What strong shilling means

Kenya shilling

The shilling depreciated more than 30 per cent in one year between 2023 and January 2024.

Photo credit: Shutterstock

The strengthening of the Kenya shilling is attributed to factors such as prudent monetary policies, increased foreign exchange reserves and growing confidence in the country’s economic prospects. This development has various economic implications, impacting trade, investment, consumer purchasing power and macroeconomic stability.

Notably, a stronger shilling may lead to reduced import costs, enhancing purchasing power for foreign goods and services and potentially contributing to lower inflation. But it also poses challenges for export-oriented industries by potentially making Kenyan goods relatively more expensive in foreign markets, impacting their competitiveness.

Conversely, it may make foreign direct investment more attractive and contribute to overall economic stability, instilling confidence in the local currency and financial markets.

The relative strength of the shilling has implications across economic sectors. Import costs may decrease, leading to lower production costs and potentially lower prices for imported goods in the local market. That could benefit consumers and help to ease inflationary pressures.

Furthermore, individuals and businesses may find it more cost-effective to conduct transactions in foreign currency, leading to increased purchasing power for foreign goods and services. But a stronger currency presents challenges for export-oriented industries, potentially impacting the competitiveness of Kenyan goods in foreign markets.

Despite these challenges, a stronger shilling may contribute to macroeconomic stability by instilling confidence in the local currency and financial markets, attracting foreign investors seeking stable and reliable investment opportunities. That would lead to increased capital inflows and support for local development projects.

- Mr Barasa is a student at Rongo University. [email protected].