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Economic Turmoil Looms as Kenyan Shilling Faces Continued Depreciation.

Kenyans’ household could be headed for tough times. This comes at a time when the country’s currency- the Shilling, continues to depreciate against the dollar with no signs of recovering any time soon. The shilling has been on a free fall hitting an all-time low against the dollar, signaling inflation and higher costs of imported goods.

The Kenyan shilling has been depreciating for the past two years, plunging millions into poverty and raising concerns in East Africa’s largest economy.

A weak shilling is harmful to Kenya given that it is an import-driven economy. The continued weakening is expected to push up the cost of living, hurting households already subjected to high fuel and increases in food prices. This situation has made the country prone to higher costs for imported goods, electricity, and difficulties in repaying debts.

In February 2020, just before the outbreak of the coronavirus pandemic, the shilling was trading at 100 against the US dollar. Since then, the greenback has strengthened, leaving the local currency weaker.

Many emerging market currencies, including the shilling, have been hit by the global hike in interest rates led by the Federal Reserve in the US. With inflation in the US hitting 9% last year, the US central bank moved rapidly to increase rates in a bid to get prices back under control.

According to the African Development Bank (AfDB), the tightening global financial conditions are set to continue destabilising the foreign exchange markets of most African countries including Kenya.

“Most African currencies, especially in commodity-exporting countries, lost substantial value against the US dollar in 2022 due to monetary policy tightening in the United States,” says the AfDB in its latest Africa’s Macroeconomic Performance and Outlook.

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Kenya’s weakening shilling against the US dollar has seen the country’s public debt rise by at least Sh680 billion in the last six months. The Kenyan shilling has fallen from Sh121 in trading against the US dollar in January this year to Sh141.7 last week, which translate to a 14 per cent drop or Sh680 billion increase in the country’s stock of dollar-denominated debt.

This is likely to increase the burden of repayment, piling more pressure on Kenyan taxpayers who are already bearing the brunt of the government’s drive to raise more tax revenue.

The World Bank and Eurobond holders account for nearly half of Kenya’s external debt at 28% and 20% respectively, based on data from the Treasury. China, whose loans have gone on infrastructure including the Standard Gauge Railway is responsible for 19% of Kenya’s external debt.

With global interest rates shooting up, it is going to become costly for Kenya to borrow or pay back its lenders.

According to the Office of the Controller of Budget, the country’s stock of US-denominated debt has led to exposure to currency fluctuation that significantly increases the stock of public debt.

“The depreciation of Kenya shilling against the US dollar has led to an increase in the debt stock and debt repayments (principal and interest),” stated the Controller of Budget in submissions to Parliament’s Public Debt and Privatization Committee.

The high cost of living in Kenya has been a persistent issue, according to the Kenya National Bureau of Statistics, Kenya has recorded the highest cost of living since 2017. with many households struggling to make ends meet. Inflationary pressures have been mainly attributed to factors such as high food and fuel prices, rising taxes, and a weak currency.

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