The Depreciating Kenya Shilling And How It Affects You

On the other hand, the Central Bank of Kenya (CBK) has a Monetary Policy Committee (MPC) which holds bi-monthly meetings where it deliberates on, among other things, current...


Many people, world over, do not pay attention to exchange rates because rarely do they need to; their affairs and businesses are local hence a typical Kenyan’s daily life is conducted in the domestic currency, the Kenya Shilling. 

Exchange rate concerns only draw attention for occasional transactions concerning foreign sourced goods, foreign healthcare services, foreign travel, or overseas remittances. 

Generally, a depreciation or appreciation of a currency is an adjustment process in response to the underlying fundamentals.

On the other hand, the Central Bank of Kenya (CBK) has a Monetary Policy Committee (MPC) which holds bi-monthly meetings where it deliberates on, among other things, current developments in the exchange rate market when deciding on the monetary policy stance to be adopted to deliver its price stability objective as well as macroeconomic stability. 

Directly or indirectly, the strength or lack thereof of the Kenya shilling may play a role in the interest rate you pay on your mortgage, the returns pegged on your investment portfolio, the price of groceries at your local supermarket, and the prospects of getting a job locally. 

The shooting dollar 

Looking at the depreciation of the Kenya Shilling in the open market over the last few years, it becomes our concern to know and hedge ourselves against the negative impacts of the local currency since it began losing value.

In January 2022 one USD exchanged for an average of KES 112.8349; while in January 2023, one USD exchanged at an average of KES. 123.3806 KES. Today, 22nd January 2024, one USD is exchanging at KES.162.50 and so we can see a steady sliding trajectory for the local currency over the past two years as one USD exchanged at an average of KES109.7428 in January 2021. 

This state of affairs has had individuals and firms that really heavily on stable exchange rates to make profit reeling in shock. One such entity is the Kenya Power and Lighting Company (KPLC), that recently announced it will start billing a certain category of its clients in USD to hedge its revenues from being wiped off by unfavorable exchange rates to the USD.  Could this be the trend in the future for such firms?

The pinch in pockets

On a wind-swept Tom Mboya street on Monday afternoon, I bumped into Jane shopping at her favorite shop named Piccadilly – a lady’s beauty and clothes shop. 

She was tongue tied… a blouse she saw there three months ago and greatly desired and had purposed to wear to her best friend’s wedding, was no longer costing KES.1500, it had risen to Ksh.2000. 

The shop attendant, Sarah, was patiently trying to explain to her that Kenya’s currency had since depreciated further and this occasioned the increased price when they restocked. 

Jane’s biggest problem was that she would have to go back home empty handed and what about her friend’s wedding? It was a case of dashed hopes and the worst part is that she could not afford to buy it a dime higher, she said she would have to pass.

As I make my way out of town, I decided to pass by Bob’s shop in Kawangware area, and true to nature, it was a sea of humanity and a beehive of activities. Everyone seemed to be in a hurry to accomplish something that only they would know of. As we exchanged niceties at his shop front he broke into a wry smile at our many questions concerning his state of business. 

Bob’s tenure in the second hand business (Mitumba) spans over 32 years and he had seen it all. He led us round the stuffy store which was not so well stocked compared to the last time we visited in 2019 and his employees are also considerably fewer; he said that both observations were the result of the hard times. 

Bob told us he has been a trader in second hand clothes since his youthful days. He learnt the trade as a youth fresh from school under the watchful eye of his uncle and, now in his fifties, he knows the ropes from back to front. 

He had made his mark selling “mitumba” bales and he tells us that the times are tough, the effects of the Covid-19 left them limping and coupled with the new challenges, his business has fallen into trying times. 

Bob says the sharp depreciation of the shilling and the increment in taxes on second hand clothes is bearing heavily on his business. He wants out but as yet has not fully decided where to re-invest when he ditches his beloved “mitumba” business. 

He says he can only look back with nostalgia on the golden age of the “mitumba” business but all that has to be left behind and forge forward on a line of business that will be less reliant on a fluctuating currency and stifling taxes. 

As I make my way further out of town, I meet Jacob, in Ngong’ town, He is a part time taxi driver and a passionate chicken farmer. He takes us home and proudly introduces his wife and children. He then proceeds to show us his chicken. 

It is now evening and his home is very well lit and so is the chicken coop. He informs me that two hundred broilers will start laying eggs soon and he hopes he will have a ready market and good prices to recoup what he has spent on them, especially their feed which has become very expensive. 

He hopes the earnings will enable him increase the chicks he buys from the hatchery; he is keen on expanding the chicken numbers.  As I get back into his house, I notice all the lights in his house and in the chicken coop are solar powered and he answers in the affirmative. 

He says he took a decision to make the investment in solar power when the power bills started going higher and higher as the months went by, from his little savings he said that that he thought solar power was his best bet and six months down the line, he had no regrets. 

He also hopes to acquire an electric car or hybrid car for his taxi business to curtail the high fuel expenditures he encounters now but the present steep prices of the vehicles have made him bid his time.

Burden of devalued shilling

I engage an economist named Churchill Ogutu. He says that the worst effects of a devalued shilling are felt by importers and those whose debt is denominated in USD. He says that most sectors of an economy are affected, ranging from general traders who find it very expensive to bring goods into the country. When these goods reach Kenya, they have to contend with slow business as clients find the good expensive and largely keep off. The next group adversely affected by the depreciating shilling are the few manufacturing firms that have to import raw materials into the country. 

This factor pushes up their production costs and it when this cost is transferred to the customers, it results in slow business as customers find the goods expensive. 

Other Kenyans are affected as they pursue critical external services such as healthcare abroad; they find that they need more shillings to access fewer dollars at the point of treatment. 

Churchill says the general population is affected by the low performing shilling when they have to purchase oil (fuel) products that are not only affected by the depreciating shilling but also by other vagaries such as the war situations witnessed in some locations in the world currently. The effect of a depreciated shilling on oil products pushes up its price and this is cascaded throughout the economy as the price of goods rise and transport using fossil fuels becomes costlier. 

International firms with branches in Kenya have also found it rough as they trade locally in Kenya shillings and then have to convert their profits back to dollars as they repatriate their earnings back home after meeting their local obligations, they incur losses in the process.

Local firms and the government who took out dollar denominated facilities are also affected, this would then make them want to charge more for goods and services to the public. 

The Kenya government has been on a run to ramp up taxes to cope with its high debt levels among other factors. The Nairobi Stock Exchange also had a declining performance over this period of time as many investors, wary of poor performance by the Kenya Shilling, ran off to “good” locations where their investments would earn them more.

Joy of a weak shilling 

All is not lost with a weak shilling, economists point out that it certainly has its positive side such as Kenya’s exports becoming cheaper in the international markets. Specific to manufacturing, this distinct advantage which would have played a great deal in Kenya’s favor might not amount to much as Kenya lacks a vibrant and commanding manufacturing sector. 

Kenya’s manufacturing sector still contributes less than 10% to Kenya’s economy. A depreciating shilling would also favor Kenya as tourists would opt for Kenya’s tourist sites as their dollars would give them more capability for tours locally.

Many are perplexed when they are told that a depreciating currency is not entirely a bad thing. What then is the best rate of exchange of the Shilling to the US Dollar? Economists generally agree that a desirable exchange rate should be at a level that makes a country’s export of goods and services competitive in the world market. So is our currency overvalued or undervalued? 

CBK says its recent MPC analysis indicate that consistently, Kenya’s exchange rate is never misaligned beyond a range of about 5 percent of its true value. It therefore is expected that the exchange rate will move to correct for any imbalances in the long-run. Meanwhile the rank and file of Kenyans will have to contend with the pain and harassment of a steeply depreciating currency without an inkling as to where it will stabilize before they get their bearing.

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