A record slump of Kenya shilling against the dollar and the sterling pound continued into the second half of the year, worsening the country’s debt service and import costs.
The Central Bank of Kenya (CBK) data shows shilling exchanged at an average of 141.06 units to the dollar on Tuesday, having lost 14.3 percent or 17.64 units since the start of the year when it opened trading at 123.42.
The shilling has been pressured by higher demand of dollars by importers, especially of petroleum and industrial products.
The shilling has also weakened against the sterling pound reflecting a jump in the price of imports and an increase in exporters’ earnings.
A unit of the UK’s currency rose to 180.50 levels on Tuesday, from 148.73 at the start of the year, representing a 21.4 percent weakening on the local currency.
The currencies have been surging on the back of adjustments in interest rates in home countries to control soaring inflation, which in turn, has boosted the currencies by attracting investors searching for higher returns.
This has led to rising yields for debt in the markets making it difficult for developing economies such as Kenya to borrow.
The weakening of the shilling continues despite plans by the government to support the foreign exchange market including measures to lessen the demand for dollars and control over banks’ FX transactions.
The Energy and Petroleum ministry in December 2022 struck a government-to-government deal with three entities in Saudi Arabia for the supply of fuel for 270 days to alleviate the demand for dollars by petroleum importers by extending the time required to source the currency in a six-month window.
The CBK in March also introduced a foreign exchange code placing stringent penalties against those caught manipulating the forex market.
Bankers had expressed optimism in measures including the revival of the interbank rate for foreign exchange and the World Bank DPO programmes to boost the foreign exchange reserves, in stabilising the shilling.
Local currency depreciation risks increased external debt stock amid expected higher external financing following low domestic debt uptake.
“With 67.3 percent of Kenya’s external debt denominated in US dollars at the end of March 2023, currency concentration risk is inevitable considering the likely increase in debt service costs resulting from depreciation,” Sterling Capital stated in a July note.
Kenya sells agricultural produce such as cut flowers, vegetables, fruits, coffee, and tea to the UK, and in turn buys vehicles, machinery, alcoholic beverages like spirits, pharmaceuticals, and electronics from the European country.
A stronger pound points to increase export earnings, however, could shrink the trade surplus on the flipside with a rise in import bills.
