The Kenyan Shilling (KSh) reached a 1-year low against the US dollar last week (1 dollar=87KSh), probably because the Presidential Elections are approaching and everybody is worried about it. Bloomberg analysts predict that the value could go down to 89 KSh a dollar on election-day.

What I find interesting is that in December 2007 the Shilling also plummeted just a few weeks before the infamous elections that led to the violence. But the value in 2007 was 63 KSh a dollar, not 87 like last week. Here’s an excerpt from an article written in 2007 in the African Executive:

The Kenya shilling (Ksh.) has hit a nine years low against the US dollar at an average of US$1.00 = Ksh.63.50. The shilling has been gaining strength over the dollar for over two years now. This has come both as a blessing and curse to many Kenyans depending on which side of the divide they hail. For exporters, the strengthening of the shilling against the dollar has wiped out millions of earnings, making them to suffer losses.

So, what puzzles me is not just the “pre-election depreciation” but the long-term trend. Why has the Kenyan Shilling lost so much value in the last 5 years? Why did it appreciate back then? I am asking these questions to myself as well the informed readers of this blog. Take a look at the 5-years trend:

KShUSD 2007 2013

You see that 2011was an “annus horribilis” for the Kenyan Shilling, which lost a quarter of its value in less than a year. But the downward trend goes beyond that.  When it comes to the currency appreciation before 2008, the African Executive gave this explanation:

The shilling has become stronger because of huge inflow from donors, increased remittance by Kenyans in the Diaspora and the weakening of the US dollar.  Other reasons include the buying of 24.99% stake in Equity Bank by Helios Capital Ltd. at an estimated value of Ksh.11 billion, and the take over by 51% of Telkom Kenya by France Telecom, at an estimated value of Ksh.26 billion. Recently, the International Monetary Fund disbursed four billion shillings to the Kenya government. This has further increased the amount of dollars in circulation.

That cannot be the only reason, however, considering that both foreign direct investment and the net inflow of portfolio equity increased between 2008 and 2011. Official development assistance increased as well. Perhaps, another possible  explanation is the one proposed by Wolfgang Fengler, lead economist for Kenya at the World Bank, who wrote that the current account deficit (imports higher than exports) is the structural cause behind the downward trend of the Kenyan currency:

The main reason is that Kenya’s economy is increasingly imbalanced: the country is importing too much and exporting too little. This makes it vulnerable to shocks.  The gap between imports and exports needs to be financed by financial inflows other than export earnings. In 2011, imports have soared (mainly due to higher oil and food costs), while exports remained stagnant. The gap between imports and exports, also called current account deficit, now stands at above 10% of GDP – one of the highest in the world! Today, Kenya’s main exports don’t even earn enough to pay for its oil imports, not to mention other imports beyond oil (figure)!  The money to pay for any additional imports needs to come from somewhere.

I bet there are plenty different explanations that I don’t know about. Feel free to comment if I missed out something.

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