Friday, 7 October 2011

Woes of the shilling

From early this year, the Kenyan shilling has considerably lost its value against the other major currencies of the world. Notably, it has lost 23% of its value to the dollar, and it is currently trading above the 100 mark at the Nairobi Stock Exchange (NSE). This is the lowest point the local currency has reached in 17 years. Sadly, experts are saying that the currency can slide further if adequate intervention policies are not implemented.

<a href="">InstaForex</a>

There are many reasons why the Kenyan shilling is performing poorly.  Chief among them is the country's love affair with imported goods and services. It is estimated that the value of Kenyan imports is Ksh. 380 billion while exports is Ksh. 38 billion. This trade imbalance has come home to haunt the country's currency. Thus, to stabilize the value of the shilling, new policies should focus on increasing food production and decreasing over-dependance on fuel-generated energy.

The economic problems of other regions of the world seem to have a ripple effect to the Kenyan economy. For example, the Euro Zone debt crisis that has affected various countries such as Greece, Portugal, and Spain, is threatening to ignite another cycle of global economic meltdown. When there is an economic crisis in the world, investors and traders often tend to sell their securities (shares or bonds) to purchase the United States dollar, which is generally regarded as a safe haven currency.

A conspiracy theory suggests that the free fall of the local currency is attributed to the relative peace in South Sudan and Somalia, as Kenya no longer enjoys the huge dollar transits to these countries. Nonetheless, the sum of the matter is that our country is sinking into deep economic woes, if nothing is done to calm the situation.

As pointed out earlier, the main cause of the depreciating value of the shilling is the increasing demand for U.S. dollars to pay for the Kenya's massive imports. About forty percent of the country's imports are dominated by the dollar. This is what has caused the increased demand for the safe haven currency in trade.

Kenya's current population size of about forty million is also increasing the demand for manufactured consumer goods, and since the country is unable to produce enough quantities of these goods, it has resorted to imports to suffice the need. The majority of the country's imports are electronics, foodstuffs, clothing, transport equipment, motor vehicles and their spare parts, iron, steel, and others. Consequently, if the value of the shilling is not managed in time, the prices of such imports will undoubtedly continue to escalate. Will the shilling sink deeper? Let us wait and see..........

1 comment:

  1. It is saddening. If their is a sustained move of the shilling trading above the 100 mark, then the next trade level will be 110. On the other hand, if the CBK intervenes or sth happens, the local currency can appreciate a little to around 95 before retesting the 100 mark. Imagine all this is happening and the election mood is not yet ripe. What level will it be trading same time next year? Let us wait and see. And, it is of essence to note that sometimes the depreciation of a currency can override a country's monetary policy. This seems to be the case of the shilling as it has absorbed the economic woes of the western world.