The Kenya shilling has been under constant pressure. It has depreciated by 10.2% from the beginning of the financial year to March 24, 2023. This volatility in exchange rate should not only worry business owners, but also consumers.
While small depreciation can be handled by passing on the impact to consumers through raising prices, when the rate is steep, it becomes unsustainable. It is not sustainable for a business to keep on raising prices. It reaches a point where such a move will just impact demand negatively.
If a business venture cannot absorb the impact of the (current) depreciation, and can’t pass it on to consumers, it may be forced to shut down. That is why the Central Bank of Kenya (CBK) needs to respond in a manner that provides assurances to the country that the matter is under control. Printing more cash, has only led to an increased circulation of money, and is yet to push up the value of the shilling.
In an effort to raise the value of the shilling and cushion it against further depreciation, the government recently issued a ‘Foreign Exchange code’ which entails guidelines to restore trust and enhance the functioning of the foreign exchange market. The code will promote a “robust, fair, liquid, open and appropriately transparent” and flexible foreign exchange rate system. It will also stop lenders from ‘compromising market integrity’ so scenarios where customers are overcharged to access units of the dollar from banks, and other forex traders is expected to be a thing of the past.
Going forward, the CBK should streamline interbank trading by removing (any) restrictions on the rate to be traded. This will improve liquidity and flow of forex exchange. Furthermore, the government should support the manufacturing sector with export-oriented policies that increase exports, while reducing reliance on imports. Policies that aim at reducing money transfer costs might also encouraging diaspora citizens to remit more money thereby reducing the pressure on the shilling.
In the US, the Federal Reserve Bank has been able to give the dollar the much-needed value. The country’s economy is also strong enough to support the currency. There is also the option of taking a leaf from Zambia, and entering into an agreement with international institutions such as the IMF and the World Bank to restructure debts; this will enable the country to acquire additional foreign funding to boost her forex reserves and reduce the dollar scarcity.
The current depreciation of the shilling has not only led to foreign exchange crisis, but also affected foreign investments and imports. Government should move with speed to stop the rapid depreciation of the shilling. Otherwise the situation will be worse especially due to speculative activities in the forex market – there are times when the wealthiest people in town hoard dollars thus creating false sense of market price. Some lenders also create artificial shortage to push up dollar demand. Let’s embrace market forces of demand and supply to boost the (weak) Kenya shilling.