Rallying shilling raises hope for an end to economic crisis

The shilling has strengthened against the dollar. [Elvis Ogina, Standard]

The shilling rallied to a new high on Thursday against the dollar, raising fresh hopes of an end to a currency crisis involving the steep decline in its value, which has been causing negative ripple effects throughout the economy.

It hit a new high against the dollar on Thursday, after Kenya booked billions from global investors to pay off an upcoming Eurobond signalling easing inflation and lowering the cost of imported goods.

The strengthening of the local currency also sets up the country for a lower cost of electricity and reprieve from debt servicing distress.

The Central Bank of Kenya (CBK) data showed the shilling exchanged at an average of 153.2039 against the dollar on Thursday.

In some forexes, it was being bought for as little as Sh139.

A weak shilling is harmful to the country given it is an import-driven economy. Conversely, a stronger shilling is a boost for the economy.

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

News of the strengthening shilling is set to deal a major boost to the Government’s efforts to turn around the economy, grow jobs and boost incomes.

On Thursday, the President’s economic advisor David Ndii attributed the strengthening of the shilling to the reduced risk of Eurobond default following the successful issuance of a new bond on Monday.

“Markets have opened. Eurobond default risk has evaporated. Speculative dollar positions unwinding,” he tweeted.

The surging energy and food costs has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships and confront the Ukrainian war’s global economic fallout.

A weak shilling has been keeping the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further pushing up inflation, which went up to 6.90 per cent in January from 6.60 per cent in December of 2023.

Cost of living

The continued strengthening of the local currency is therefore expected to lower the cost of living, further easing pain for households already subjected to high fuel and food prices.

Fuel prices hit historical highs this year on account of higher taxes and the weak shilling.

CBK Governor Kamau Thugge recently projected Kenya’s foreign exchange market will be stable this year, mainly due to an improvement in the current account deficit.

The surging US dollar had seen the shilling weaken, contributing to the skyrocketing prices of most basic commodities.

This has been compounding financial distress for many Kenyans at a time when they have been facing food and energy crises tied to Russia’s invasion of Ukraine.

A government-backed deal to import fuel on credit had failed to stop the drop.
Investors are known to hoard dollars for speculation purposes in the wake of previous forecasts showing that the shilling would remain weak.

With the expected decline, those holding dollars later convert their money to shillings at a gain or do not suffer conversion losses when importing.

The scramble for the dollar means that buyers - both for trading and hedging purposes - keep bidding higher for the currency.

Thugge had recently said the CBK’s aggressive monetary policy stance puts on notice individuals stockpiling dollars in the hope they will cash in from the shilling fall at a later date.

“I know there are a lot of people who have been holding dollars in the banks or even dollars as an investment asset expecting the shilling to go up. We are determined to make sure we are going to tighten the monetary policy until the exchange rate is stabilised and finds its true level which in my view the current rate has overshot that true value,” he said.

“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.”

By the end of August last year, foreign deposits in local banks stood at the equivalent of Sh1.32 trillion, nearly 50 per cent higher than the Sh896.2 billion recorded earlier in August 2022, according to CBK data.