A look at the good side of a weaker currency.
Since mid-last year, the Kenyan shilling has continued to drop against the dollar due to global uncertainties created by the conflict between Ukraine and Russia. As of October 20, the exchange rate of the shilling was about Sh121.60.
In June 2021, the exchange rate dropped to Sh108. This has raised the price of imports, thus setting the stage for the price of all ranges of imported goods to increase, from electronics to furniture, motorbikes to vehicles, and second-hand clothes.
As demand for the dollar continues to rise, analysts see a gloomy future for a country like Kenya that relies on imports. First, businesses and manufacturers have passed the additional costs to the consumers, increasing the heavy burden on households that have already been facing a difficult period.
Besides unpredictable commodity prices, especially basic products, the country’s debt burden is continuously rising as most of it is repaid in dollars. With almost 70% of external debt being denominated in dollar, the country is currently paying more – the national government’s external debt stock increased by Sh9.04 billion from Sh4.29 trillion in June 2022 to Sh4.299 trillion in July 2022 as a result of disbursements and exchange rate depreciation, according to the National Treasury.
It has not been all gloom. The weaker shilling has managed to have a positive impact. Employees of companies and institutions such as the United Nations that pay salaries in dollars are smiling all the way to the bank despite the weaker shilling. For example, someone earning $10,000 would have an equivalent of about Sh122,000 after conversion. In June last year, the same amount would have been about Sh108,000.
In addition, the further weakening of the shilling has seen the value of remittances from abroad increase upon conversion. Families with members sending money, especially in terms of dollars, enjoyed an increase in value. In the six months to June, recipients of remittances have received an average of Sh41.81 billion ($343.7 million), which in 2021 would have been valued at Sh37 billion.
The Central Bank of Kenya has also benefited from the depreciating shilling as the institution recorded an unrealised exchange gain of Sh68 billion on its forex holdings in the year ending June 2022. The gains increased from Sh25.27 billion in the previous financial year, as per the Central Bank of Kenya (CBK). As of June 2022, the CBK held Sh1.034 billion ($8.5 billion) in foreign exchange reserves, mainly dollars.
With the Kenyan shilling depreciating against the dollar by 3.7% in the six months to June, those with dollars were the big winners. For the country to gain more this financial year, measures to handle the increasing import prices should not be implemented. The country will record real economic growth by sourcing goods from countries that do not transact in dollars or by tilting focus to intra-regional trade to reduce reliance on overseas commodities.