How Kenya shilling became best performer in sub-Sahara Africa

A trader counts money after a day’s sale on March 29, 2024. 

Photo credit: Photo | Dennis Onsongo | Nation Media Group

The World Bank Group has credited interest rate increases by the Central Bank of Kenya (CBK) and the partial settlement of Kenya’s debut Eurobond for the shilling's rally seen since mid-February.

According to the multilateral lender, the higher benchmark lending rate by the CBK has amounted to a defense of the local unit while the partial repayment of the Eurobond notes maturing in June has revived demand for the shilling.

The unit has been the biggest gainer among peers in sub-Saharan Africa on a year-to-date basis, alongside the Zambian Kwacha which has however shed some of its gains.

“The Kenyan shilling is the best-performing currency in the sub-continent and it recorded an appreciation of 16 percent so far this year. After strengthening by 14 percent in mid-February, the Zambian kwacha has lost some ground and recorded a year-to-date appreciation of 2.4 percent as of mid-March. In both cases, the monetary authority hiked interest rates to defend their currencies,” the World Bank notes in a new regional outlook report.

“In Kenya, securing funds to repay its Eurobond falling due in June 2024 restored confidence and increased the demand for local currency.”

CBK effected two consecutive raises of the benchmark interest rate in December and February at 13 percent from 10.5 percent with the primary goal of cushioning the shilling by attracting foreign exchange flows into local investments such as government securities.

This month, the CBK noted that raising interest rates had resulted in the desired outcome as it left the CBR unchanged at 13 percent.

In February, Kenya raised Sh195.3 billion ($1.5 billion) in new Eurobond notes to partly meet the maturity of the Sh260.4 billion ($2 billion) debut sovereign bond due to mature in June. The news marked the turning point for the shilling as investor sentiment improved on the back of the elimination of what had largely been seen as a looming default.

Since then, the shilling which had lost ground on the US dollar by more than two percent in 2024-as of January 30, trading at Sh160.75, has rallied to Sh130.22, representing a year-to-date appreciation of 17 percent.

CBK has termed the sharp depreciation of the local unit in January as an overreaction to the perceived sovereign risk which has since been discounted by the partial repayment of the maturing Eurobond notes.

The shilling is still expected to find equilibrium in the coming days as the new supply of foreign exchange continues to catch up to demand, driving the appreciation seen in the past two months.

“There was a time when we thought the exchange rate was overvalued and we could see the current account widening, but then there was an overreaction and we got to a situation where the shilling exchange rate was undervalued. The reason for the undervaluation was really on what the Kenyan government was going to do about the Eurobond that was going to fall due in June 2024,” CBK Governor, Dr Kamau Thugge, said last week.

CBK expects the shilling to find further support from sustained growth prospects. The World Bank expects Kenya’s GDP to grow at five percent this year, falling inflation and the return of foreign portfolio flows into the economy.

Dr Thugge has adopted his predecessor’s stance on the exchange rate maintaining the CBK’s view on letting the shilling float freely, intervening only in cases of volatility in either direction.

According to Dr Thugge, the CBK stands ready to intervene in the scenario of rapid depreciation or appreciation without accompanying fundamental drivers.

“We will just allow the exchange rate to find its true level and really just intervene when there is excessive volatility. I can’t give a particular level of where the rate settles but we will allow demand and supply of foreign exchange to determine the level,” he added.

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