Expert warns that Kenya’s shilling is strengthening, but cautions against expecting a lasting trend

The rollercoaster ride of Kenya’s shilling exchange rate has been a topic of concern for many, with fluctuations impacting the economy and the livelihoods of its citizens. Finance scholar Odongo Kodongo sheds light on the factors driving these changes and the implications for the country’s economic stability.

Kenya’s floating exchange rate regime means that market demand and supply determine the shilling’s value. Factors such as exports, imports, investments, and economic fundamentals like interest rates and inflation influence these fluctuations. The exchange rate matters as it can drive inflation, affect export earnings, and impact different economic sectors differently.

The Central Bank of Kenya plays a crucial role in maintaining exchange rate stability by intervening in the market when necessary. Recent interventions, like increasing the policy interest rate, aimed to reestablish equilibrium but did not yield the desired results due to other factors like fears of a sovereign default.

Kenya’s economic fundamentals have not improved, with growing external debt, negative trade balance, and high-interest rates posing challenges. The country’s human capital development index remains weak, hindering economic diversification and productivity.

As the shilling’s value seesaws, sustainability remains a concern. While sentiment and interventions can temporarily boost the currency, long-term stability requires strong economic fundamentals. Kenya’s path to a stable exchange rate lies in addressing its debt burden, trade imbalances, high-interest rates, and investing in human capital development.

With insights from experts like Odongo Kodongo, Kenya can navigate the complexities of exchange rate fluctuations and work towards a more stable and prosperous economic future.