Kenya’s economic landscape has experienced notable fluctuations in recent months with the shilling’s performance mirroring the broader fiscal challenges facing the nation.
Despite pessimistic outlooks from international credit rating agencies, the Kenyan shilling has demonstrated an unexpected recovery closing at Sh129.15 per US dollar, a marked improvement from the previous week’s Sh132.22. The Central Bank of Kenya (CBK) notes that the shilling has strengthened against major international and regional currencies. This upturn coincides with a period of relative calm in Nairobi, as the city experiences a respite from the anti-government protests that had dominated the capital for two months.
However, the shilling’s reprieve may be short-lived as traders observed a slight slip on Friday due to increased dollar demand from the manufacturing sector. The impending review of Kenya’s sovereign rating by S&P Global on August 23 looms large, with the potential to significantly influence the shilling’s trajectory. Currently, Kenya’s long-term foreign and local currency ratings stand at ‘B’ with a negative outlook, dangerously close to junk status. This apprehension is further compounded by recent downgrades from other major rating agencies, including Moody’s and Fitch Ratings.
Despite these challenges, early signs this week suggested a slight strengthening of the shilling, with commercial banks quoting it at 130.50/131.50, an improvement from the previous Friday’s closing rate. Traders anticipate further gains bolstered by expected dollar inflows from tea exports. The shilling’s recovery journey began in late January when it hit a historic low of Sh162 to the US dollar. This turnaround was catalyzed by Kenya’s partial settlement of the Eurobond debt due in June 2024, which alleviated fears of a potential default. Since then, the shilling has regained significant ground, stabilizing around the Sh128 to Sh130 mark, although it experienced volatility in July.
The World Bank notes that Kenya’s GDP growth outpaced that of Sub-Saharan Africa, growing at 4.8% in 2022 despite facing challenging global financial conditions, fuel and food price shocks, and a historic drought. The service sector, particularly financial services, tourism, and transport, contributed significantly to this growth. In 2023, Kenya’s economic performance strengthened further, with real GDP growth accelerating to an estimated 5%. This improvement was attributed to a strong rebound in the agriculture sector which had faced a persistent and severe drought, as well as moderate growth in the services sector.
The recovery of agriculture led to improvements in food supply, and coupled with monetary policy tightening, helped reduce inflationary pressures. However, the Kenyan economy still faces several challenges to sustain its growth momentum. These include heightened fiscal and external vulnerabilities manifested through high public debt, elevated cost of living, exchange rate pressures, global economic uncertainties, and tight global financial conditions. The fiscal deficit widened from 6.3% of GDP in 2022 to 7% in 2023, as revenues underperformed and interest costs rose.
Public debt expanded from 66.7% of GDP in 2022 to 70.2% in 2023, driven by increased loans to finance the primary deficit and by exchange rate depreciation. The impact of exchange rate fluctuations on Kenya’s debt repayment is significant, with estimates showing that the debt repayment bill increases by $271 million for every dollar unit the shilling weakens. The government’s strategy to tap into concessional borrowing prudently helps mitigate the accumulation of expensive debt.
