Why The Kenyan Shilling Appreciation Might be Short-lived

The Kenyan shilling has been on a remarkable run lately, appreciating significantly against the dollar. The shilling, currently at 1 usd to ksh standing at 132.00 Kenyan Shilling, has climbed steadily from a rate of usd to ksh 162.877 on January 26, 2024.However, financial experts are cautioning that this trend may not be sustainable in the long term.

Dr. Alex Kamau, a prominent business consultant, sheds light on the reasons behind the recent appreciation and the potential challenges that lie ahead.

Dr. Kamau explains that the initial surge stemmed from speculative buying. Investors, anticipating the Kenyan government’s need for dollars to service a 2 billion Eurobond, hoarded dollars in hopes of profiting from a favorable exchange rate.

Their plans were disrupted when the government sourced the required dollars externally, bypassing the local market. This left speculators with an excess of dollars, which they were forced to sell at a lower price. This drove down the dollar’s value and inflated the shilling.

While the current situation offers some temporary relief, Dr. Kamau warns of looming factors that could weaken the shilling once again.

Kenya’s status as a net importer necessitates a steady stream of dollars to finance imports.

In January 2024 alone, imports reached 244,573 KES Million, a significant increase from 219,664 KES Million in December 2023.

Historically, Kenya’s imports have averaged 94,486.12 KES Million since 1998, with a record high of 259,111.00 KES Million in November 2023.

 

This constant demand for dollars will eventually deplete the current surplus in the market, putting downward pressure on the shilling.

Additionally, the upcoming Eurobond repayment in June is expected to further reduce dollar availability in Kenya. To settle this debt, the government will need a significant amount of US dollars.

Their options to acquire these dollars, including dipping into foreign reserves, securing new loans, or bank syndication, all have a common thread: future dollar outflows.

This, coupled with the ongoing need for import dollars, could create a perfect storm that weakens the shilling and erases its recent gains.

Notably, Kenya’s total debt currently stands at a staggering Sh11.1397 trillion.

The positive impact of the stronger shilling might also be short-lived.

This includes the temporary decreases in some basic goods like maize flour (which neared Ksh. 200 a few months ago and is now close to Ksh. 100).

Additionally, the recent price reductions announced by EPRA were attributed to a decline in the landed costs of these fuels.

Super Petrol, Diesel, and Kerosene went down to Ksh. 196, Ksh. 185.47, and Ksh. 183.23 respectively,

However, when Kenya imports fuel, it pays in US dollars. A stronger ksh to usd means each dollar buys more fuel, effectively reducing the landed cost per liter.

However, Dr. Kamau suggests this situation may not be sustainable. The upcoming Eurobond repayment and Kenya’s ongoing import needs will put a strain on dollar reserves. When the dollar becomes more expensive again, the landed cost of fuel will inevitably rise. This could translate back into higher pump prices, potentially erasing the current gains for Kenyan consumers

Dr. Kamau also expresses concern about the government’s tight fiscal policies, which have limited the circulation of money within the economy. The Kenyan government recently announced tax measures aimed at bolstering its revenue collection. The government has increased PAYE from 30% to 35%.

Contrary to many beliefs, this doesn’t only affect high earners, but also secondary employees. E.g. A part time university lecturer earning a monthly salary of 100,000 ksh, will receive 65000 after the PAYE is deducted. Remember, there is also an introduction of the 1.5% housing levy which will significantly reduce the local mwananchi net income.

Additionally from 1st March 2024, Kenyans started paying 2.75 percent of their pay to the Social Health Insurance Fund (SHIF). This saw contributions for top earners rise by more than eight times, as the government moved to implement the controversial universal health coverage.

The proposed budget of 4.2 trillion Kenyan shillings, with a staggering 1.2 trillion allocated for debt repayment and 2.3 trillion for recurrent expenditure, leaves a meager 800 billion shillings for development expenditure.

The limited development budget translates to fewer government-funded projects. These projects, from road construction to school building, create significant employment opportunities for Kenyan citizens.

With a smaller budget, fewer projects will be initiated, leading to a potential decrease in job creation. This decrease in job creation has a ripple effect. Kenyans with fewer employment opportunities will have less disposable income.

This reduced spending power translates into lower demand for goods and services, potentially forcing businesses to cut back or even close down. This, in turn, could lead to further job losses, creating a vicious cycle of economic stagnation. These combined factors have reduced the spending power of the local Kenyan.

This situation puts producers in a bind, forcing them to lower prices due to reduced consumer demand. This has the potential to stifle economic growth if not addressed.

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