The Central Bank of Kenya (CBK) urged Kenyans to brace themselves for an economic crisis.
In a statement released on the CBK website on November 5, the governor, Patrick Njoroge, attributed the impending crisis to rising interest rates in the US which saw the dollar gain strength over other currencies.
With the Kenyan currency weakening, Njoroge explained the country may default on its loan, thus hurting the economy immensely.
“Further, with the resultant flight of capital to the safety of the US dollar, financing from the global capital markets has dried up for Emerging Markets and Developing Economies (EMDEs) and particularly for the frontier economies," the governor wrote.
"This has made it difficult to close the fiscal and external financing gaps in those countries,” Njoroge explained further.
While speaking to Kenyans.co.ke, financial and insurance expert Nicholas Mutua, explained why the strength of the dollar weakens the Kenyan shilling.
“The US dollar is the worldwide accepted currency of trade and if Kenya is buying it at high price, it devalues our shilling.
“Today Kenyans are buying a dollar at an exchange rate of between Ksh126 and Ksh130, this is up from Ksh110 same time last year,” he explained.
With Kenya being a consumption country, the government and traders spend more on imports than the previous years.
“We import raw materials for almost all industries in Kenya, with the dollar up, it means that we are using more Kenyan money to buy those raw materials,” Mutua added.
Gideon Kirui, a banker by profession, concurred with Mutua stating that the cost incurred by traders is passed on to the buyers.
With the increase of price on basic commodities like fuel, oil and foodstuffs, Kenyans will be forced to dig deeper to sustain themselves.
“The increase in price of commodities will reduce purchasing power of Kenyans and most businesses will shut down,” Kirui predicted a recession.
With businesses closing down, the government will not meet its tax targets, heaping more pressure on an administration battling with a dilapidated economy.
“The CBK governor is right, if the government does not collect enough tax revenue, then as a country, we will not be able to pay our loans,” Mutua cautioned.
On Kenya defaulting its loans, Mutua stated, “It will depend on terms of particular loans but the immediate risk is Kenya not being able to be advanced more loans which we dearly depend on for development and even current expenditure.”
