Rally of the shilling revs up economy
The Kenya shilling has strengthened significantly over the past two months in a consistsent rally that threatens to exchange at less than Sh130 against the greenback.
Last week, the currency experienced a consistent rally, as per the latest CBK Bulletin for the week ending April 11. It appreciated by 0.73 per cent against the dollar, 0.21 per cent against the British pound, and 0.08 per cent against the Euro.
The Central Bank of Kenya (CBK) reported that the appreciating shilling saw the dollar decline from Sh131.41 to Sh130.45, the British Pound dropped from Sh165.42 to Sh165.08, and the Euro decreased from Sh141.67 to Sh141.55.
The stong performance took an extreme swing after news of Kenya’s successful $1.5 billion Eurobond and the over subscribed Sh75 billion infrastructure bond. When markets opened after the news, Central Bank quoted the average exchange rate at Sh145.86 against the dollar.
Flexible exchange rate
Yesterday, the shilling traded at Sh130.7 against the dollar, underlining its resilience in the international currency market, and positioning it among the most improved currencies in Africa.
At such times, the value of the Kenya shilling presents a challenge for the National Treasury and the CBK as they are tasked with the delicate balance of controlling inflation while maintaining a competitive exchange rate.
CBK Governor Kamau Thugge emphasized the regulator’s commitment to a flexible exchange rate system. While they intervene to stabilize the shilling during excessive volatility, they generally allow market forces to determine the exchange rate. Thugge has acknowledged a historical overvaluation of the shilling and indicated a shift towards market-driven valuation.
“We pursue a flexible exchange rate system and intervene when necessary, although our interventions have reduced lately. We intervene only during excessive volatility, allowing the exchange rate to find its equilibrium through demand and supply,” Thugge stated.
As of March 2024, Kenya’s annual inflation rate was 5.7 per cent, which is within the Central Bank of Kenya’s target range of 2.5 to 7.5 per cent, to mark the second month of decline from February’s 6.3 per cent.
According to Albert Bwire, a senior Finance lecturer at the United States International University (USIU), this suggests that the CBK need not intervene in the current situation. He believes the recent strengthening of the shilling is temporary due to the absence of supporting fundamental economic factors. Consequently, he anticipates a future depreciation of the shilling.
Lacking fundamentals
“There is no point in stepping in. It (the Kenya shilling) will go back to where it was, between Sh140 and Sh150 to the USD experienced in July last year. When we start paying the Eurobond, we will use a lot of the US dollar we are holding. I do not think there are any fundamentals supporting the Kenya shilling. It will definitely appreciate again,” Bwire said.
He attributes this to the fact that Kenya will soon start repaying the $2 billion Eurobond in June, which will require the use of a significant portion of its dollar reserves, currently at $7,291 million (Sh944.2 billion) or 3.8 months of import cover as of April 12, 2024.
This is a view shared by several other experts who also caution that the underlying economic fundamentals remain weak.
A stronger shilling can be beneficial in terms of reducing inflation, and the cost of servicing foreign debt, but it also has the potential to make Kenyan exports less competitive globally. This could have a detrimental impact on the nation’s export sector, which is a crucial source of foreign exchange. Moreover, the currency’s strength may invite speculative trading, leading to market volatility that can disrupt economic planning.
