The shilling has weakened to the lowest levels in more than 13 months against the euro and sterling pound amid relative stability against the US dollar, portending higher earnings from exports to Europe.
The shilling opened trading on Tuesday at 149.73 units against the euro based on the official exchange rate published by the Central Bank of Kenya (CBK), the lowest levels last witnessed since mid-March 2024.
Kenyan currency, on the other hand, exchanged for 174.08 units against the pound, the weakest level since March 14, 2024, of 175.93 units, according to official CBK data.
A depreciating shilling against the pound and the euro means increased earnings for horticultural exports to the 27-member European Union bloc and the United Kingdom.
Two markets are the biggest destination for Kenya’s agricultural produce such as cut flowers, vegetables, and fruits, while they also remain key buyers of locally-produced coffee and tea.
Exporters to the EU largely earn in euros, while those to the UK are largely paid in pounds, meaning appreciating exchange rate for the two currencies means increased earnings when converted into shillings.
This has come at a time when the Kenyan currency is experiencing prolonged stability against the US dollar, the currency that producers of horticultural produce use to buy inputs such as fertiliser, keeping production costs relatively stable.
Currency traders linked the weakening of the shilling to excess liquidity in the market, which has prompted the Central Bank of Kenya to increase mop-up activity through repurchase agreements (repo).
“There is a lot of liquidity in the market and this has informed a lot of activity we are seeing in the repo market where the CBK is mopping up the shilling more and more,” a trader at one of the leading commercial banks said on the phone.
“Our hunch is that the CBK actions are transitory.”
The excess supply of the shilling has not impacted the US dollar exchange rate as it has on the euro and pound because the CBK has largely applied a “crawling peg” exchange rate when it comes to the greenback, according to a top official at the apex bank.
The crawling peg strategy is where central banks tend to allow small adjustments on the exchange rate to cater to economic factors such as inflation and current account balance. This helps provide relative stability to the value of the currency (shilling) while allowing some flexibility resulting from changing economic conditions.
Increased supply of shilling in the market is a result of reduced lending by banks to the private sector on fears of defaults at a time when the non-performing loan ratio has crossed the 16 percent mark.
The analysis of the CBK printed foreign exchange data shows that shilling has lost about 13.17 percent of value against the euro since February 3 and 9.80 percent against the pound. It has remained relatively stable, depreciating 0.45 percent against the US dollar.
