Why weakening of the currency has to be stopped by all means

BY ANTONY MUTUNGA

At the start of 2020, the Kenyan economy was expected to rebound as compared to the previous year. The Covid-19 pandemic was still in its early stages and was only being recorded in China. 

The Kenyan shilling which had weakened against international currencies in the last decade was slowly stabilizing and, compared to 2010, the cost of living had almost doubled as a result of the depreciation. The slow stabilization was therefore a good welcome because if it was to continue then the citizens would see a change in the cost of living.

However, this has not been the case so far, as of mid July, the Kenyan shilling weakened further against the dollar. According to data from the Central Bank of Kenya, the weak performance of the currency is due to unevenly matched demand and supply of the dollar in the inter-bank market. This is a foreign exchange market where banks exchange different currencies. 

With President Kenyatta having opened up the borders and flights starting to return back to normal, businesses are starting to pick up momentum. Consequently, those who rely on imported goods have increased the demand for the dollar in order to purchase the raw materials and goods they need. With the country mostly reliant on imports, the surge in demand for the dollar has far outweighed the supply.

Kenya has mostly relied much on tourism and remittances as leading sources of dollar flow in the country. However, lately due to the coronavirus, flights all over the world had been halted as countries tried to control the spread of the pandemic. Kenya was one of the world’s most hurt by this move as the country relies on tourism. As tourists dried up over the period, hotels felt the pinch with many having to reduce employees and in the extreme, close down. 

Apart from the dollar flow from tourists, the country also experienced a reduction in supply of the dollar due to a reduction in exports. With flights being halted, many farmers who would be mostly paid in international currencies, saw a reduction as they had to stop the movement of their products over a period of over four months.

In addition, the supply was also affected by the reduction in remittances. Before the pandemic hit, remittances to Sub Saharan Africa were on  a rise once again as more people were sending money back. However, with the pandemic, many have been left unemployed while others have been forced to close down their businesses. This has resulted in the reduction of remittances and thus a reduction in the supply of the dollar and other international currencies.

If the Kenyan shilling is to continue weakening against international currencies then importers will see the cost of imports increase. As a result, this burden will be felt by the final consumer as the importer is forced to increase his/her prices so as to make a profit. 

Prior to the pandemic, the shilling was stabilizing against the international currencies due to the increasing remittances and a sense of political stability that was welcomed after the 2017 elections. Investors had thus increased investments in the country hence ensuring a balance. With economies opening up, there is a need to regain the balance and stabilize our currency. 

However, for this to happen the Government has to find solutions to reducing our trade deficit and our growing debt. If not, our currency is facing a further weakening streak against the other currencies, leading to a higher cost of living and pushing more people behind the poverty line. The time is now to stabilize our currency before we end up slowing down the economic activity further. 

Writer is a member of NBM’s inhouse editorial team and lead business researcher

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