Why the Kenyan Shilling continues to lose against the US Dollar
For almost three years, the Kenyan Shilling has been weakening against the US dollar. These are some of the reasons that explain the shilling’s decline.
Just before the outbreak of the COVID-19 pandemic, the shilling was trading at 100 against the US dollar. Since then, the ‘worlds reserve currency’ has strengthened by 39% to trade at 139 at the time of this writing in mid-June 2023. The plummeting in value has become particularly steep in the last 12 months which begs the question, why is the Kenyan currency performing so poorly?
- Political Uncertainty
Following fears that the General Elections in 2022 would cause disruptions in economic activity in Kenya, many investors pulled out their investments.
After the polls were held peacefully, they began reinvesting rapidly. However, months down the line, a sequence of policy changes and economic reports have dampened the investment outlook in Kenya. These instabilities and uncertainty have led to a decrease in foreign investment, which has caused the depreciation of the currency. Investors are also choosing to invest in other countries, further exacerbating the weakening of the shilling.
- Global Market Sentiments
In times of global economic uncertainty, the US Dollar remains the “Worlds Reserve Currency”, thanks to the Bretton Woods Agreement of 1944 under which the dollar is backed by the world’s largest gold reserves.
If investors are anxious about the global economic prospects, chances are high that they would move their investments into US Dollars, causing the Kenyan shilling to depreciate.
- Trade Deficit
Many countries are both importers and exporters. However, when a country imports more goods than it exports, it creates a trade deficit. In other words, it is buying more than it is selling. This leads to loss of jobs which in turn put pressure on the value of the currency.
- Commodity Prices
Commodity prices are believed to be a leading indicator of inflation as they respond quickly to general economic shocks such as increases in demand.
The Kenyan economy is heavily reliant on the export of commodities such as horticultural products, tea and coffee. If the prices attached to these commodities fall in the global market, the Kenyan import revenue is affected and may lead to a weaker shilling.
- Economic Fundamentals
These are mainly topics that affect an economy at-large, including statistics about unemployment, supply and demand, growth, and inflation, as well as considerations for international trade. In Kenya, the economy has been underperforming relative to the US economy, leading to a depreciation of the Kenyan Shilling against the US Dollar.
- COVID-19 Pandemic
The pandemic had a significant impact on the global economy, and led to a decrease in demand for Kenyan exports and a decrease in foreign investment. This has continued to put pressure on the value of the currency.
- International Wars
External factors such as the war in Ukraine has led to a spike in the prices of commodities such as food, fertilizer and petroleum products. The high commodity prices means that inflation has also gone up.
With Kenya no longer meeting its food needs, it is left with the option of importing most of the food, and the currency used during imports is the US dollar, further steepening the dollar to shilling value.
In Kenya, and to the government, a weakened shilling foreshadows more distress with regard to foreign debt repayment obligations, increase in electricity and oil prices as well as a hungry and angry nation. Urgent measures to lower the cost of living need to be taken, and fast.