Here is how to stop the decline of the Kenyan shilling – Cytonn

Concerns persist regarding the future performance of the Kenyan shilling, fueled by existing pressures, dwindling foreign exchange reserves and escalating levels of national debt, according to investment firm Cytonn – even as the (country’s debt maturity levels of the USD 2.O Eurobond in June 2024 near.

Anticipating a continued depreciation of the currency, the firm says it foresees adverse consequences in the economy, marked by an augmented import bill.

Also read: Kenyan shilling falls to record low

Despite the implementation of a tightened monetary policy, with MPC increasing the rate to 12.5% in December 2023 from 10.5%, short-term inflation is expected to remain elevated, mainly because inflation in the country is mainly cost driven rather than demand driven, as the money supply remain stable.

Although the current strain on the Kenyan shilling (at KES155.12 against the US dollar as at 7.1.2024) of is unlikely to ease in the immediate future, there are proactive measures that the government can adopt to alleviate further depreciation.

Cytonn now recommends a host of measures including.

Read: Kenyan shilling to remain under pressure

Formulate policies to encourage Foreign Direct Investments (FDIs): The government should prioritize 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,

Promotion of Tourism through Implementing robust marketing campaigns to attract international tourists and enhancing the tourism infrastructure which will help increase the inflow of dollars and hence boost our Foreign Exchange Reserves

Dramatically cut Spending: The government should Contain expenditure by limiting expenditure to the core activities of the government as well as reducing wasteful spending at both the County and Central government levels

Reduce corruption: The government should adopt measures to reduce corruption, improve transparency, and strengthen governance structures. A corruption-free environment attracts foreign direct investment, enhance economic efficiency, and instils confidence in the stability of the Kenyan Shilling.

Stimulate our moribund capital markets to attract foreign investors: The government should focus on improving the capital markets by Implementing policies that encourage foreign investment, streamlining regulatory frameworks, and introducing investor-friendly initiatives. A vibrant capital market attracts foreign capital as well as enhances liquidity and diversifies investment options, contributing positively to currency stability.

Maintaining a sustainable debt level: The government should find a harmonious equilibrium between engaging in foreign borrowing to boost foreign reserves and preserving a favourable credit standing with creditors. This delicate balance is crucial for maintaining the country’s attractiveness to investors, facilitating capital inflows and financial stability. Consequently, the government should be proactive in meeting upcoming financial obligations, such as the impending USD 2.0 bn Eurobond maturing in June 2024,

Reduction of commercial loans: There is need for the government to reduce the share of commercial loans in order to reduce debt servicing costs. This is mainly because commercial loans attract higher interest rates as compared to concessional borrowings. Reduced debt service amounts would greatly help to bring down demand for the US Dollar and stabilize the exchange rate,

Building an export-driven economy: The government can do this by formulating and implementing robust export-oriented policies and manufacturing to increase exports aimed at reducing the current account while reducing overreliance on imports to preserve the country’s foreign exchange reserves,

Alternative projects financing strategies: The government should diversify the sourcing of funding for infrastructure projects in the country to further shift to alternative financing strategies such as Public-Private Partnerships (PPPs), joint ventures and stimulation of the capital markets. This will attract more private sector involvement in funding development projects such as infrastructure instead of borrowing, and,

Formulation of diaspora-friendly policies: 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 on digitization and technology and explore alternative channels,

Improve Ease of Doing Business: Improving the ease of doing business will make it easier for entrepreneurs to form business ventures, which will eventually grow, employ people and contribute to tax revenues, and,

Encourage export and revenue diversification: the government should shift from complete over-reliance on traditional agricultural sector exports like tea, horticulture and coffee, through diversification in promoting value-added processing and manufacturing to increase export revenue.

Notably, the manufacturing sector contribution to GDP remains low, coming in at only 8.3% 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 preserving the foreign exchange reserves, aiding in stabilizing the exchange rate.