The Kenyan currency, the shilling has been on a steady decline as it loses value against more dominant currencies like the US Dollar.

The shilling’s decline is a pointer to an ailing economy because with a higher exchange rate against the dollar, it means that the cost of doing business in the country goes up.

International businesses are very sensitive to exchange rates because they determine the buying and selling prices of commodities at the international market.

Take an example, if a manufacturer wants to buy raw materials like maybe steel from China or India, one will have to buy Dollars so that to change the local currency into dollars before they either buy directly in dollars or they change the dollars into the Chinese Yuan or Indian Rupee to complete the transaction. Here it depends on the seller.

This means that if the exchange rate is high, the Kenyan manufacturer will buy less dollars and thus less commodities from the international market.

Likewise if the exchange rate is low the Kenyan manufacturer will get more dollars for his or her shillings, this will enable him to buy more commodities at the international market.

The exchange rates are naturally determined by the laws of demand and supply of the dominant currency, such that the currency in this case the Dollar, is traded like a commodity.

The more dollars you have in your economy, the less the demand for dollars and thus a lower exchange rate. On the flip side, the lesser the dollars the higher the demand which inturn raises the exchange rates.

Dollars are accumulated in the economy through inflows such as diaspora remittances, sale of products in the international markets and payment for services such as tourism.

On the other hand, we reduce dollars in the economy by buying products on the international market, repayment of loans owed to international lenders and any other spending that will necessitate a transaction in dollars.

The Kenya shilling has reached an all time high of 124 shillings against the dollar. This has brought the cost of living in Kenya high as the Kenyan economy is import driven, we import almost everything key among them being energy, clothes and food.

With a high exchange rate, it means the importer imports at a higher price and thus the additional cost is pushed to the consumers.

Kenya’s low Dollar reserves can also be attributed to the low inflows of dollars in as much as diaspora remittances are at their all time high.

Tourism which has been a top foreign exchange earner has been performing poorly since the COVID pandemic struck. Another reason could be the huge debt repayment schedules which suck the much needed dollars out of the economy.

The only solution is to strengthen our manufacturing sector such that we have more products to sell to the international market in order to earn more dollars and thus stabilize the shilling and bring the cost of living down.