- A currency is classified as strong when it is worth more than another country’s currency.
- Some countries have very strong currencies when the world economy is weak or politically unstable.
Image: FILE
The Kenyan shilling has strengthened significantly against the US dollar in the recent past after a period of constant decline.
The shilling firmed 1.4 per cent to trade at 136.79 per dollar as of 2:30 pm last Thursday, which was its 10th consecutive day of gains.
The US dollar went up from an average exchange rate of Sh125 against the shilling in the first quarter of 2023 to Sh160 posted on January 15, 2024.
The shilling, however, started to register improvements and posted its strongest intra-day gain against the US dollar in the last 12 years on February 14, reaping from a tide of investor confidence after the government received significant inflows to pay off the US$2 billion Eurobond.
What does a strong shilling mean for Kenyans?
A strong currency is good for people who like to travel abroad, and people who like imported goods, because they will be cheaper.
However, it can be bad for domestic companies as their products will be expensive overseas.
A currency is classified as strong when it is worth more than another country’s currency.
Some countries have very strong currencies when the world economy is weak or politically unstable. These countries are called “safe havens” because that country is viewed as economically and politically stable.
In other words, their currency is likely to recover from any turmoil going on. The U.S. is viewed as a “safe haven,” so the dollar tends to get stronger in times of instability.
A stronger shilling also means cheaper foreign stocks/bonds for Kenyan investors and lower inflationary pressure from cheaper prices.
Muthoni Mutonyi, a financial expert told African Business Kenya’s efforts to repay the US$2bn bond restored investor confidence which led to foreign exchange inflows that strengthened the shilling.
She also pointed a decline in demand for the dollar as another reason for the strengthening of the shilling.
“Lower oil prices have reduced the need for dollar-denominated imports, easing pressure on the shilling,” she added.
When the shilling was on the decline, the performance was attributed to a general increase in prices of essential commodities like food, transport and energy.
Kenyan borrowers struggled to meet their debt obligations.
A weak shilling promotes domestic investments that create employment and also discourages the final consumption of luxury imports.
However, for a developing economy like Kenya that has a huge oil import bill, a weakening of the shilling could cause inflationary pressures. Kenya has been importing too much and exporting too little, making the country vulnerable to shocks.
Edwin Dande, Managing Partner, Executive Director and Chief Executive Officer at Cytonn Investments Management advised that the government formulate policies to encourage Foreign Direct Investments (FDIs).
“The government should prioritise creating an attractive investment environment for foreign investments by improving transparency in all required regulations as well as reducing hurdles in the process,” he said.
Dande noted that building an export-driven economy would also strengthen the shilling.
He said the government could make this possible by formulating and implementing robust export-oriented policies and manufacturing to increase exports.
He said the country should reduce overreliance on imports to preserve the country’s foreign exchange reserves.