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Friday, September 22, 2023

Contextualizing the Kenyan shilling’s devaluation


The shilling’s dwindling value reveals the intense pressure on the economy, as a burgeoning US dollar forces the country to spend its precious foreign reserves to support runaway forex rates.

The drop in the shilling’s value has affected inflation, foreign investments, and the price of imported commodities, posing economic issues for Kenya and its people.

Many countries, including Kenya, rely on the US dollar as their primary trading and investment currency since it is the world’s reserve currency. Due to the rising demand for US dollars, the dollar’s value in relation to the Kenyan shilling has increased.

The Kenyan shilling’s decline is also attributed to the country’s current account deficit. When a country imports more goods and services than it exports, the result is a current account deficit, which results in a negative balance of payments. Kenya has a growing current account deficit, meaning the country spends more on imports than it makes through exports. Due to foreign currency shortages, the shilling’s value has fallen.

High inflation rates and the Central Bank’s policies are also to blame. To boost the economy, the CBK has been printing more money, which has increased the amount of money available. The Kenyan shilling’s value has decreased due to the increase in inflation that has resulted from this, nevertheless.

Why is the dollar value rising?

The US government has implemented several programs to maintain the dollar’s strength and raise its value in relation to other currencies. Monetary policy, which the Federal Reserve Bank manages, is one of the most significant tools utilized by the government. The Federal Reserve can boost interest rates, enhancing investor demand for the dollar and improving its value by making it more appealing
to them.

Additionally, the US government has a track record of sustaining a robust economy, which supports the dollar’s strength. Tax cuts and infrastructure expenditure are two measures that can enhance demand for US goods and services, which can raise the dollar’s value. These measures also support economic growth and stability.

Additionally, the US dollar enjoys widespread use in international trade, giving it a demand that no other currency can match. Because of this, the value of other currencies is frequently correlated with the dollar’s value, making it challenging for them to increase in value when the dollar is strong.

So, what does the depreciation of the Kenyan shilling mean for the country? First and foremost, it indicates that imported goods will continue to be costly for Kenyans.

Secondly, the depreciation of the shilling will dent foreign direct investment. When the value of the currency is declining, foreign investors are less likely to invest in the country as their returns will be worth less when they convert their profits back into their own currency.

Finally, as the value of the currency declines, it becomes more expensive to import goods, and these increased costs can be passed on to consumers in the form of higher prices, further driving up inflation. (

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