Kenya on the right path to economic recovery, says Absa

Absa Kenya MD Abdi Mohamed. [File, Standard]

The Kenya shilling is performing better against the dollar than other major African currencies, a new report by Absa Bank Kenya shows.

In 2023, the shilling depreciated 9.7 per cent against the dollar while South Africa's and Ghana's currencies weakened by 13.9 per cent and 11.2 per cent respectively.

"Beyond Africa's borders, the significant rise in global interest rates have pulled foreign investor money out of many emerging markets, turning currency supportive dollar inflows into currency challenge dollar outflows," said Absa.

"At the same time, these same higher global interest rates have increased the financial hurdle that many foreign direct investment projects will face. Alongside this, the ratcheting higher of geo-political uncertainty as the Russia/Ukraine conflict slips into its second year and tensions between the West and China increase, also strains global risk appetite."

The lender noted that debt increases faced by Mozambique, Zambia, and now Ghana have focused attention on Africa's debt sustainability.

"Across East Africa, all countries have seen their public debt rise over the past decade, with the Covid-19 era only confirming the worrying upward trend already in place the previous years."

Central Bank of Kenya (CBK) provisional data shows that Kenya's debt stands at Sh9.182 trillion as of January this year, edging toward the Sh10 trillion borrowing cap set by Parliament last June.

Absa explained that for the shilling, it's not just about the perceived issues, but it's also about the underlying balance of demand and supply of foreign currency from the economy.

The report noted that the increased number of tourists in the country and Nairobi's role as a regional business hub are helping restore foreign currency inflow.

"Similarly, expectations of a better growing season to come should also improve Kenya's dollar-earning capability. And looking further into the future, Kenya looks set to play an important role as a regional manufacturing hub as the African Continental Free Trade Area (ACfTA)," said Absa.

According to Absa, the recent government-to-government oil deal with Saudi Arabia may also ease some of the near-term pressure on the shilling by providing some breathing space on payments for imports of oil.

"Potential inflows from multilateral lenders like the IMF and the World Bank can also help provide access to hard currency in the near term. Tax proposals, aimed at helping shrink the country's budget deficit and supportive of slowing the deterioration in public debt, also mark a positive step, even if the detail in the revenue-raising measures have raised voices of concern in the country," the lender said.

This noted Absa, re-affirms IMFs recent position on Kenya's economy where it lauded the government's economic recovery efforts and the decision to prioritise investments in agriculture and micro, small and medium enterprises (MSMEs).

Absa added that for the currency market, should Kenya show success in reducing its vulnerabilities, or should the global environment become more constructive for emerging markets, the shilling could appreciate against the dollar.

"There is no doubt that this would help provide welcome relief to many importers and, via lower inflation for many items, a more comfortable environment for households as well."

The lender, however, warned that a narrow focus on the shilling distracts from the broader Kenyan economic opportunity.

"Inflation is falling, which should help provide welcome relief to households across the country. Economic growth of 4.5 to 5 per cent places Kenya's diversified economy amongst the fastest-growing economies on the continent. Kenya also benefits from being the anchor economy for East Africa, which in turn is amongst the fastest growing economic regions in the world," said Absa.

Speaking at an event in Nairobi where the Bank hosted its corporate customers for a roundtable on the macro-economic factors affecting the business environment, new Absa Kenya MD Abdi Mohamed lauded Kenyan business leaders for steadily steering their enterprises through difficult times while maintaining a positive outlook.

"Amidst the persisting challenges, there are opportunities for us as business leaders to rise up and support our customers, shielding them from these headwinds and ensuring that they continue to thrive. As Absa, we are inspired by Kenyans' resilient spirit that continues to carry us through the tough economic challenges we face as a nation," he said.