Kenya Does Not Have A Dollar Shortage: The Consequences Of Price Controls In The Interbank Market And The Expensive Imports Are To Blame

By Steve Biko Wafula / Published March 17, 2023 | 6:55 pm

KEY POINTS

The shortage of foreign currency has resulted in a parallel market for the US dollar, where it is traded at a higher rate than the official exchange rate.

KEY TAKEAWAYS

Kenya's current economic situation is largely shaped by the COVID-19 pandemic, which has had a significant impact on the global economy. As a result of the pandemic, many countries have experienced a decrease in exports and a reduction in tourism revenue, which has had a ripple effect on their currencies.

Kenya is a developing country located in East Africa, with a population of over 50 million people. The country has made significant strides in terms of economic development over the past decade, but it still faces some challenges, including a shortage of foreign currency, particularly the US dollar. In this essay, we will examine the real situation in Kenya regarding the dollar shortage and the policies put in place by the Central Bank of Kenya (CBK) to address this issue.

To begin with, it is important to note that the Kenyan economy heavily relies on imports, particularly in the energy and agriculture sectors. As a result, the country requires a significant amount of foreign currency to pay for these imports. However, over the past few years, the country has experienced a shortage of foreign currency, especially the US dollar, which has led to the depreciation of the Kenyan shilling. This shortage is primarily due to the decline in the country’s exports, particularly in the tea and horticulture sectors, which are the primary sources of foreign exchange.

The shortage of foreign currency has resulted in a parallel market for the US dollar, where it is traded at a higher rate than the official exchange rate. This parallel market has emerged due to the restrictions placed on the amount of foreign currency that individuals and businesses can access from banks. The Central Bank of Kenya has put in place policies to control the outflow of foreign currency, particularly the US dollar, to address the shortage. For instance, banks are required to hold a certain amount of foreign currency reserves to ensure that they have adequate funds to meet their customers’ needs.

The question of whether Kenya is facing a dollar shortage or if it’s the policies of the Central Bank that have created a parallel market is a complex one that requires a detailed analysis of several economic factors affecting the country. In this article, I will examine the different factors that may be contributing to the current situation in Kenya, as well as their potential impact on the economy.

It is important to note that Kenya’s current economic situation is largely shaped by the COVID-19 pandemic, which has had a significant impact on the global economy. As a result of the pandemic, many countries have experienced a decrease in exports and a reduction in tourism revenue, which has had a ripple effect on their currencies. This has resulted in a general trend toward currency depreciation, which has affected Kenya’s exchange rate and may have contributed to the current situation.
Kenya’s economy is heavily dependent on imports, particularly for essential goods such as fuel and food. This means that the country requires a steady supply of foreign currency to pay for these imports. In recent years, Kenya has experienced a trade deficit, meaning that it imports more than it exports, which puts pressure on the country’s foreign currency reserves. This could potentially contribute to a dollar shortage, as the country struggles to meet its foreign currency needs.
The policies of the Central Bank may also be contributing to the current situation in Kenya. In an effort to control inflation, the Central Bank has implemented a number of policies aimed at limiting the amount of money in circulation. This has included price controls on some essential goods, which has created a parallel market where these goods are sold at a higher price than the official rate. This parallel market may be contributing to the shortage of dollars, as traders are forced to source foreign currency on the black market at a higher rate.
Kenya’s financial sector is relatively underdeveloped, which can limit the country’s access to foreign currency. In particular, Kenya’s capital markets are not well-developed, which means that the country is less able to attract foreign investment. This can limit the inflow of foreign currency into the country, which could contribute to a dollar shortage.
Kenya’s political environment may also be contributing to the current situation. The country has experienced a number of political upheavals in recent years, including a disputed presidential election in 2017. This has led to a degree of uncertainty among investors, which may be contributing to a lack of foreign investment in the country.
Kenya has a relatively high debt-to-GDP ratio, which could potentially limit the country’s access to foreign currency. As lenders become more cautious about lending to countries with high debt levels, Kenya may find it more difficult to secure foreign loans, which could exacerbate the shortage of dollars.
Kenya’s reliance on remittances from the diaspora may also be a factor in the current situation. Remittances are an important source of foreign currency for the country, but the COVID-19 pandemic has had a significant impact on the ability of Kenyans living abroad to send money back to their families. This could be contributing to the shortage of dollars in the country.
Corruption and money laundering could also be contributing to the dollar shortage in Kenya. Illicit financial flows out of the country are estimated to be worth billions of dollars, which could be exacerbating the shortage of foreign currency.
Kenya’s infrastructure deficit, including power and transport infrastructure, may limit the country’s ability to attract foreign investment. Without investment, the country may find it more difficult to generate the foreign currency needed to pay for imports.

Kenya’s export market is relatively limited, which could be contributing to the country’s trade deficit. The country’s economy is heavily reliant on imports and this feels like a deliberate design by those in power to benefit. Unless Kenya changes the trade imbalance, the perceived dollar shortage will keep happening.

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

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