The Kenyan Shilling Faces Pressure Due to Dollar Oversupply
Kenyan Shilling Devaluation and Trading at Sh150 per U.S. Dollar
The Kenyan shilling is currently under significant stress as there is an oversupply of dollars in the market. This has led to the devaluation of the currency, with the exchange rate reaching Sh150 per U.S. dollar. The situation has been further aggravated by capital outflows from major economies, which are increasing base lending rates to combat inflation. Additionally, importers seeking dollars have worsened the situation, as reported by Capital Business Today.
CBK Governor Acknowledges Currency’s Plunge and Imbalanced Capital Inflows
Kamau Thugge, the Governor of the Central Bank of Kenya (CBK), has acknowledged the “artificial strength” of the Kenyan shilling, which has resulted in a decrease in international reserves since last year. This has caused the currency to experience its most significant decline in years. Thugge attributes this to imbalances between foreign and domestic capital inflows over time, which has put pressure on the exchange rate.
Structural Reforms Proposed to Address Dollar Oversupply
During a meeting with the Kimani Kuria-led Parliamentary Finance and National Planning Committee, Thugge emphasized the need for structural reforms to tackle the issue of dollar oversupply. He proposed reducing imports from 13.2% to 11.4%, increasing exports, and encouraging indirect foreign investments to enhance tourism and boost foreign currency flow.
Enhancing Reserve Flow and Attracting Foreign Investments
Despite attracting only 1.7% of its GDP from foreign investments, Kenya managed to generate Sh1.3 billion in returns during 2022-2023. However, this is only half of Tanzania’s travel receipt earnings. To address this, Thugge suggested investing in Medical Tourism to increase reserve flow.
IMF Meeting to Focus on Financial Reforms and Debt Financing
Thugge has an upcoming meeting with the International Monetary Fund (IMF) in late October, where he will discuss additional financial reforms and debt financing. The aim is to address the current predicament marked by a slowdown in depreciation from June to September. This situation has been further worsened by dwindling international reserves due to the overvaluation of the shilling-dollar exchange rate.
This article provides a comprehensive overview of the challenges faced by the Kenyan shilling due to an oversupply of dollars. It highlights the proposed structural reforms and upcoming discussions with the IMF to address the currency’s devaluation. By implementing these measures, Kenya aims to stabilize its exchange rate and strengthen its economy.
