The Ever Falling Kenya Shilling

by Derrick on October 3, 2011

The weakening of Kenya shilling against the US dollar and other major currencies has been making headlines for more than two months now. The debate on how to stop the free fall never misses out in the local media but each day there is a new record and experts are predicting a further fall. The news that the Kenya Shilling would trade at hundred shillings to the dollar was unimaginable but this is now a reality as the shilling has hit the hundred mark and surpassed it. This has forced many traders to adopt a wait and see attitude while others have hiked the prices of goods citing the weak shilling.

Though many interventions have been taken by the Central Bank of Kenya (CBK) there has been very little change in value. The major reason being that the country depends so much on imports which are paid in dollars and this creates a huge demand for the greenback and since it is the main world currency this has led to other currencies to follow suit. Though the imports have not just increased in the recent months but the fact that the economy is dependent on imports any measures taken to check on the shilling stability doesn’t seem to work.

The requirement by the development partners for the CBK to increase the foreign currency reserves was the straw that broke the camels back. This led to CBK buying off almost all the dollars in the market hence creating a shortage.

This was complicated further by the major commercial banks which saw an opportunity in the market as there was a huge demand for dollars and thus controlled the supply since holding the dollar for a night would mean a reasonable gain would be attained the following day. Having not contravened any of the Central Bank Prudential Guidelines the banks were right on this as Kenya is free market economy where the rule of demand and supply controls the prices.

To reverse this situation requires an increase in supply of dollars in the market by the CBK. While this has already been adopted where selected importers will be able to buy dollars from the central bank at a rate lower than what is quoted by the commercial banks and use them to pay for the essential imports such as petroleum. However this may have its own limitations as the selected individuals or corporates may sell the same to the market at a profit thus making such efforts fruitless.

The panic on the falling shilling against the dollar can be averted if the country reduces over reliance on the dollar in making the payments for import. It is a fact that it will take time to improve our balance of payment which is always a deficit since the exports are lower than imports but over reliance on currency makes the matters worse.

Though the dollar is the world most accepted currency the Kenya shillings has never fallen to this level during the 2008 financial crises in the US and this begs the question what other fundamentals are causing this free fall?

The Euro Zone debt crises also cannot be overlooked but very little imports come from this part of the world with majority of Kenya imports coming from China while exports such as horticulture which are destined to Europe have not been significantly affected by the crises as countries such as Greece are not major buyers of the Kenyan products.

Due to the intertwined nature of a weak to shillings to other macro economic indicators matters are not looking good as banks have started adjusting the base lending rates while the inflation rate is expected to hit the 20% in addition to increases prices of goods and services as the manufactures shield themselves against the high cost of inputs which are mostly imports. All this is not good news for an economy that receives a beating whenever there is a shortage of rainfall.

The risk of investors also diverting their capital to other countries where the shilling is not volatile is not farfetched as nobody would like to put his or her money to a country where the value of investment loses its value in a fortnight.

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