July 18, 2024

World Bank Explains 3 Reasons Why The Shilling is Gaining

World Bank Explains 3 Reasons Why The Shilling is Gaining

The World Bank has hailed various measures taken by the Central Bank of Kenya (CBK) as a key factor in the recent appreciation of the Kenyan shilling against the US dollar.

This comes as the usd to ksh exchange rate reached a positive milestone, with 1 US Dollar now equaling approximately 130.14 Kenyan Shilling on April 10, 2024. 

This marks a significant improvement compared to the year’s high of 163.50 KES per USD recorded on January 25, 2024.

  • The 13% Central Bank Rate (CBR)

The World Bank credited the CBK’s decision to raise its benchmark interest rate, the Central Bank Rate (CBR), to 13% as a key driver. This move signaled the bank’s commitment to both controlling inflation and stabilizing the currency.

Historically, investors see higher interest rates as a sign of a sound economy and increased confidence in Kenya’s monetary system, leading to demand for the Kenyan shilling over other currencies. This flight to quality, as analysts described it, strengthened the shilling.

  • The Issuance of the $1.5 billion Eurobond

Another significant factor was the CBK’s successful issuance of a $1.5 billion Eurobond in February 2024. The bond issuance attracted strong investor appetite from both domestic and foreign sources, serving a dual purpose.

It not only secured the necessary funds to repay a maturing Eurobond in June, eliminating a major financial risk for Kenya, but also instilled confidence in investors and traders. This increase in confidence helped the shilling appreciate.

Furthermore, the Eurobond issuance directly affected the foreign exchange market. Investors had to have Kenyan shillings to buy bonds, further increasing demand for the currency against the dollar.

This increase in demand, coupled with positive investor sentiment, created a positive outlook that strengthened the shilling.

  • The Oversubscription of the Kshs. 75 billion Infrastructure Bond

The oversubscription of a separate infrastructure bond issuance (Kshs. 75 billion) also played a crucial role. This relationship acted as a bridge between the investors and the Kenyan government.

As with Eurobonds, investors needed shilling opportunities to participate, again increasing shilling demand and making the shilling gain against the dollar

The World Bank stressed that this oversubscription goes beyond the immediate surge in demand. It signaled a positive sign for the Kenyan economy, which was interpreted as a vote of confidence from investors.

This positive sentiment had a chilling effect, shaking up previously hesitant foreign investors. With a strong commitment to bond issuance, they were more likely to hold or convert their existing dollar holdings into shillings, further strengthening the local currency.

This newfound confidence in the Kenyan economy from this successful and consolidated bond issue proved to be a key factor in shilling.

Prior to the successful bond sale, worries about a possible dollar weakness in Kenya had driven the shilling lower. Companies and individuals tend to hoard dollars as a hedge against perceived scarcity, driving up prices.

However, strong investor interest in shilling bonds helped put these concerns to rest. The acquisition of the Kenyan shilling through bond sales reduced the urgency to acquire dollars, contributing to a more stable exchange rate.

This stability in the foreign currency market boosted investor confidence, and it created positive feedback that strengthened the shilling.