Commercial banks see renewed pressure on the Kenya shilling against key global currencies, including the US dollar, citing a cash crunch on the government following rejection of the Finance Bill 2024, which expanded the budget deficit and eroded the country’s sovereign credit ratings.
The Kenya Bankers Association (KBA), the umbrella lobby of the commercial banks, noted that the wider-than-expected fiscal hole will keep domestic interest rates high as investors take advantage of the government’s increased cash requirements to demand steeper returns on Treasury securities.
The recent credit ratings downgrade by Moody’s and Fitch are also expected to exert pressure on Kenya’s ability to contract external debt at favourable terms.
“Government financing risks going forward, including from the rejection of the Finance Bill 2024 and Moody’s downgrade in July 2024, pose significant threats. These risks could exert upward pressure on the exchange rate and necessitate the sustenance of high domestic interest rates,” KBA said in a new report on Thursday. The Kenya shilling has enjoyed some relative stability for about six months now on recent reforms including interventions in the foreign exchange market, improved remittances, and monetary policy tightening to rank among the best-performing currencies in the world this year.
The Central Bank of Kenya (CBK) last week noted that the exchange rate has stayed within the target range, trading between Sh129 and Sh133 against the US dollar and that the rate is a representation of market-determined developments having held back intervention action.
“The shilling has remained stable even in the face of the recent credit rating changes and even during the protests on the Finance Bill 2024,” CBK Governor Kamau Thugge noted during a media briefing on Wednesday last week.
Fiscal developments including the wider budget hole have, however, created concerns for the exchange rate as the adverse rating for instance raises the hurdle to accessing external financing.
Kenya is eyeing to unlock a Sh77 billion funding by the International Monetary Fund to bridge the deficit created by the failed Finance Bill 2024.
The CBK quoted the local unit at Sh129.11 during mid-morning trade on Thursday, a highly improved rate from Sh160.75 at the end of January this year while major banks sold the greenback to clients at between Sh130.90 and Sh132.50.
The rejection of the Finance Bill raised the fiscal deficit from Sh597 billion to Sh769.2 billion including Sh356.4 billion in expected net foreign financing and Sh412.8 billion in domestic financing in the current financial year to June 2025.
The government has taken several remedies to revise its fiscal framework following the rejection of the Finance Bill including trimming overall spending to Sh3.87 trillion from the approved Sh3.99 trillion budget in June.
This week, newly appointed Treasury Cabinet Secretary John Mbadi said that his Ministry would be seeking to restore some of the ‘progressive’ provisions in the rejected Finance Bill with the view of increasing revenue mobilisation.
