The shilling's continued fall is now being tied to the locking out of Kenya from the international credit market, loan repayments and high import bills.
This is in the wake of a tight global credit market that continues to prove it difficult for poor countries to raise capital trough debt instruments such as Eurobonds, experts say.
A number of countries, including Kenya, have now been forced to turn to multilateral institutions mainly World Bank and IMF.
“With foreign exchange reserves at just 3.69 months of import cover, there is very little room to defend the shilling. These were previously replenished easily through instruments like annual Eurobonds,” data analyst and financial expert Mihr Thakar explained.
Forex reserves were at Sh1.02 trillion last Friday, according to Central Bank of Kenya data, from highs of $8.01 billion (1.2 trillion) sometimes last year, amid low inflows.
Reserves have been reducing in recent months, with a major impact in the first half of the year, mainly as a result of dollar-denominated loan repayments, low earnings as a result of reduced exports, and a high import bill mainly on fuel.
“The unrelenting weakening has something to do with Kenya being shut out of the international debt markets,” Thakar said.
Despite a 12 per cent fall in imports in the 12 months to August 2023 against a similar period last year, the trade balance is still skewed towards imports, he said.
This is worsened by lack of investment inflows in the capital markets and persistent capital flight.
Government's measures geared towards growing exports to stabilise the shilling against the dollar appear to have not borne the desired effect, according to financial and tax expert, Clifford Otieno.
This seems to have been made worse by the unpredictability of the Kenyan investment environment arising out of the recent spate of increases in taxes,he noted.
"Perhaps, a stable tax environment and predictable policy towards taxation would be a good starting point," Otieno said.
The shilling has hit a record low of Sh150 to the US dollar-CBK data, with banks selling at up to Sh155.
It has now shed some 20 per cent of its value to the dollar since January, with the continued slide piling more presser on households who have to contemplate with a rise in the cost of living.
According to trading solutions provider – AZA Finance, the currency is expected to remain under pressure amid continued high demand from those buying dollars, such as manufacturers and firms in the energy sector.
“We expect the shilling to remain under sustained pressure as the foreign exchange reserves continue to provide adequate cover against short-term shocks,”said Terry Karanja-Senior Treasury Associate at AZA Finance.
Nevertheless, households should expect a higher cost of living as costs on imports are set to rise, key being petroleum products which have multiplier effects in the transport, farming, production and manufacturing sectors.
The depreciation is also set to increase electricity prices through higher forex levies on power bills, as generators factor in foreign exchange fluctuation adjustment charges.
Inflation rose from an average of 7.15 per cent in the second quarter of 2022 to 7.94 per cent in the second quarter of 2023, Kenya National Bureau of Statistics noted in its latest quarterly reports, “primarily due to higher food and energy prices.”
In its latest policy meeting, Central Bank of Kenya for the second time held the benchmark rate at 10.5 per cent, as it cited global uncertainties, inflationary pressures, an increase in international oil prices and a weak global growth outlook.
“The Committee will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take further action as necessary,” governor Kamau Thugge said.
Meanwhile, Kenya is in talks with the IMF and the World Bank for a new loan to buy back part of the inaugural Eurobond issued in 2014.
Subsequently, the country will pay accrued interest and postpone repayment of part of the $2 billion loan that was largely used to finance infrastructure, including the Standard Gauge Railway (SGR) during the Kenyatta regime.
The Centre Bank of Kenya (CBK) governor Kamau Thugge told Reuters during the recent IMF/World Bank summit in Morocco that the country plans to buy back up to a quarter of its $2 billion in 2024.
Eurobonds offer more flexibility and policy options to countries, with potential to accelerate development if well spent, but pose underlying risks.
Since they are are issued in foreign currencies, countries are exposed to an exchange rate risk that could exacerbate their vulnerabilities.
According to a UN report dubbed “Eurobonds, Debt Sustainability in Africa and Credit Rating Agencies”, Africa’s debt structure is changing rapidly, borrowing from private creditors has increased, and African countries have limited access to Eurobond markets.