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The depreciation of the Kenyan Shilling is forcing the government to borrow in U.S. dollars


The Kenyan Shilling (KSh), one of the most powerful, if not the most powerful, currency in East Africa, is in trouble. The currency has been depreciating over the last few months. As of today, KSh is trading at 140.90 to the dollar, which is its lowest level in history.

About two months ago, President William Ruto advised Africans to abandon the U.S. dollar and to start trading in KSh. This news came, of course, as a moment of emancipation from the monetary domination of the U.S. Dollar. But the KSh is not strong enough to sustain government expenditures. Thus, the Kenyan government has no other choice but to use the dollar to sustain its expenditures and trade balance.

To cover its deficits in payments on external debt caused by changes in foreign currency, the Kenyan government borrowed $24.33 million (KSh 3.43 billion). Moreover, the growing concerns over the impact of the sliding shilling on Kenya’s debt profile, as foreign constitutes 52.9% of the country’s total debt.

According to the Auditor-General, the devaluation of the shilling against the U.S. dollar in the first half of the fiscal year 2022-23 required Kenya to borrow $24.33 million to fill the budget shortfall in the foreign debt service commitments, as reported in Business Insider Africa.

This whole situation weakens President Ruto politically. He, who advised everyone to abandon the U.S. dollar, is now forced to borrow in dollars to pay back government obligations. It forced Kenya to continue depending on the U.S. dollar. The main question to ask then is, what led to the depreciation of the KSh? Several factors triggered the depreciation of the KSh.

First, the increased demand for the dollars. The Kenyan economy is heavily reliant on imports, and the rising cost of oil and other commodities has led to increased demand for dollars to pay for these imports.

Second, the reduced supply of dollars. Indeed, the Central Bank of Kenya has been selling dollars in the market in an effort to prop up the shilling, but this has not been enough to offset the increased demand.

Third, Kenya's economic growth has slowed in recent years, and this has led to lower export earnings and reduced foreign investment. This has also reduced the supply of dollars in the market.

Fourth, the upcoming general election in Kenya has also created some political uncertainty, which has made investors less willing to invest in the country and has led to a sell-off of Kenyan assets.

The combination of these factors has put downward pressure on the shilling, and it is likely to continue to slide in the near future. This will have a number of negative consequences for the Kenyan economy.

The first consequence is the expectation of higher inflation. The rising cost of imports will lead to higher inflation in Kenya, which will erode the purchasing power of consumers.

The second consequence would be a reduced economic growth. The weaker shilling will make it more expensive for businesses to import goods and services, which will lead to lower investment and slower economic growth.

The third negative consequence would be an increased debt burden. Kenya's public debt is denominated in US dollars, so the weaker shilling will increase the cost of servicing this debt.

The Kenyan government has been taking a number of steps to try to stabilize the shilling. But for now, it is unclear whether these measures will be enough to prevent the currency from further weakening.

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