Kenya’s reliance on diaspora dollar inflows to keep the shilling stable faces risks in the future, the parliamentary economic and fiscal advisory team has warned.
The shilling has largely remained stable in the recent past against major international currencies such as the US dollar, Sterling pound and the euro, partly helped by strong diaspora remittances.
The rising remittance inflows from Kenyans working and living abroad, which last year rose 38.55 percent to $2.7 billion (Sh270 billion), have helped build Kenya’s stock of foreign exchange reserves in recent years, offering a buffer to the shilling when it comes under pressure.
The parliamentary Budget Office has, however, warned that over-reliance on “hot money flows” such as remittances as the main source of foreign exchange reserves poses a major risk to the Kenyan unit.
“Though diaspora remittances have grown significantly in the past, they are not reliable as a source of foreign exchange,” the unit within the National Assembly that advises legislators on financial, budgetary and economic matters says in a report released last week.
“Focus should, therefore, be on attracting Foreign Direct Investment (FDI) as well as diversifying and growing the country’s exports.”
Kenya has struggled to attract FDIs in recent years, falling behind neighbouring Ethiopia, Tanzania and Uganda despite being the most developed economy in the region, the World Investment 2018 report by the United Nations Conference on Trade and Development (UNCTAD) says.
The UNCTAD report released in May 2018 put FDI flows to Nairobi at $670 million (Sh67.05 billion) in 2017, a 71.79 percent jump over $390 million (Sh39.03 billion) a year earlier, but just 18.61 percent of the $3.6 billion (Sh360.29 billion) flows into Ethiopia. Nairobi’s FDIs also trailed Tanzania’s $1.2 billion (Sh120.09 billion) and Uganda’s Sh70.06 billion.