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20 February, 2023


Over the last 10 years, the Kenyan shilling has depreciated at a 10-year CAGR of 3.7% to an all-time low of Kshs 125.6 in February 2023 from Kshs 87.3 over the same period in 2013, mainly attributable to various factors such as an ever present current account deficit, increasing debt levels and the rising prices of commodities such as crude oil prices as Kenya remains a net importer. The economic disruptions occasioned by the COVID-19 pandemic in 2020 significantly caused volatility of the Kenyan shilling which led to a depreciation of 7.7% in 2020 followed by a further 3.6% in 2021. In 2022, the shilling depreciated for a fifth consecutive year, closing the year at Kshs 123.4 against the dollar as compared to Kshs 113.1 at the beginning of the year, translating to a depreciation of 9.0%. The weakening of the shilling was mainly attributable to increased dollar demand from commodity and energy sector importers as a result of the high global crude oil prices occasioned by supply chain constraints worsened by the geopolitical pressures at a time when the economy was recovering from the impacts of COVID-19 pandemic which had stifled demand in the economy. In 2023, on a YTD basis, the shilling has depreciated by 1.8% against the USD, to close at Kshs 125.6, from Kshs 123.4 recorded on 3rd January 2023. The continued depreciation in 2023 is mainly attributable to sustained dollar demand by importers especially in the oil and energy sector against a low supply of dollar currency leading to shortage of US Dollars in the Kenyan market. The chart below illustrates the performance of the Kenyan Shilling against the US Dollar over the last 10 years:


ource: Central Bank of Kenya

The Kenyan shilling has been put under significant pressure by;

  1. High global crude oil prices attributable to the persistent supply chain constraints and high demand with fuel being an integral input in most sectors in the economy. Consequently, this increased dollar demand by oil and energy importers, as well as, manufacturers against a low supply of dollar currency. The high dollar demand has caused shortage of US Dollars in the Kenyan market further inflating the country’s import bill and consequently weakening the shilling,
  2. Existence of an ever-present current account deficit estimate at 4.9% of GDP in 2022, despite improving by 0.3% points from 5.2% recorded in 2021. The ever-present current account deficit signifies country’s reliance on imports and with the high global commodity prices, it has resulted in increased demand for foreign currency which weighs down on the local currency. The chart below highlights the trend in the current account deficit as a percentage of GDP for the last 10 years:


ource: Kenya National Bureau of Statistics (KNBS)

  1. A deterioration in Kenya’s trade imbalance as a result of adverse macroeconomic conditions in the country. According to the Kenya National Bureau of Statistics Q3’2022 Balance of Payments Report, Kenya’s balance of payments deteriorated by 283.9% in Q3’2022, coming in at a deficit of Kshs 112.7 bn, from a deficit of Kshs 29.3 bn in Q3’2021. The deterioration was brought by a 5.5% widening of the Current Account deficit to Kshs 193.4 bn, from Kshs 183.4 bn in Q3’2021, driven by a 15.8% deterioration in trade imbalance to Kshs 373.1 bn, from Kshs 322.0 bn in Q3’2021. Consequently, with Kenya being a net importer, the shilling has continued to weaken as a result of increasing import bill mainly attributable to the high global commodity prices,
  2. High debt levels and increasing debt servicing costs with Kenya’s public debt having grown exponentially at a 10-year CAGR of 17.7% to Kshs 9.1 tn in December 2022, from Kshs 1.8 tn in December 2012, with external debt contributing 51.1% of the total debt. Consequently, the increasing debt servicing costs mainly on the back of the continued weakening of the shilling have put pressure on forex reserves given that 69.3% of Kenya’s External Debt was US dollar denominated as of October 2022. Additionally, the projected amounts that is expected to be used for foreign debt servicing in FY’2023/2024 stands at Kshs 475.6 bn, which are likely to put more pressure forex reserves as most of it will be used to repay the debts. The chart below highlights the trend in the country’s debt composition:

Source: The National Treasury

  1. High debt servicing costs mainly as a result of continued appreciation of the dollar and aggressive depreciation of the shilling on the back of the monetary policy tightening by United States Federal reserve. Consequently, this has resulted in continued dwindling of the country’s forex reserves given that 69.3% of Kenya’s External Debt was US dollar denominated as of October 2022.

Section II: Evolution of the Interest Rate environment in Kenya

The Interest rates environment in Kenya has witnessed high volatility as evidenced by the significant increase in yields on the government papers. The continued rise in the yields in government papers is as a result of investors attaching a higher risk premium to the country, driven by the elevated inflationary pressures, high public debt and currency depreciation that have put the country’s macroeconomic environment at risk. The chart below highlights the trend in the 91-day T-bill weighted average yield for the last 10 years:


Source: Central Bank of Kenya

Conclusion and our view going forward

Based on the factors discussed above and factoring in the uncertainties in the Kenyan macroeconomic environment;

  1. We expect the Kenya Shilling to trade within the range of between Kshs 130.2 and Kshs 134.4 against the USD in 2023 based on the purchasing power parity (PPP) and interest rate parity (IRP) approach respectively, with a bias of a 6.4% depreciation mainly driven by:
    1. The ever present current account deficit with Kenya being a net importer, which will increase dollar demand in the market, and,
    2. The currently high global crude oil prices that have weighed in on the dollar demand from oil and energy importers who will have to increase the amounts they pay for oil imports and hence depleting dollar supply in the market.
  2. We expect a continued upward readjustment on the yield curve with our sentiments being on the back of:
    1. Increased pressure on the government to meet its budget deficit by borrowing more domestically. The government is likely to accept expensive bids and in turn destabilize the interest rate environment, and, 
    2. Uncertainties about the economy occasioned by elevated inflationary pressures which have resulted in high credit risk which hampers lending to businesses and individuals.