By David Owino
It is has been a month since Dr William Ruto and Rigathi Gachagua were sworn into office as Kenya’s President and Deputy President respectively. President Ruto’s tenure began with high-level international assignments including his maiden address to the Un ited Nations General Assembly; but since his return, he has promised a number of changes including the presentation of a supplementary budget that will shave 300 billion shillings off the current budget. If judged only by this pledge, then it is clear that Kenya’s economy is on the ropes.
Ruto becomes President as the country faces a number of problems, one of which is a weakening of the Kenyan shilling. The shilling is poised for a 15-month straight depreciation against the dollar and is likely to dip further as the dollar keeps on strengthening in the international market. Currently, the shilling is trading around 120.77 against the dollar compared to January when it was trading for Ksh113.38 against the dollar.
In the year 2018, Kenya’s risk of debt distress increased from low to moderate, having breached three indicators: its external debt service-to-export ratio, the country’s external debt service-to revenue ratio and the present value [PV] of external debt to export ratio.
The exact strength of the Kenyan shilling has been debated over the years, with a number of players in the market arguing that it is overvalued. The International Monetary Fund even declared that the Kenya shilling was overvalued by 17.5% and reclassified it from a floating currency to a managed currency in 2018. This according to them meant that the Kenyan currency is not one whose value is set by the foreign exchange market through supply and demand but rather its purchasing power is adjusted by the monetary authorities with the purpose of influencing business activities and prices.
Since then, the Kenyan shilling has struggled to regain balance in the market.
What does this mean for the Ruto government? First, this means Kenya will spend more money to service its foreign debt. This is because most of the foreign debt Kenya owes is serviced in dollars. This might force the struggling government to acquire more loans just to service the already existing loans. This in turn means that there will be little money left to spend on development projects. Kenya’s public debt as at 2021 stood at Ksh7.06 trillion of which domestic and external debts stood at Ksh3.4 trillion and Ksh3.66 trillion respectively.
A weak shilling will also mean that Kenya will spend more on imports. This comes with a number of challenges including imported inflation. Currently, Kenya’s inflation stands at 9.2% and is projected to rise further. Importers will pass this burden to consumers, and so rises the cost of living. This is already evident in the increasing fuel prices which has led to significantly higher public transport fare.
Another challenge which President Ruto’s government is likely to face due the weakening shilling is pressure to increase Kenya’s public wage bill. This is because the imported inflation will lead to hiking of commodity prices and public servants will realize that the wages they earn no longer meet their expenditure. The government may find itself dealing with strikes from different sectors demanding pay rises in line with rising inflation.
However, according to Treasury Cabinet secretary nominee Prof Njuguna Ndung’u, a Kibaki-era Central Bank governor, a weak shilling is not always a bad news for the economy. He claims that a weak currency also comes with it a number of good tidings.
According to Prof Ndung’u, a strong Kenyan currency reduces the competitiveness of her exports which could slow down economic growth. This is because when the currency is strong, exports become expensive abroad, thereby reducing their competitiveness against locally produced goods.
As the shilling weakens, this means Kenyan exports are likely to do better in the international market since they are relatively cheaper. This could work in President Ruto’s favour, as part of his agenda, plainly titled “the plan” is to revive local production and increase the amount of goods that Kenya exports.
Also, a strong shilling can discourage domestic investments as the cost of domestic borrowing is implicitly high, which in turn may negatively impact employment and economic growth in turn.
One then could ask what is the desirable exchange rate of the shilling to the dollar? Economists generally agree that a desirable exchange rate should be at the level that makes our exports of goods and services competitive in the international market.
More broadly, depreciation and appreciation of a currency is an adjustment process in response to underlying market dynamics.
A recent analysis by Kenya’s Monetary Policy Committee shows that over the years, the exchange rate is never misaligned beyond a range of about 5%. This means that in the long-run, the Kenyan shilling will find its true value. What moves the government will make in the meantime will have a large impact on this value.