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16 May, 2022
Press Release

In 2022, the Kenyan shilling has continued with the depreciation trend against the US Dollar (USD) experienced in 2021 and 2020, depreciating by 2.6% year to date. This in addition to the 3.6% and 7.7% depreciation in 2021 and 2020, respectively. Some of the factors that have led to the performance year to date include;

  1. Increasing global oil prices - The increasing global oil prices have increased the demand for dollars from oil and energy importers who have to increase the amounts they pay for oil imports and hence depleting dollar supply in the market,
  2. Higher demand and shortage for US Dollars following the reopening of most economies,
  3. An ever-present current account deficit expanded by 30.1% in FY’2021, to Kshs 663.8 bn, from Kshs 510.1 bn recorded in FY’2020. Persistent supply chain bottlenecks exacerbated by the Russia-Ukraine geopolitical tensions and COVID-related lockdowns in China have led to further increases in the costs of imports in 2022, and,
  4. Increased government borrowing with the public debt increasing at a 10-year Compounded Annual Growth Rate (CAGR) of 18.6% to Kshs 8.2 tn in December 2021, from Kshs 1.5 tn in December 2011. External borrowings have grown more aggressively at a faster 10-year CAGR of 19.7% to Kshs 4.2 tn in December 2021, from 0.7 tn in December 2021 as compared to domestic debt growth at a CAGR of 17.5% over the same period.

Continuous depreciation of the shilling is set to have a negative effect on the economy as the import bill will continue to be inflated, with the additional costs likely to be passed on to consumers hence elevating the current inflation levels. The high debt burden especially external debt will continue to expose the shilling to exchange rate shocks and will, in turn, emanate pressure on the shilling to weaken during the repayment period.

In our view, the current pressure on the shilling is unlikely to reduce in the near term, and is a cause of concern. We expect the shilling to close the year at a range of Kshs 115.1 to Kshs 119.1 in 2022, with a bias to a 4.7% depreciation.

There are a number of actionable steps that can be taken by the Kenyan Government to mitigate further depreciation of the shilling. These include;

  1. Building an export driven economy - This can be achieved by formulating and implementing robust export oriented policies and manufacturing to increase exports, thus improving the current account while at the same time reducing overreliance on imports to preserve our foreign exchange reserves. Exports should also undergo value addition before leaving the country in order to increase purchase value and competitiveness,
  2. Reducing the mix of commercial loans which attract high interest rates - The Kenyan government should move towards reducing the share of commercial borrowing as compared to concessional borrowing so as to reduce amounts paid in debt service. Reduced debt service amounts would greatly help to bring down demand for the greenback and stabilize the exchange rate,
  3. Diversification of the economy to avoid over-reliance on agriculture and tourism - Kenya’s brand, location and skilled workforce uniquely positions the country to be a financial hub, but we will have to fundamentally rethink our capital markets infrastructure and regulatory frameworks. We have seen Mauritius, which is primarily a financial hub, benefit greatly from the diversification of their economy. Mauritius has a developed mixed economy hinged on different sectors such as manufacturing, financial services which have been increasing their share of GDP and has constantly been diversifying from agriculture and tourism unlike earlier years,
  4. Capital Markets Authority to encourage local capital formation rather than foreign capital, which has to be repatriated - The current Capital markets structure in Kenya is foreign investors and capital dominated and as such, companies have to repatriate profits and dividends in dollars continues to starve the market’s dollars and further weakens the shilling, and,
  5. Work with the private sector to maximize Kenyans living abroad investments in the country - Despite the fact that the remittances have reached historic highs, there is potential for much more to come into the country if we develop, promote and implement an active diaspora investment strategy and engagement. 

For more information, please see our Currency Outlook 2022.