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.
The depreciation has been linked to increased government borrowing with the public debt increasing at a 10-year Compounded Annual Growth Rate (CAGR) of 18.6% to Ksh8.2 trillion in December 2021, from Ksh1.5 trillion in December 2011.
External borrowings have grown more aggressively at a faster 10-year CAGR of 19.7% to Ksh4.2 trillion in December 2021, from Ksh0.7 trillion in December 2021 as compared to domestic debt growth at a CAGR of 17.5% over the same period.
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The shilling tumble has also been attributed to increasing global oil prices, which 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.
Higher demand and shortage for US Dollars following the reopening of most economies has also been cited as a factor causing the tumble, as well as an ever-present current account deficit expanded by 30.1% in FY’2021, to Ksh663.8 billion, from Ksh510.1 billion 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.
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According to Cytonn Report, 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 Ksh115.1 to Ksh119.1 in 2022, with a bias to a 4.7% depreciation,” the report notes.
The report suggests that several actions should be taken to mitigate further fall, including:
i) 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 foreign exchange reserves. Exports should also undergo value addition before leaving the country in order to increase purchase value and competitiveness,
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ii) 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,
iii) 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,
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iv) 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,
v) 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.
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