Rationing: In early 2022, the Central Bank of Kenya (CBK) directed commercial banks to ration the sale of dollars to manufacturers and importers, by imposing a daily cap of USD 50,000 in a bid to manage the forex allocations and reserves in the country. However, the Kenya Association of Manufactures (KAM) reported that the shortage made it difficult for manufacturers to fulfil their obligations to foreign suppliers. Consequently, the rationing of the dollar only contributed to further disruption in the market.

Government-to-Government (G2G) deal: In an effort to address the dollar shortage, in early 2023, the Government entered into a G2G deal for the supply of petroleum products with a six-month credit period, as opposed to settlement on delivery. Its aim was to ease frequent demand for the dollar, which would in turn increase circulation of the dollar in the country. Following the deal, the shilling strengthened slightly, however, this was short lived and the dollar continued to depreciate late into 2023. The Government recently announced its intention to exit the deal as the arrangement did not work as hoped.

Interbank currency market: The President, in early 2023, ordered the revival of the interbank foreign exchange market to promote a wholesale exchange market and curb hoarding and black market transactions.

FX Code: Following the directive, the CBK developed the Kenya Foreign Exchange Code (FX Code). The FX Code aims to promote the effective functioning of the wholesale foreign exchange market. It applies to licensed banks that engage in the wholesale foreign exchange business in Kenya as part of their licensed business.

Increased interest rates: At the end of 2023, the CBK Monetary Policy Committee increased the central bank interest rate in an effort to address the existing pressure on the shilling and to mitigate inflation. Interest rates for infrastructure bonds have also increased significantly leading to shilling investments becoming more attractive.

US 1,5 billion Eurobond: The Kenyan Government sold a new USD 1,5 billion Eurobond, which it used to buy back a large portion of a USD 2 billion bond maturing in June this year. There had been scepticism about Kenya’s ability to repay the USD 2 billion bond, but this early repayment appears to have raised confidence levels among investors. Additionally, two recent attractive local currency infrastructure bonds have led to increased confidence in shilling investments.

Some of these measures are short-term measures, which temporarily alleviated the depreciation and dollar shortage crisis, while others are more long term, and it will take time for their impact to be felt. 

Impact of the fluctuation on investments in Kenya

Despite the mitigation measures put in place by the Government, currency fluctuations create uncertainty and instability in the investment space. Depreciation of the shilling over the last few years has led to investor uncertainty since the value of investments is destabilised. Dollar shortages have led to investors in capital markets losing confidence in listed companies’ abilities to repatriate dividends in hard currency and this has led to reduced investment. Private equity/venture capital investments have continued to decline generally on the continent. Funds have struggled to overcome the lower risk of investing in their economies compared to the higher risk posed by currency depreciation and other risk factors. There has been notable sector transition by investors who have reduced their investments in fintech and tech-focused companies, which have traditionally been popular investment sectors. We have seen investors focusing more on sectors with dollar revenues, particularly those in the export sector, currently dominated by agriculture and tourism.

Options for investors

Hedging arrangements: While such arrangements protect foreign currency debt investors, they can be quite costly, and this may make the investment unattractive or unattainable for a local borrower.

Local currency financing: Raising equity or debt denominated in the local currency can help mitigate against currency risk. According to an International Finance Corporation (IFC) report, local currency financing is a pivotal part of sustainable private sector investment, particularly in sectors that underpin development: infrastructure, housing, and small and medium enterprises. Most local currency investments are made by developmental finance institutions as they have patient capital which may overcome short-term currency fluctuation risk. The Kenyan Government should advocate for local currency financing by such organisations.

Local participation: Local investors should participate more in investment in the private sector in Kenya as they would be able to do so in local currency. Pension funds in Kenya manage approximately KES 1,7 trillion, 10% of which is authorised for investment in private equity. Pensions fund investments in private equity and venture capital are below 1%, according to 2023 reports, and it is unclear what is required to mobilise the balance. Investing in consortiums could help mitigate or share perceived risks. Angel investors and high-net-worth individuals should also participate in local investment in local currency instead of foreign currencies.

While currency fluctuations have had an adverse impact on investments in Kenya, the Government has continued to make efforts to address the issue and has been strategic when certain efforts did not work as desired. Ultimately, currency fluctuation is a risk that is to be expected in developing markets, thus investments are still possible with an understanding of this risk and adjustments on the investor’s part.