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15 Reasons Why Kenya Has A Shortage Of Forex Reserves, Russia Vs Ukraine War Has Nothing To Do With It

BY Steve Biko Wafula · March 14, 2023 01:03 pm

KEY POINTS

One of the primary reasons for the shortage of dollars in Kenya is the country's trade deficit. The country imports more than it exports, which means that it requires more foreign currency to pay for these imports. This trade imbalance has been exacerbated by the pandemic, which has disrupted global supply chains, making imports more expensive.

KEY TAKEAWAYS

Kenya has experienced a decline in foreign direct investment (FDI) in recent years. This has been due to factors such as political instability, corruption, and a lack of transparency. The reduction in FDI has meant that there are fewer dollars entering the economy, exacerbating the shortage.

Kenya’s current shortage of dollars has been attributed to the ongoing conflict between Russia and Ukraine, but this is only one factor contributing to the situation.

In this article, I will explore the true reasons behind Kenya’s dollar shortages and their impact on the country’s economy in simple and clear terms so that every Kenyan can understand;-

Trade Deficit: One of the primary reasons for the shortage of dollars in Kenya is the country’s trade deficit. The country imports more than it exports, which means that it requires more foreign currency to pay for these imports. This trade imbalance has been exacerbated by the pandemic, which has disrupted global supply chains, making imports more expensive.
Reduced Foreign Direct Investment: Kenya has experienced a decline in foreign direct investment (FDI) in recent years. This has been due to factors such as political instability, corruption, and a lack of transparency. The reduction in FDI has meant that there are fewer dollars entering the economy, exacerbating the shortage.
Reduced Tourism Revenue: Kenya’s tourism sector is a significant source of foreign exchange. However, the pandemic has caused a sharp decline in tourism revenues. This has reduced the amount of foreign currency coming into the country, further exacerbating the shortage.
Reduced Remittances: Kenyans living abroad send significant amounts of money back home in the form of remittances. However, the pandemic has reduced the amount of money being sent back due to job losses and reduced incomes.
Increased Government Borrowing: The Kenyan government has been borrowing heavily in recent years to fund its infrastructure projects. This borrowing has increased the country’s debt levels, making it more expensive for the government to borrow in international markets. This has reduced the amount of foreign currency available in the country.
Corruption: Corruption is a significant problem in Kenya and has contributed to the shortage of dollars. Corrupt officials siphon off funds meant for public projects, reducing the amount of money available for essential imports.
Political Instability: Kenya has experienced political instability in recent years, with contested elections leading to violence and unrest. This instability has reduced investor confidence, resulting in reduced FDI and a shortage of dollars.
Weak Economic Growth: Kenya’s economic growth has been weak in recent years, averaging around 5% annually. This is below the country’s potential, and the slow growth has reduced the amount of foreign currency coming into the economy.
Debt Servicing: Kenya has a significant amount of external debt, and servicing this debt requires foreign currency. The amount of foreign currency required to service this debt has increased, contributing to the shortage.
Currency Speculation: Currency speculation is also a factor contributing to the shortage of dollars in Kenya. Speculators buy dollars with the expectation of selling them for a profit in the future, reducing the amount of foreign currency available in the market.
Capital Flight: Capital flight is the movement of assets out of a country due to economic or political instability. This has been a problem in Kenya, with wealthy individuals and corporations moving their money out of the country, reducing the amount of foreign currency available.
Overreliance on Imports: Kenya has become over-reliant on imports for essential goods such as food and fuel. This has made the country vulnerable to price shocks and reduced the amount of foreign currency available.
Trade Restrictions: Trade restrictions, such as tariffs and quotas, can reduce the amount of foreign currency coming into the country by making imports more expensive.
Lack of Diversification: Kenya’s economy is heavily reliant on agriculture, which is vulnerable to external shocks such as droughts and commodity price fluctuations. The lack of diversification has reduced the country’s resilience and reduced the amount of foreign currency coming into the economy.
Low Productivity: Low productivity levels in Kenya have reduced the country’s forex reserve because the country has become a net importer, meaning we spend all our forex reserves importing things for consumption and we have nothing to produce to export to give us the opportunity to grow our reserves.

Related Content: The Kenyan Tax Question: Is The Issue A TAX Collection By KRA Or Revenue Spending By The Government?

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters. He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com