Experts split on where the KES will end up by December 2023

By Steve UMIDHA

Is the Kenyan Shilling showing no further signs of weakening or hurtling inescapably towards one? It depends on who you ask.

In the last three years, at least, since the onslaught of Covid-19 in March 2020, the local currency has flirted with every global economic shock as it continues to search for direction.

BMI Research – an affiliate of Fitch Solutions that provides macroeconomic, industry and financial market analysis for instance, predicted in April that the Kenyan shilling will depreciate by 13.5 percent against the US dollar, closing the year at Sh140.

“We project that the Kenyan shilling will depreciate by 13.5 percent against the US dollar in 2023, closing the year at KES140/USD,” notes the firm in its Q2 macroeconomic update, further noting that the inflation – which slowed last month to 7.9 percent, to remain elevated in 2023, averaging 7.5 percent.

The country’s inflation rate had soared a dreadful 9.2 percent in March and below market estimates of 9 percent, on accelerated rise in prices of food and non-alcoholic beverages which averaged to 13.4 percent from 10.1 percent the previous month.

It also marked the period where the Shilling performed poorly against the dollar and other global currencies.

At Sh140, the BMI Research, announced last week, remains one of the highest digits put out thus far, with previous predictions tinkering between Sh134 and Sh139 against the US Dollar.

Cytonn investment, a local venture firm in its February report titled Currency and Interest Rates Outlook, projected at the time that the Kenya Shilling would trade within the range of between Sh130.2 and Sh134.4 against the USD this year.

It based those arguments on the purchasing power parity (PPP) and interest rate parity (IRP) approach respectively, with a bias of a 6.4 percent depreciation mainly driven by the “ever present current account deficit with Kenya being a net importer, which will increase dollar demand in the market.”

But last week, in its weekly report, the firm without giving an exact figure noted that it expects the shilling to remain “under pressure in 2023” as a result of high global crude oil prices on the back of persistent supply chain bottlenecks coupled with high demand for the dollar.

The local currency depreciated by 0.4 percent against the US dollar, closing the week ended on May 7, 2023 at Sh136.4, from Sh135.9 recorded a week earlier. It closed the week at Sh134.58.

On a year-to-date basis, the shilling has depreciated by 10.5 percent against the dollar, adding to the 9.0 percent depreciation recorded in 2022.

Concerns remain high on the future performance of the shilling given the current pressures as well as the dwindling country’s forex reserves and the rising debt level – whose servicing is projected to increase by 34 per cent in the year 2023 from Sh930.35 billion to Sh1.25 trillion.

As such, economic experts like Peter Macharia who also runs a digital lending firm Jijenge Credit ltd, shares the same pain and frustration, but he’s upbeat about a possible flip-up in the currency performance in the coming months.

“Usually, across the globe, a strong dollar makes a bad situation worse for the rest of the economies, especially developing markets like ours. But I would expect things to improve in the coming months based on the fiscal policies being executed by the government through the Finance Bill,” offers Macharia.

The 2023 Finance Bill – which contains tax proposals to aid in the attainment of the government’s objectives in the 2023/24 fiscal year, seeks to amend various laws relating to taxes and duties with the goal of increasing government revenues from levies collected through the Kenya Revenue Authority (KRA).

Several reasons have been floated around on why the value of Shilling has performed so badly this year, including interest rate hikes by the Federal Reserve Bank of the United States, a situation that has resulted in the US dollar rising in value relative to other currencies, including the Kenyan shilling.

Genghis Capital in March said it expects the shilling to trade as low as 161.40 per dollar by year-end on dwindling foreign-exchange reserves, and a deteriorating balance of payments.

But Charlie Robertson, global chief economist at Renaissance Capital in his predictions to African Business, notes that a “worst-case scenario”, which would involve the government defaulting on its debt, “could send the shilling weakening to 20-30 percent below its long-term average rate –168-182/$ by the end of 2023.”