Kenya Shilling Starts 2024 On a Downward Trend - Money Weekly News

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It is that time of the week again when we look at the news headlines over the last seven days and dissect those that can affect your money. 

Welcome to the first edition of Money Weekly in 2024.

We start with a look at how the Kenya Shilling is doing. 2023 was not a favourable year for the Kenyan currency as it lost 35 units against the U.S. Dollar. 

The IMF projects that the Kenyan shilling might continue to struggle to maintain its value. Efforts by the Central Bank of Kenya (CBK) have not stabilised the shilling. Some efforts might have come a little late to have an effect.

The weakening shilling is expected to increase import costs, impact consumer prices, forex reserves, and exacerbate Kenya's dollar-denominated external debt.

On the other hand, the “Visa-free” promise by President William Ruto seems to be more of a headache than a relief for visitors coming to Kenya. Tourists are complaining that the new Electronic Travel Authorization (ETA) is more complicated than the initial Visa application process.

Meanwhile, government bonds and Treasury bills are offering competitively high returns, reaching 16% and 18%, respectively. This is due to many reasons, including the government's cash crunch and the shilling's depleting value.

The government’s borrowing spree continues as the Treasury raises the borrowing target by Ksh168 billion. This comes as the Kenya Revenue Authority (KRA) fails to reach its revenue collection targets.

Elsewhere, the Nairobi Securities Exchange (NSE) opened at a four-year low, trading less than a million shares on its first day. This is after it saw a loss of share value in 2023, amounting to Ksh4.2 billion.

The Shillings Starts the Year (2024) On a Downward Trend

The Kenyan shilling ended 2023 on a depreciating trend. The trend seems to keep on as 2024 starts. According to the IMF, part of the reason for the depreciating shilling is the interest rates in the U.S., which are forecasted to go up to as high as 5.4% this year. 

This has, among other factors, led to the persistent weakening of the shilling since 2020 from when the shilling has lost 58% of its value against the dollar. In 2023 alone, the shilling lost about 35 units against the dollar.

Last month, the Central Bank of Kenya (CBK) tried to counter the downward spiral of the shilling by raising interest rates. Still, the Kenya shilling continued to depreciate at a faster rate. The CBK's surprise interest rate increase of 200 basis points to 12.5% aimed to address exchange rate pressure and inflation, but the shilling's decline persisted. Analysts question the effectiveness of the monetary policy tightening, suggesting it may have come too late in the currency's depreciation cycle.

The raising of the interest rates was partly from the CBK acknowledging the shilling's overvaluation by up to 25%. Governor Kamau Thugge stated that the shilling's fall beyond the Ksh150 mark against the US dollar resulted from persistent foreign exchange demand exceeding supply. Last year, the governor outlined measures, including adopting an electronic brokerage system and expecting significant cash inflows from the IMF, World Bank, and regional institutions. Still, we have yet to see a positive impact from these measures.

The weakened shilling raises concerns about increased import costs, impacting consumer prices, forex reserves, and exacerbating Kenya's dollar-denominated external debt.

A weak Kenyan shilling cost taxpayers an extra Ksh65 billion monthly in the year to June 2023, contributing to over two-thirds of the Ksh1.2 trillion increase in the public debt stock. A report by the Parliamentary Budget Office (PBO) reveals that the weak shilling added Ksh809 billion to the public debt in the 12 months from July 2022. The depreciation, over 20% against the US dollar and Euro, the major components of Kenya's external debts, led to an increase in external debt by Ksh1.12 trillion. 

Additionally, Kenya's January payments for the Standard Gauge Railway (SGR) loans from China have increased by Ksh14 billion due to a weaker shilling, inflating external debt service costs. World Bank data reveals that the country will spend $536.9 million (Ksh84.8 billion) to service the loans, with principal and interest payments of $289.95 million and $246.96 million, respectively. 

Nonetheless, the weakening of the Kenyan shilling against major world currencies has led to significant gains for expatriates, Kenyans with foreign currency salaries, exporters, and diaspora remittance recipients. Over the past year, the shilling depreciated by 22.2%, 27.2%, and 25.3% against the US dollar, British pound, and Euro, respectively. This resulted in notable foreign currency gains for those holding such currencies in Kenya. 

However, importers, individuals paying overseas fees, and borrowers in hard currency faced forex losses. The tourism industry and exporters benefited, while those paying fees overseas and companies with hard currency borrowing experienced challenges due to the weaker local currency.

Kenya’s “Visa-free” Puzzle

The new Electronic Travel Authorization (ETA) introduced by Kenya to replace visa requirements has faced criticism from foreign travellers who find it tedious, complex, and costly. 

"Requirements for ETA are far worse than the previous visa regime. This is my sixth visit. Kenya is a beautiful country, but the state should not lie to visitors,'' said Birgit Scovia, a German tourist who arrived in Diani on Saturday.

Visitors complain about excessive paperwork, a 72-hour wait for approval, and a hidden application fee of $34 (Ksh5,300). 

"I am afraid eTA is NOT visa-free, and looking at the myriad of questions that potential visitors to Kenya have to answer is making it even more difficult,'' Hospitality sector expert Mohammed Hersi said.

The ETA was implemented in January, replacing the visa application process. While President Ruto had promised to simplify travel procedures, visitors now feel misled. 

Tourism industry optimism, reflected in over 80% bookings, may wane if the government fails to ensure the promised visa-free experience - commentators argue. Kenya aims to attract five million tourists annually with the new policy, defending it as cost-effective and providing real-time information. 

January Bond Rates Seen Rising Past 18%

As the year starts, activity in the government bonds and Treasury bills is picking up, with different factors coming into play. The dual-tranche January 2024 Treasury bond sale is expected to have rates above 18% due to the Central Bank of Kenya's recent base rate hike and an upward revision of the domestic borrowing target.

On the other hand, short-term Treasury bills are anticipated to have interest rates above 16% due to concerns among investors about government debt refinancing risks and anticipation of higher interest rates.

Analysis by investment banks suggests bids may range between 18.3% and 18.9% for the bond offer, which includes a new three-year bond and a third reopening of a five-year bond. The three-year bond's interest rate will be market-determined, while the five-year paper, initially at 16.84%, saw subsequent re-openings raise rates to 17.95% and 17.99%.

Subsequently, All three short-term papers closed above 16% last week, with the 91-day T-bill reaching 16.0589%. Analysts attribute this surge to investor anxiety over repaying outstanding debts, especially the maturing Eurobond in June 2024.

Notably, the interest rates of government bonds and Treasury bills are rising due to perceived risks in government borrowing, high inflation, and a weakening Kenyan shilling.

Kenya Likely to Borrow More as Taxes Fall Behind Target

The Kenyan government faces pressure to borrow more for its current financial year ending June 30. Despite a higher debt obligation, the Kenya Revenue Authority (KRA) has been falling behind set targets. 

The government aims to borrow an additional Ksh143.3 billion to bridge the budget gap, pushing the country's debt higher from Ksh10.6 trillion in September 2023.

KRA is set to receive an additional Ksh12.9 billion in funding to implement tax administrative measures to enhance compliance and expand the tax base. This will bring KRA's funding from the National Treasury to Ksh36.6 billion for the 2023/24 fiscal year.

Meanwhile, Kenya's foreign exchange (forex) reserves dropped by nearly Ksh50 billion in Q4 2023 despite increased service exports, travel receipts, and diaspora remittances. The country struggled to maintain a surplus balance of payments, particularly in goods exports, hindering foreign exchange generation. 

However, the government plans to boost revenue by directing Ministries, Departments, and Agencies (MDAs) to increase levies and introduce new ones. 

This is as Kenya's exports to Africa surpassed imports by Ksh121 billion in the first nine months of 2023 through September, reaching record levels. Traders exported goods worth Ksh324.79 billion to African countries, a 20.86% increase from the previous year. 

Import expenditure fell by 2.85% to Ksh203.79 billion.

Treasury Raises Borrowing Target by Ksh168 Billion

The Kenyan government has increased its borrowing target for the current financial year by Ksh168 billion to Ksh886.6 billion, citing lower-than-expected tax collection. The government had initially planned to borrow Ksh718.9 billion but revised the target amid challenges in revenue collection. 

“The budget deficit including grants projected at Ksh886.6 billion (5.5 percent of GDP) from the Budget Estimates of Ksh718.9 billion (4.4 percent of GDP),” Treasury noted in a presentation on December 13.

The Treasury projects poor revenue performance due to a weak start in the first five months of the financial year. The Kenya Revenue Authority (KRA) collected just 34.6% of its 2023/24 revenue targets, down from 40 percent in the same period last year. 

Additionally, Kenya has become the fourth-largest borrower from the International Development Association (IDA), the World Bank's soft loan affiliate, tapping $2.01 billion (Ksh316.78 billion) in the fiscal year ending June 2023. 

The IDA provides highly concessional or interest-free loans and grants to reduce poverty and improve economic growth, infrastructure, education, health services, and environmental safeguards in the world's poorest countries. 

This is as Kenya's failure to execute a promised $300 million Eurobond buyback heightens the risk for the maturing inaugural Eurobond in 2024, causing yields to rise by 200 basis points. 

Despite an initial plan to make an advance payment by December, the National Treasury paid $68.7 million on the bond, stating the buyback plan is ongoing, with intentions to settle before March. Kenya is awaiting external inflows from the World Bank, IMF, and bilateral partners.

Private Sector Activities Up in December on Softening Inflation

According to the Purchasing Managers Index (PMI), December saw improved stability in business conditions. The services sector saw increased activity; anecdotal evidence showed improved purchasing power. The drop in fuel prices in December contributed to the reduced costs. However, business expectations in the new year remain weak.

Additionally, cash-rich listed firms in Kenya are expected to benefit from higher finance income soon, thanks to elevated interest rates on fixed deposits and government paper. The average deposit rate among commercial banks rose to 9.11% by October 2023, further increasing with the Central Bank's base lending rate hike to 12.5%. Firms holding cash in government securities have also enjoyed higher rates, with Treasury bills now at 16%, up from 9.3-10.3% in early 2023.

Meanwhile, Agricultural firm Sasini has increased its dividend payout by 50%, reaching Ksh342.1 million, despite a more than 50% decline in net profit to Ksh542.6 million for the financial year ending September 2023. The board recommended a final dividend of Ksh0.50 per share, in addition to the Ksh1 per share interim dividend paid in July 2023.

In the financial year ending June 2023, government contracts awarded to marginalised groups, including women, youths, and persons with disabilities (PWDs), reached a record Ksh45.1 billion. Tenders awarded by government entities saw women receive Ksh24.87 billion, youths Ksh16.91 billion, and PWDs at Ksh3.36 billion. 

NSE 2024 Trading Opens On a Four-Year Low

Trading at the Nairobi Securities Exchange (NSE) commenced at a four-year low, with only 904,000 shares valued at Ksh12.5 million traded on the first day of the year. A stark contrast to 2023, when the NSE opened with 1.73 million shares valued at Ksh33.8 million. 

This reflects low investor confidence, considering the NSE witnessed a Ksh4.2 billion loss in share value traded over the past year, dropping from Ksh9.4 billion in September 2022 to Ksh5.2 billion in September 2023. Despite an increase in the number of shares traded from 351 million to 424 million over the same period, the total value of shares traded declined. 

The NSE 20 Share Index also fell from 1,718 points to 1,508 points.

Other News In a SnapShot

The Africa Energy Forum is coming to Kenya from June 20th to 23rd this year. The forum is expected to bring together 2,500 participants from different sectors, including global renewable energy players, banks, and regulators. The event aims to address challenges like financing and regulations hindering wind energy adoption in Africa despite the continent's significant potential. Only 1% of global wind farms are in Africa due to funding obstacles.

Auditor-General Nancy Gathungu's special audit reveals that Medical equipment worth Ksh555.2 million lies unused in 12 Kenyan county hospitals. Some equipment is inoperable due to breakdowns, while others can't be used because hosting hospitals lack the necessary infrastructure. The equipment is part of a Ksh3.9 billion deal between Kenya and France in 2020 for Covid-19 and maternal/infant care. Notable facilities flagged include Gatundu South, Cherangany, and Mukurweini Level Four hospitals.

The government faced a setback as the Court of Appeal rejected a plea to lift orders halting the implementation of the Social Health Insurance Act 2023 until January 19, 2024. The three-judge bench, including Justices Kiage, Nyamweya, and Macharia, declined the request by Health CS Susan Nakhumicha. Nakhumicha, represented by Senior Counsel Fred Ngatia, urged temporary relief for patients, emphasising the adverse impact on healthcare.