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Why Kenya shilling remained at Sh129 against the dollar for record 16 months
A teller handles US dollar banknotes and Kenya shilling banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya on February 16, 2024.
This year, the shilling enjoyed its most stable run against the dollar in decades, but not without controversy after the International Monetary Fund (IMF) expressed concern that the stability was affecting monetary policy transmission.
The IMF concerns came as the Treasury let slip that the Central Bank of Kenya (CBK) was keeping the currency stable by buying dollars from the market, even as the apex bank reiterated its commitment to a free floating exchange rate.
As the shilling held at the Sh129 level to the dollar for 16 straight months since August 2024, the CBK found itself sitting between IMF scrutiny on one hand and a grateful government on the other end.
The Bretton Woods institution’s main concern was that the shilling was too stable, despite a globally weakening dollar and positive indicators such as higher export and remittance inflows, which should ideally have led to a strengthening of the shilling.
As a result, the IMF was worried that the static exchange rate was interfering with inflation targeting, possibly by distorting the cost of imports.
With the CBK actively buying dollars in the market this year to boost forex reserves under what it termed as favourable conditions, National Treasury Cabinet Secretary John Mbadi and Principal Secretary Chris Kiptoo, separately indicated that the shilling would have gained to the 118-120 level against the dollar had it not been for the CBK action of reducing dollar liquidity from the market.
The official forex reserves, which give an indication of whether the CBK has been active in the market, currently stand at $12.13 billion (Sh1.56 trillion), up from $9.2 billion (Sh1.19 trillion) at the beginning of the year, although they have partly been boosted by proceeds of external sovereign loans taken up in the period.
That said, the CBK has repeatedly sought to delink its market activity from the movement of the exchange rate, saying that its policy of allowing the market to set the rate remains in place.
“We stick to our long held stance on non-interference, and we have not told banks to stick to a particular exchange rate level. This exchange rate is market driven, and if you don’t believe it, try selling your dollars at a higher rate, or go to a bank or forex bureau and try buy the dollar below the current rate of between 129 and 130,” said CBK Governor Kamau Thugge in a briefing on December 10.
Dr David Ndii, the chairperson of the Presidential Council of Economic Advisors, argued that the CBK had been alternating between setting interest rates and creating a dollar peg as a measure to check imported inflation.
He further said that Kenya, unlike developed markets, could not rely on interest rates alone as the key monetary policy tool, as the economy is small and open to shocks, which limits the transmission of interest rate decisions.
Even as the debate continues over whether the shilling is trading at a true market determined level, importers and exporters will have welcomed the breather from the volatility of 2023 and 2024, which made forecasting costs and earnings difficult.
Traders also faced a dollar supply hiccup in 2023 after a near breakdown of the interbank forex market, which was however resolved early last year.
In 2023, the shilling had weakened by 21.1 percent against the dollar to a rate of Sh156.46 at year-end, before clawing back the losses in 2024 when it gained 21 percent to end the year at Sh129.29 to the dollar.
On the other hand, commercial banks have counted losses in their forex trading income, which has suffered due to shrinking margins on account of the static exchange rate.
In the nine months ended September 2025, the nine tier one banks—which dominate the forex trading segment— recorded a combined decline of 30.9 percent or Sh17.27 billion in foreign currency trading revenue to Sh38.67 billion.
KCB Group recorded the largest absolute decline in forex trading income, going down by Sh5.52 billion to Sh8.24 billion, while Standard Chartered Bank Kenya had the steepest percentage decline, with its forex trading income falling by 58.9 percent from Sh6.68 billion to Sh2.74 billion.
At the height of the forex exchange crisis in early 2024, when the shilling also hit its all-time low of 161 units to the dollar, the buy-sell margin quoted by banks had gone as high as Sh13, but this has since come down to between Sh4.50 and Sh6.50 among the large lenders.
In the coming year, the macro-economic and market conditions are expected to keep the shilling trading within the narrow band established this year.
“In the next year, the probability is we will not see much movement. From a defensive perspective, the CBK is holding ample ammunition through large forex reserves, while the positive balance of payments remains supportive of the currency,” said Churchill Ogutu, an economist at IC Group (Mauritius).
“In November, when there was significant demand for dollars, we should have ideally seen the shilling weakening, but there was little movement in the exchange rate.”
Support for the currency comes from steady forex inflows from diaspora remittances, tourism, agriculture and services exports.
According to CBK projections, the country set to close the year with a balance of payments surplus of $1.94 billion (Sh250 billion).
The positive balance of payments will be supported by a $5.18 billion (Sh667 billion) surplus in the financial and capital accounts, which measure foreign direct investment, foreign loans and portfolio inflows into the capital markets, making up for a $3.24 billion (Sh418 billion) deficit in the current account, which measures the balance of trade on goods and services.
In the near term, market players anticipate the shilling will gain further ground on the dollar, boosted by higher inflows from horticulture and tea exports, diaspora remittances and portfolio investors.
A periodic CBK survey on banks and non-banking institutions that was done ahead of the December 7 monetary policy committee meeting showed 76 percent of respondents projecting that the shilling will either hold at the current level or strengthen against the dollar in the next two months.
Only a minority said they expected pressure on the shilling, largely coming from increased import demand, and seasonal factors associated with increased demand for consumer durables during the festive season.
