The Kenyan shilling’s free fall against the dollar and major currencies is expected to continue for the better part of 2024, as the local currency officially crossed the 160-unit points against the US dollar on January 15. 

This suggests that President William Ruto’s administration has every reason to stabilise the currency, as a weak shilling not only leads to expensive inputs like fuel and fertiliser but also results in high debt service costs for the numerous dollar-denominated loans. 

Latest data from the Central Bank of Kenya (CBK) shows that Kenya’s overall inflation increased to 6.9 percent in January from 6.6 percent in December 2023, and remained sticky in the upper bound of the government’s target range. “The risk to inflation remains elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation.” 

In January, the National Treasury revealed that Kenya’s debt repayment surged to $3.69 billion (Ksh600.73 billion) by December 2023. Debt consumed 57 percent of the government’s tax revenues, amounting to $6.14 billion (Ksh1.05 trillion). Only 43 percent of the generated revenue was used for development and recurrent expenditure, such as paying salaries.

The disclosure, titled “Kenya’s statement of actual revenues and net exchequer issues as of December 31, 2023,” signalled a need for Kenyans to tighten their belts in 2024. The government anticipates higher repayments due to the devaluation of the shilling. 

Already, the exchequer has revised this year’s total public debt obligation upward to $11 billion (Ksh1.866 trillion) from the initial estimate of $10.7 billion (Ksh1.75 trillion). 

Debt repayment burden 

The Institute of Public Finance (IPF) says that since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt, currently standing at 70 percent of the country’s GDP.

IPF, in a report titled “Macro-Fiscal Analytical Snapshot Report”, says the recent depreciation of the shilling against the US dollar indicates a downgrade in the country’s economic outlook.

IPF says Kenya is still at a high risk of debt distress on account of it breaching the upper thresholds of several critical debt sustainability ratios. “Even if the IMF would reclassify Kenya as a country with “high” debt-carrying capacity, it is projected that Kenya would still be in breach of the upper limit until at least 2027”. The forecast shows that in the case of a major shock (e.g. further depreciation) Kenya risks increasing its inability to service debts that could potentially precipitate a crisis. 

The think tank, in its report, adds that the repayment of the $2 billion Eurobond later in June creates a major concern on the implications of such lump sum withdrawal from the economy or the alternative refinancing at an elevated cost. 

At present, Kenya appears unlikely to default; even so, owing to the implication of such harsh conditionalities, decision-making should not be left only to the executive and creditors but rather should include engagement with Parliament, civil society, and other actors, IPF notes. 

On the weakening shilling against the US dollar, IPF says that the fast depreciation of the shilling is making inflation and debt pressure worse, and the international reserves are running down. Currently, the reserves are at 3.6 months of import cover, which is below the minimum statutory requirement of four months of import cover.

“If no measures are taken, the manufacturing sector is likely to be adversely affected as imports get strained by the depreciation and low foreign reserves. There is a need to strengthen the country’s manufacturing and value addition as a strategy to the country’s economic recovery,” the IPF report states. 

What needs to be done

Concerns persist regarding the future performance of the shilling, fuelled by existing pressures, dwindling foreign exchange reserves and escalating levels of national debt with the approaching maturity of the $2 billion Eurobond in June 2024.

Although the current strain on the shilling is unlikely to ease in the immediate future, there are proactive measures that the government can adopt to alleviate further depreciation. Experts say these measures encompass strategic interventions and policies aimed at stabilising the currency and fostering economic resilience.

They include the formulation of policies to encourage Foreign Direct Investments (FDIs). The government should prioritise creating an attractive investment environment for foreign investments by improving transparency in all required regulations as well as reducing hurdles in the process.

This would include targeting sectors that enjoy global interest like the Renewable Energy sector and Sustainable Energy Development Goals (SEDG) and could include incentives for the same. This would majorly increase the foreign exchange reserves thus reducing the pressure on the foreign currency in the Kenyan markets.

The government should work in close conjunction with banks and other investment institutions to allow for favourable accounts for diaspora citizens, which will encourage them to remit more money back to the country hence cushioning the shilling against further depreciation. 

This can be done by reducing money transfer costs by exploring alternative channels for remitting money by leveraging digitisation and technology and exploring alternative channels.

Additionally, the government should improve the ease of doing business, which will make it easier for entrepreneurs to form business ventures, which will eventually grow, employ people and contribute to tax revenues.

The government should shift from complete over-reliance on traditional agricultural exports like tea, horticulture and coffee through diversification in promoting value-added processing and manufacturing to increase export revenue. Notably, the manufacturing sector’s contribution to GDP remains low, coming in at only 8.3 percent in Q3 2023; hence the government should put in policies to grow the sector like incentives which would, in turn, increase exports as well as preserve the foreign exchange reserves, aiding in stabilising the exchange rate.

On February 7, Central Bank of Kenya (CBK) Governor Kamau Thugge said the recent steadiness in the local forex market will help the shilling gain its value. In addition, Dr Thugge said they expect the decision by the Monetary Policy Committee Meeting (MPC) to hike the Central Bank Rate (CBR) by 50 basis points from 12.50 percent to 13.00 percent on Tuesday, will shield the shilling from losing additional value. 

“The Kenyan shilling has been stable for the past few days, and as CBK, we expect this stability to continue because we have taken action to raise the Central Bank Rate higher from 12.5 per cent to 13 per cent,” Dr Thugge said during a post-monetary Policy Committee (MPC) meeting on Wednesday.

The CBK Governor said the exchange rate has overshot the equilibrium rate, and the apex bank is focused on protecting the local unit from further declines in value. “The rate is currently elevated, but we believe with the actions we have undertaken as CBK and the expected inflows of foreign exchange, the rates should stabilise and move toward the rate that is consistent with the strong macroeconomic fundamentals.”