The Kenyan shilling has been experiencing significant depreciation against the US dollar in recent years, with some projections suggesting it could continue to weaken in 2024. Several factors contribute to this trend:
1. Trade Deficit: Kenya’s trade deficit, which stood at 3.5% of GDP in the third quarter of 2023, reflects the country’s reliance on imports. With high global commodity prices, especially for oil, demand for foreign currency has surged, putting pressure on the shilling.
2. Foreign Debt: A substantial portion of Kenya’s external debt is denominated in dollars (around 67.5% as of late 2023). This means that the government faces higher costs for servicing its debts, further straining the country’s forex reserves.
3. Monetary Policies: While the Central Bank of Kenya has raised interest rates in response to inflation and currency depreciation, external factors, including US interest rates and global economic conditions, are expected to continue influencing the shilling’s performance. For instance, rising interest rates in the US have compounded the depreciation by making dollar-based investments more attractive.
4. Government Strategies: Experts suggest that stabilizing the shilling could involve improving trade relations, particularly with key partners, and reducing reliance on imports of essential commodities. There’s also potential for stronger support from sectors like agriculture and tourism, which have shown resilience despite global challenges.
Despite these challenges, the Kenyan economy is projected to grow by around 5-5.4% in 2024, supported by strong agricultural performance and a rebounding service sector. However, inflation, high energy costs, and persistent debt issues remain risks to overall economic stability.
As the government looks to address these concerns, strategies focusing on managing imports, bolstering remittances, and aligning fiscal policies with global economic trends could help mitigate further depreciation. However, the outlook remains cautious due to the uncertain global economic landscape.