Kenya Currency Woes: How Did It Get There?

Published 1 year ago
African business
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Kenya is among several African countries that have experienced a decline in the local value of currencies.

By Terryanne Chebet

Kenya has had a tough few months: ballooning debt, an enormous wage bill, and a depreciating shilling exacerbated by global conditions. Now, the government is unable to pay its salaries. An increased import bill, investment portfolio outflows, and servicing of existing foreign debt have also resulted in the reserves falling below the statutory minimum of four months of imports, with the Kenya shilling depreciating to an all-time low of KES130 to the US dollar.


So, how did Kenya get here? 

“It was a matter of ‘when’ and not ‘if’ KES would weaken to reflect its fundamentals. There have been successive external shocks since 2020, but the currency remained relatively stable relative to its peers. In this light, it is not surprising the sharp adjustment we have seen this year and which we see bringing it closer to its fundamental value,” explains Churchill Ogutu, an economist with IC Africa. 

Kenya is among several African countries that have experienced a decline in the local value of currencies, with a 25% decline in value since 2020, to a large extent caused by the rising interest rate environment in the United States (US), which has witnessed a very aggressive rate tightening by the US Federal Reserve. 

 Kenya’s borrowing for the financial year 2022-2023 is also substantially behind target.


“Given the continued uncertainty in the global financial markets, it appears that [the government] will have no choice but to borrow at higher rates from the domestic markets,” adds Sunil Sanger, CEO of Orion Advisory. 

Kenya is also looking to offload its parastatals to reduce pressure on funding and to raise capital.

Despite fears that Kenya could default on its external loans, experts say it is unlikely. 

Ogutu notes that Kenya’s position may be fragile, but a default seems remote. “With FX reserves at multi-year low levels, it is higher than upcoming short-term external debt servicing costs. Thus, I see a muddling through regarding external debt servicing costs.”


He adds that a default on domestic borrowing seems to be more likely due to its outsized domestic debt servicing costs compared to external debt servicing costs. 

The outflow of portfolio investments in equity and bond markets and higher import prices for commodities, particularly petroleum products has seen Kenya’s government importing petroleum products on a deferred payment basis. The government is pursuing the government-to-government oil importation deal with Gulf countries to alleviate pressure on the shilling. 

The reduction in oil demand will also help to reduce the depreciation of the shilling though analysts argue that Kenya could have used the opportunity to build reserves and maybe even consider using those to start buying back its 2023 eurobond maturity, an action that could help to calm down the market nerves.

Ogutu argues that is short-term thinking. “At some point in time, the supply and demand in the FX market will still reflect the mandated OMC coming to the market sourcing dollars. Kenya may get a bit of reprieve in the short-term but ultimately, the supply-demand dynamics will come to play.”


Both analysts agree that the revival of the interbank market in the last few weeks is a positive sign and has helped to reduce some of the uncertainty in the exchange rate. However, given the economic environment both locally and internationally, it is difficult to see circumstances under which the Kenya shilling would appreciate from current levels.  

However, Ogutu holds that the shilling isn’t out of the woods yet.

“I have the sense that the initial sugar rush in the FX interbank market has ebbed away, and the next FX guidance will be delivered with the imminent changes at the helm of CBK. That said, my base case is a continued further weakness with 140 on sight.”