Earlier this year, experts warned that the Kenyan shilling was due to weaken further compared to the US dollar. Some predicted that it would slide past the KES 200.0 mark against the dollar, this was in the aftermath of historic gains, with the Shilling gaining by 18.8% to 130.5 against the dollar as of 8th April 2024 from KES 160.8 recorded at the end of January this year . The main reason experts saw this as a temporary increase was because Kenya was due to pay its 10-year Eurobond that matured June 2024. However, 9 months later, the shilling remains as strong as it was before June 2024.
In order to understand why there was a gain, one has to understand why there was a slide in the first place. In 2021 and 2022 the government, in an effort to shield local companies from international pressures caused by the Covid-19 pandemic, used the Central Bank of Kenya (CBK) forex reserves in an effort to support the exchange rate.
The government used upward of USD 2.0 billion, but this was untenable as foreign reserves began to fall sharply towards the statutory minimum requirement of maintaining at least 4 months of import cover.
In 2022 the government decided to stop supporting the Shilling and, in its place, came up with a Government to Government (G2G) deal that would enable fuel importers to use Kenyan shillings. At the same time, the US Federal Reserve was in the middle of an aggressive round of monetary policy tightening, with the Fed increasing their policy rate by 25 bps to 5.25% in March 2022 from 5.0%. All this, coupled with the expected Eurobond repayment in 2024, made investors and companies to head for the exit and sell their shillings in preparation for tough times ahead.
However, in February, the country successfully issued a new Eurobond worth USD 1.5 billion (KES 194.2 billion) to buy back the inaugural one that matured in June 2024. The Shilling started to gain against the dollar and in September the Fed started lowering rates this provided breathing space for the shilling.
The experts were not wrong in predicting doom for the Kenyan shillings, it is only that they didn’t factor in the chain of fortunate events that followed, we cannot say the same for the Nigerian Naira.
