In the globalized economy, the stability of a country's currency exchange rate is crucial for fostering an environment conducive to business growth and investment. Kenya, as a regional economic hub, stands to benefit significantly from a stable Kenya Shilling (KES) forex rate. This article explores the advantages of exchange rate stability for businesses in Kenya, supported by practical examples and case studies.
1. Enhanced Predictability for Budgeting and Planning
One of the primary advantages of a stable forex rate is the ability it grants businesses to forecast their financial outcomes accurately. Fluctuations in exchange rates can disrupt financial planning, especially for businesses heavily reliant on imports or exports.
Practical Example:
Consider a manufacturing company in Nairobi that imports machinery from Germany. A stable KES-Euro rate allows the company to predict the cost of importing equipment accurately. If the rate were volatile, the company might face unexpected cost increases, leading to budget overruns.
2. Encouraging Foreign Direct Investment (FDI)
Investors are naturally drawn to stable economies where the value of their investments is less likely to erode due to currency depreciation. Forex stability sends a signal of macroeconomic stability, reducing the perceived risk of doing business.
Case Study:
In 2020, multinational retail giant Carrefour expanded its operations in Kenya. A stable KES made it easier for the company to convert profits back to its home currency without significant losses, thus ensuring confidence in the Kenyan market.
3. Facilitating International Trade
For exporters, a stable currency ensures competitive pricing in international markets. Conversely, for importers, it means predictable costs for goods and services purchased abroad.
Practical Example:
Kenyan flower exporters to the Netherlands benefit from a stable KES-Euro exchange rate. With consistent pricing, they can negotiate better contracts with international buyers, maintaining Kenya’s position as a leading flower exporter.
4. Mitigating Inflationary Pressures
A volatile forex rate often leads to inflation, as the cost of imported goods fluctuates unpredictably. Stability in exchange rates ensures that inflation remains under control, fostering a stable economic environment for businesses and consumers alike.
Case Study:
During periods of KES volatility in 2017, the cost of imported fuel spiked, leading to increased transportation costs. This, in turn, raised the prices of essential goods, negatively impacting small businesses reliant on stable input costs.
5. Boosting Confidence in Local Financial Markets
Forex stability often correlates with confidence in the local financial system. Investors, both domestic and international, are more likely to engage in the stock market, bond market, and other financial instruments when exchange rate risks are minimized.
Practical Example:
Safaricom, one of Kenya’s largest companies, attracts substantial foreign investment. A stable KES ensures these investors can repatriate profits without significant exchange losses, making Kenyan equities more attractive on the global stage.
6. Supporting SMEs and Local Businesses
Small and Medium Enterprises (SMEs) form the backbone of Kenya’s economy. For these businesses, forex rate stability reduces the unpredictability of importing raw materials or machinery, enabling smoother operations and sustainable growth.
Case Study:
A local entrepreneur running a bakery in Mombasa relies on imported baking equipment and ingredients. Stable exchange rates allow the business to set consistent product pricing, fostering customer trust and loyalty.
Policy Measures to Achieve Forex Stability
To maintain a stable KES, the Central Bank of Kenya (CBK) has implemented several measures, including:
Foreign Exchange Reserves Management: Adequate reserves cushion against external shocks.
Market Interventions: CBK occasionally intervenes to stabilize extreme volatility.
Inflation Targeting: Ensuring low inflation indirectly supports forex stability.
Promotion of Export-Oriented Policies: Increasing foreign currency inflows through robust export growth.
A stable Kenya Shilling forex rate is a cornerstone of economic growth and business prosperity. By fostering predictability, encouraging investment, and facilitating trade, exchange rate stability creates a fertile ground for businesses to thrive. While challenges remain, strategic policy measures and prudent financial management can help Kenya achieve and maintain the desired stability, ensuring long-term benefits for businesses and the broader economy.
About the Author
Dr. David Onguka brings more than 26 years of expertise in finance, tax, audit, and management to his role as Managing Partner at David & Associates - Certified Public Accountants. His extensive experience includes serving as General Manager and Group Chief Financial Officer at Ainushamsi Energy Limited for 6 years, as well as holding similar positions at Jaguar Petroleum Limited for five years. He began his career as an Audit Senior at PKF Kenya and was Finance Manager at Gapco Kenya Limited for seven years. He holds PhD in Finance from University of Nairobi (UON), MBA in Finance, CPA(K) and CPS(K). He is also a researcher, author, publisher and practicing member of ICPAK and Institute of Certified Secretary (ICS).
For inquiries, you can reach him at or link to our website: www.davidandassociates.co.ke or visit at West Park Towers, 2nd floor, Mpesi Lane off Muthithi Road, Westlands.
