Kenya’s public coffers due to maturing debt obligations denominated in foreign currency.
“For most of Africa’s dollar-denominated debt, currency depreciations pose a significant downside risk for debt management and sustainability in a continent where external debt stock—including bonds, syndicated loans, and bilateral borrowing - surged to $466 billion in 2022,” said the study.
“This wave of depreciation could be contained if countries continue to strengthen their monetary policies in the face of tighter financial conditions in advanced countries, though further tightening could exacerbate the already high cost of capital and halt economic recovery.”
The cost of servicing the public debt, which stood at Sh9.39 trillion at the end of March, is also set to rise with a weakened shilling piling pressure on the public purse.
Pile fresh pressure
Any further depreciation of the shilling now threatens to pile fresh pressure on fuel prices, which have stoked public anger.
To alleviate the economic fallout from the fall of the shilling, Kenya should build adequate forex buffers and also tap regional trade pacts to boost trade and cut reliance on foreign currency, said AfDB’s Chief Economist Professor Kevin Chika Urama.
The full implementation of Africa’s free trade area, he said, will help Kenya ride out the current currency crisis. A weak shilling is harmful to Kenya given it is an import-driven economy.