The June 2024 Eurobond buyback in February 2024 turned around the USD-KES exchange rate which had sunk to a low of KES 160.75/1$ on 31st January 2024. The Kenya Shilling (KES) is appreciated at a negative 3.01 percent year on year against the USD to stabilize at 129.27 on 1st April 2025.
Winners and Losers
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This strength means exporters are losing as each USD is exchanged for less KES. Importers are winners as they need less KES to buy one USD.
The Government is a winner as the foreign public debt repayment costs have fallen drastically as it needs less KES to buy USD to service multilateral and bilateral concession loans, liability management for commercial Eurobonds and syndicated loans.
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Similarly, banks and other private sector players with foreign currency loans from global development financial institutions are benefiting.
Demand of FX in Kenya
The USD-KES strength is hinged on the balance of demand and supply of FX tilting in favor of supply. The rank ordering of FX demand in Kenya from the smallest to the highest comprises profit repatriation by foreign investors, followed by foreign debt with imports forming the bulk of annual foreign currency payments bill.
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In 2024, the NSE listed counters paid out KES 135.6 billion in dividends which is equivalent to an average of USD$ 1.05 billion.
Assuming foreign investors’ market share of NSE equities ranges between 20 to 30 percent, the dividends repatriation averages around USD$ 314.7 million per year.
Also Read: Kenya’s Credit Outlook Revised to Positive, Rating Affirmed Ahead of Finance Bill 2025
Kenya’s foreign currency public debt stood at KES 5.05 trillion in December 2024 which is equivalent to USD$ 39.11 billion.
The projected external debt service by various creditors in today’s exchange rate stands at USD$ 4.57 billion in FY 2024/25.
This is expected to rise to USD$5.91 billion in FY 2025/26. In FY 2026/27, Kenya’s foreign currency debt repayment will inch down to USD$ 5.67 billion.
External debt repayment pressure will crystallize more significantly in FY 2027/28 at USD$ 6.82 billion. In 2024, the NSE listed counters paid out KES 135.6 billion in dividends which is equivalent to an average of USD$ 1.05 billion.
Merchandise goods import free on board stood at KES 2.4 trillion in 2023 which is equivalent to an annual demand of USD$ 18.65 billion today.
Supply of FX
The supply of FX in Kenya is anchored on the stock of FX deposits held by commercial banks, the stock of official FX reserves held by the Central Bank, exports, diaspora remittances, foreign direct investment, and annual foreign debt inflows.
Foreign currency deposits in the M3 Money Supply component stood at KES 1.26 trillion in December 2024 which is equivalent to USD$ 9.73 billion.
The Central Bank of Kenya FX reserves at USD$ 9.96 billion remains robust to defend the country from external shocks as they are equivalent to 5.1 months of imports cover which lies above the global benchmark of 3 months of import, the national target of 4 months and the EAC Macro Economic Convergence Criteria threshold of 4.5 months.
Diaspora Remittances and tourism
Kenya’s goods exports free on board grew by 15.5 percent in 2023 to KES 1 trillion which is equivalent to USD$ 7.8 billion.
Remittances by Kenyans in diaspora grew by 18.03 percent year on year to USD$ 4.95 billion in 2024. The USA has a lion share of 53.2 percent of all diaspora inflows at USD$ 2.63 billion having grown by 12.34 percent in 2024.
Also Read: Why Kenyans in Diaspora are Sending Home More Money Than Before
Saudi Arabia was ranked second with a market share of 8.2 percent at USD$ 403.13 million after growing by 9.01 percent in 2024.
Foreign tourism services export receipts rose by 19.79 percent in 2024 to KES 452.2 billion (USD$ 3.5 billion) after tourists rose by 14.6 percent to 2,394,376. UNCTAD world Investment Report indicates Kenya’s Foreign Direct Investment (FDI) inflows stood at USD$ 1.5 billion in 2023 while outflows amounted to USD$ 588 million.
Kenya has secured but not yet drawn down USD$ 1.5 billion bond via private placement to UAE investors at 8.25 percent (SOFR of 4.33 percent plus country risk premium of 3.92 percent).
The principal repayment for this bond is in three tranches of USD$ 500 million in 2032, 2034 and 2036.
Kenya allowed the three-year USD$ 3.6 billion IMF Extended Fund Facility (EFF)/Extended Credit Facility (ECF) program to expire in April 2025 without drawing down the final tranche in preference for negotiations for a new 2025- 2028 program.
What Could Weaken the Strong Kenya Shilling
There exist several downside risks to the USD-KES exchange rate. Successful talks of the new IMF three years program are paramount but faces the decisive test of difficulties in sticking to the fiscal consolidation path amidst public pressure against tax hikes and fiscal indiscipline associated with 2027 general elections.
A Strong Dollar has emerged against other global currencies since President Trump was declared the winner of November 2024 US elections.
President Trump tax cuts and tariff trade wars are expected to be inflationary which means the US FED will continue pausing or even hike its benchmark Federal Funds Rate now at the 4.25 – 4.5 percent range.
This means the SOFR (Secured Overnight Financing Rate) market reference rate will pause at the current 4.33 percent and may even rise further, making foreign debt expensive.
Further downgrade of Kenya’s sovereign credit risk rating from Moody’s Caa1 with positive outlook would raise the country risk premium on foreign borrowings. Geopolitical risks from tariff trade wars and Middle East crises may increase imported inflation as Kenya’s import bill bloat upwards.
CBK may deliberately choose to support private sector credit growth by commercial banks via a monetary policy jumbo cut of its Central Bank Rate.
This decision may heighten international interest rate disparities with USD FED FFR.As a result, Kenya may experience capital flight to safety from KES denominated assets to USD denominated assets like US Treasury bills, bonds, and equities. The USD-KES may depreciate while imports bill could rise.
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