Weak Shilling: What it means, how it works

By Monica MUEMA

In February 2020, just before the outbreak of the coronavirus pandemic, the Kenyan shilling was trading at 100 against the US dollar. Since then, the greenback has strengthened by 50 percent to trade at 150 at the time of writing in August 8, 2023.

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 to the US dollar.

What’s worse a host of commercial banks are breaching Ksh150 threshold, intensifying the strain on the Kenyan shilling and setting the stage for potential price hikes across various imported items, ranging from electronics to vehicles.

This was however expected given that the National Treasury had in June this year projected the shilling could weaken further to 150.76 by the time it is repaying its debut Eurobond in June next year, signaling unabated pressure on the country’s exchange rate.

Treasury projects the country will pay a total Sh301,513,774,986 for $2 billion international sovereign bond. This works out to an exchange rate of 150.76.

The shilling, which has been hitting record lows every day and has since breached the 140-mark, was trading at an average of 140.2 against the dollar a few weeks ago, according to data from the Central Bank of Kenya (CBK).
And as Kenya’s economic landscape continues to undergo a seismic shift, the Financial Fortune Media looks at possible impact of a weakening shilling.

Inflation and Purchasing Power: A significant drop in the value of the Kenyan shilling (KES) against other major currencies could lead to higher inflation. Imported goods become more expensive, which can increase the overall cost of living for the citizens. This can impact people’s purchasing power and their ability to afford essential goods and services.

Import Costs: A weaker currency can make imports more expensive, including critical items like fuel, machinery, and raw materials. This can affect various sectors of the economy, potentially leading to higher production costs and reduced competitiveness for local industries.

Trade Balance: A weaker currency could potentially benefit exports, as Kenyan products become more price competitive on the global market. However, this effect might be limited if the country heavily relies on imported raw materials or if the demand for its exports is not very elastic.

Investor Confidence: A sharp decline in the currency’s value might undermine investor confidence, both domestic and foreign. Uncertainty about currency stability can deter foreign direct investment and lead to capital flight, further weakening the currency.

Government Debt: If a significant portion of the government’s debt is denominated in foreign currencies, a weaker Kenyan shilling could increase the cost of servicing that debt, putting additional pressure on the government’s finances.

Central Bank Intervention: If the currency is weakening rapidly, the central bank might intervene in the foreign exchange market to stabilize the exchange rate. This can involve selling foreign reserves to buy back the local currency, aiming to slow down or reverse the depreciation.

Tourism and Remittances: A weaker currency could potentially attract more tourists, as the country becomes more affordable for foreign visitors. On the other hand, it might impact the value of remittances sent by Kenyan expatriates living abroad.

Political and Social Impact: Rapid currency depreciation can lead to public dissatisfaction, protests, and political pressure. Governments may face criticism for their economic management and policies.

Monetary Policy: The central bank might need to adjust its monetary policy to address the currency’s depreciation. Interest rates might be raised to curb inflation or to attract foreign investment, but this can also impact borrowing costs for businesses and consumers.

It’s important to note that the impact of such a currency movement can vary based on a multitude of factors including the overall economic conditions of the country, government policies, global economic trends, and more.