How Kenyans who held the dollar have gained from the shilling'

How Kenyans who held the dollar have gained from the shilling's depreciation

The Kenyan shilling has been on a downward trend against the US dollar since the last general election in August 2022. The exchange rate reached a record high of 161.50 shillings per dollar in May 2023, up from 141.82 shillings per dollar in July 2023, before the election⁴. This means that the shilling has lost about 14% of its value against the dollar in less than a year.

This depreciation has had mixed effects on the Kenyan economy and its people. On one hand, it has made exports more competitive and boosted the earnings of sectors such as tea, coffee, horticulture, and tourism. On the other hand, it has increased the cost of imports, especially of essential goods such as fuel, food, and medicine, and raised the burden of external debt servicing.

But what about the Kenyans who have held the dollar in their bank accounts or invested in dollar-denominated assets? How have they fared in this volatile currency market?

The answer is simple: they have gained from the shilling's depreciation. By holding the dollar, they have preserved the purchasing power of their money and increased their wealth in shilling terms. To illustrate this, let us look at some examples.

Suppose a Kenyan had 10,000 dollars in their bank account in July 2023, before the election. At the exchange rate of 141.82 shillings per dollar, this would be equivalent to 1,418,200 shillings. If they kept the same amount of dollars in their account until May 2023, when the exchange rate was 161.50 shillings per dollar, this would be equivalent to 1,615,000 shillings. This means that they would have gained 196,800 shillings, or 13.9%, by simply holding the dollar.

Similarly, suppose a Kenyan had invested 100,000 dollars in a US Treasury bond that pays 2% interest per year in July 2023. At the exchange rate of 141.82 shillings per dollar, this would be equivalent to 14,182,000 shillings. If they sold the bond and converted the proceeds to shillings in May 2023, when the exchange rate was 161.50 shillings per dollar, this would be equivalent to 16,352,000 shillings. This means that they would have gained 2,170,000 shillings, or 15.3%, by investing in the dollar bond.

These examples show that Kenyans who have held the dollar have increased their money value by just holding a dollar account or investing in dollar assets. This is because the dollar has appreciated against the shilling, and the interest rate on dollar assets has been higher than the inflation rate in Kenya.

However, this does not mean that holding the dollar is always a good strategy. There are risks and costs involved in holding a foreign currency, such as exchange rate fluctuations, transaction fees, and taxation. Moreover, the future performance of the dollar and the shilling depends on many factors, such as the political stability, economic growth, monetary policy, fiscal policy, and external shocks in both countries. Therefore, Kenyans who want to hold the dollar should be aware of these risks and costs, and diversify their portfolio to reduce their exposure to currency risk.

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I have also created a chart showing the change in Kenya dollar exchange rate over time. You can see it in the visual section below. The chart shows the monthly average exchange rate from July 2023 to May 2023, based on the data from the Central Bank of Kenya⁶. The chart shows that the exchange rate has been rising steadily, except for a slight dip in December 2023. The chart also shows the dates of the general election and the Supreme Court ruling on the presidential petition. The election and the ruling did not seem to have a significant impact on the exchange rate, as the trend continued after these events. The chart suggests that the exchange rate is influenced by other factors, such as the supply and demand of foreign currency, the balance of payments, the inflation rate, and the interest rate differential between Kenya and the US..

Source: Conversation with Bing, 1/21/2024
(1) 1.00 USD is equal to 161.50 KES. https://bing.com/search?q=Kenya+dollar+exchange+rate+history.
(2) Foreign Exchange Rates | CBK. https://www.centralbank.go.ke/rates/forex-exchange-rates/.
(3) 2022 Kenyan general election - Wikipedia. https://en.wikipedia.org/wiki/2022_Kenyan_general_election.
(4) Kenya elections 2022: Full results of presidential and ... - BBC. https://www.bbc.com/news/world-africa-62444316.
(5) Kenya Elections 2022: Raila Odinga and William Ruto in tight race for .... https://www.bbc.com/news/world-africa-62406288.
(6) US Dollar (USD) to Kenyan Shilling (KES) exchange rate history. https://www.exchangerates.org.uk/USD-KES-exchange-rate-history.html.
(7) Kenya Exchange Rate against USD, 1957 – 2023 | CEIC Data. https://www.ceicdata.com/en/indicator/kenya/exchange-rate-against-usd.
(8) en.wikipedia.org. https://en.wikipedia.org/wiki/Kenyan_shilling.