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20 December, 2021
Press Release

Review of the Kenyan Shilling Performance

So far in 2021, the Kenyan shilling has depreciated by 3.5% against the US Dollar (USD) in addition to the 7.7% depreciation in 2020. The shilling touched an all-time low of Kshs 113.0 to the USD on 17th December 2021 and some of the factors that have led to this year to date performance include;

  1. Increased Global oil prices since we have to spend more shillings to buy dollars to be used for purchasing oil,
  2. Higher demand for US Dollars following the reopening of most economies in 2021,
  3. An ever present current account deficit which expanded by 28.1% to Kshs 110.1 bn in Q2’2021, as compared to Kshs 85.9 bn in Q2’2020,
  4. Increased government borrowing with the public debt increasing at a 10-year compounded annual growth rate of 17.7% to Kshs 7.8 tn in July 2021, from Kshs 1.5 tn in July 2011. External borrowings have also grown aggressively at a 10-year compounded annual growth rate of 18.4% to Kshs 4.0 tn in July 2021 from Kshs 0.7 tn in July 2011, and,
  5. Dwindling Forex reserves due to low inflows from key sectors such as tourism.

The continuous depreciation of the shilling is set to have a negative effect on the economy as imports’ costs will continue to increase, and this will be passed on to consumers hence elevating the current inflation levels. In as much as most of the factors contributing to depreciation of the shilling during the year are external, we are of the opinion that the Government and the Central Bank of Kenya (CBK) should take actionable steps to mitigate further depreciation of the shilling. These include;

  1. Building an export driven economy - This can be achieved by promoting export oriented policies and manufacturing to increase exports, thus improving the current account while at the same time  reducing 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. To improve manufacturing, we need competitive energy pricing,
  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 stabilise 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 Gross Domestic Product (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 investor capital dominated and as such, companies have to repatriate profits and dividend in dollars which starves the market of dollars and further weakens the shilling, and,
  5. Work with the private sector to encourage Kenyan’s living abroad to invest back in the country - Despite the fact that the remittances have increased, there is potential for much more to come into the country if we develop and implement an active diaspora investment strategy and engagement.

In 2021, we expect the shilling to close the year at a range of Kshs 112.1 to Kshs 114.1, with a bias to a 3.9% depreciation.

For more information, please see our Review of the Kenyan Shilling Performance.