In the last few weeks the Kenya shilling has slipped against the US Dollar in an almost steady fashion. Our local currency hit a five month low of almost KES 88 per US Dollar. This declined seemed to nullify the gains the CBK has made since the beginning of the year.

The depreciation of the Kenya Shilling in the month of May has mainly been attributed to the repatriation of dividends by overseas-registered companies and their subsidiaries and a drop in interest rates on Treasury bills and bonds.

[caption id="attachment_10168" align="alignleft" width="606" caption="Image sourced from Bloomberg (Note that the graph is counter-intuitive. The lower it is the better))"][/caption]

In lieu of this, the CBK left its benchmark lending rate unmoved at 18%. The bank has also introduced longer-dated repurchase agreements (repos) to take out excess liquidity from the market. The CBK has spent KES 21 billion in the last four weeks to stabilise the shilling.

The Treasury has also formed a team to devise incentives to reduce demand for imports and increase export earnings as a means of strengthening the shilling. The incentives would most probably include tax holidays or tax cuts and market assistance. This would have long term effect as the average demand for dollars would fall, making our economy less susceptible to global currency shocks such as the Eurozone crisis that caused international demand for dollars to increase and contributed to the Kenya Shilling depreciation.