- Early this year, Kenya’s economic output, the growth prospect, was projected to a slow of 5.3 per cent.
- Yesterday, the Central Bank of Kenya quoted Shilling at 141.69, having lost about 19 per cent of its value year-to-date.
Image: FREDRICK OMONDI
Kenya might need more than three years to recover from the output losses occasioned by the weakening shilling against the US dollar, IMF now says.
In its latest external sector assessment report, the lender says economic contraction occasioned by the appreciating dollar on emerging economies such as Kenya is deeper and takes much longer time to ease as compared to developed economies.
“Output in advanced economies recovers three quarters after the appreciation, while emerging market output remains depressed 10 quarters out,” IMF says.
The lender says an appreciation of the US dollar index by 10 percentage points is associated with a decline in real output by about 1.9 per cent in emerging markets, two quarters after the initial appreciation.
Early this year, Kenya’s economic output, the growth prospect, was projected at 5.3 per cent, compared to the previous two years' projections of 5.4 per cent in 2022 and 7.5 per cent in 2021.
IMF attributed this to a funding squeeze on the back of tight international monetary policies that have led to higher borrowing costs specifically for sub-Saharan African countries.
It now says healing from such shocks that are further driving up the local exchange rates in turn exacerbating the cost of living, would take more than three years.
The Kenyan shilling has been on the losing streak against the dollar since early 2020, imposing multiple economic shocks such as increased import costs meaning further costly commodities for consumers.
Yesterday, the Central Bank of Kenya quoted the currency at 141.69, having lost about 19 per cent of its value year-to-date.
Since early 2020 when it started depreciating, it has lost about 42 per cent, meaning importers would now incur an extra Sh42 on every shilling spent to buy a dollar for imports.
Besides the GDP contraction, the appreciating dollar also impacts developing nations’ investment portfolios, the lender says in part.
"An outsized decline in real investment in emerging markets drives the differential impact on output. Trade volumes decline disproportionately more than economic activity for the countries," the lender says.
It adds that this could cause a magnitude decline in imports, roughly double the decline in exports.
"In response to such, the current account in the developing nations as a share of GDP, will further increase, mimicking the output responses."
Kenya's balance of trade last year widened to Sh1.62 trillion from Sh1.41 trillion in 2021, according to KNBS.
This is despite growth in exports that not sufficient to offset the growth in imports during the period.