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Kenyan Shilling hits record low of 136.02 per dollar, posing economic challenges

Kenyan Shilling hits record low of 136.02 per dollar, posing economic challenges
  • Kenyan shilling hits a new record low of 136.02 per dollar, raising concerns over increased import costs and debt repayment challenges. 
  • Dollar scarcity and rising US interest rates exacerbate the depreciation of the shilling, leading to higher living expenses and difficulties for businesses in Kenya. 
  • While exporters of agricultural goods and recipients of remittances may benefit from the weaker shilling, the government faces mounting pressure to meet foreign debt obligations.

The Kenyan shilling has fallen to a new record low of 136.02 per dollar, putting the nation at risk of higher import costs and trouble paying its debts.

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Despite the introduction of the forex code by the top bank and a government agreement to import oil on credit from the Gulf States, according to data from the Central Bank of Kenya (CBK), the local currency declined from an average of Ksh135.9 on Monday evening to the new rate on Tuesday.

Since mid-2021, when it stood at Ksh106.54 due to a mix of poor inflows and high dollar demand, the shilling has been under pressure.

The shilling lost 9% of its value in the 12 months leading up to December of last year, driving up living expenses and harming consumers already facing high food and gasoline prices.

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The aggressive increase in US interest rates to combat inflation has made the situation much worse by causing a persistent dollar scarcity in the local market.

A fluctuating shilling will increase the amount importers spend bringing in items as raw materials for manufacturers, driving up the cost of inputs for businesses, who will then pass the higher costs on to consumers.

Petroleum goods, equipment, medicines, machinery, medical supplies, vegetable oil, vehicles, wheat, and clothes are among Kenya's top imports.

Additionally reflecting the effects of the strengthening dollar on household budgets, the depreciation of the shilling is expected to result in higher electricity prices through higher foreign exchange fees on power bills. A weaker shilling foretells further problems for Kenya's government in terms of its responsibilities to repay foreign debt.

For instance, the weakening shilling caused a massive increase in foreign interest payments in the eight months leading up to February of Ksh19.3 billion ($141.9 million), emphasizing the disastrous effect on debt servicing.

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However, since they are typically paid in dollars, exporters of agricultural goods like tea, coffee, and horticulture stand to gain from the weakening of the Kenyan shilling as they will end up making more money.

Kenyans who receive money from distant relatives also account for currency gains on the US dollar they convert for Kenyan shillings before using it locally.

This is a Business Insider Article, for more articles like this, visit africa.businessinsider.com

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