The World Bank Group has credited rate hikes by the Central Bank of Kenya (CBK) and the partial settlement of Kenya’s debut Eurobond for the shilling’s rally since mid-February.
According to the multilateral lender, CBK’s higher benchmark borrowing rate amounts to a defense of the local unit, while the partial repayment of eurobonds due in June has revived demand for the shilling.
The unit was the biggest gainer among its sub-Saharan African peers on a year-to-date basis, alongside Zambia’s Kwacha, which has however lost some of its gains.
“The Kenyan shilling is the best performing currency on the sub-continent and has recorded a 16% appreciation so far this year. After strengthening 14 percent in mid-February, the Zambian kwacha lost some ground and posted a 2.4 percent year-to-date appreciation in mid-March. In both cases, the monetary authority raised interest rates to defend its currencies,” the World Bank notes in a new regional outlook report.
“In Kenya, securing funds to repay its Eurobond maturing in June 2024 restored confidence and boosted demand for the local currency.”
The CBK made two consecutive hikes in the benchmark interest rate in December and February to 13% from 10.5%, with the primary aim of softening the shilling by attracting foreign exchange flows to local investments such as government bonds.
This month, the CBK noted that the rate hike had the desired effect as it left the CBR unchanged at 13%.
In February, Kenya raised Sh195.3 billion ($1.5 billion) in new Eurobonds to partly cover the maturity of the original Sh260.4 billion ($2 billion) government bond due in June. The news marked a turning point for the shilling as investor sentiment improved due to the elimination of what had been widely seen as a looming default.
Since then, the shilling which had lost ground against the US dollar by more than two per cent in 2024 – on January 30, trading at Sh160.75, has risen to Sh130.22, representing a 17 per cent year-to-date appreciation.
CBK characterized the sharp devaluation of the local unit in January as an overreaction to perceived sovereign risk, which has since been discounted by the partial repayment of maturing Eurobonds.
The shilling is still expected to find equilibrium in the coming days as new supply of the currency continues to meet demand, driving the appreciation seen over the past two months.
“There was a time when we thought the exchange rate was overvalued and we could see the current account widening, but then there was an overreaction and we got to a situation where the shilling exchange rate was undervalued. The reason for the devaluation was really about what the Kenyan government was going to do about the Eurobond due in June 2024,” CBK governor Dr Kamau Thugge said last week.
CBK expects the shilling to find further support from sustainable growth prospects. The World Bank expects Kenya’s GDP to grow by 5% this year, reducing inflation and returning foreign flows to the economy.
Dr Thugge adopted his predecessor’s stance on the exchange rate by maintaining the CBK’s view of letting the shilling float freely, intervening only in cases of volatility in either direction.
According to Dr Thugge, CBK is ready to intervene in the scenario of rapid devaluation or appreciation without accompanying fundamentals.
“We will just allow the exchange rate to find its real level and really just intervene when there is too much volatility. I can’t give a specific level of where the interest rate will settle, but we will let demand and supply of foreign exchange determine the level,” he added.