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Global analysts see shilling weakening to Sh134 against dollar
A teller handles US dollar banknotes and Kenya shilling banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya on February 16, 2024.
The shilling is expected to weaken against the US dollar to about Sh134 next year on the back of increased imports and higher costs for servicing foreign public debt.
Seven global institutions tracking Kenya’s macroeconomic position such as Oxford Economics, Standard Chartered and Citigroup Global Markets see sustained calmness in the foreign exchange market for nearly one and a half years coming under threat in coming months due to mounting pressure on Kenya’s dollar reserves.
The Kenyan currency opened trading on Wednesday at 129.90 per dollar, according to official data from the Central Bank of Kenya, a 15-month low since it hovered around 130 units on August 6, 2024.
It has remained little changed for months at 129.24 units, drawing concerns from the International Monetary Fund (IMF).
IMF officials are reported to have termed the shilling too stable during their recent staff visit to Kenya, which concluded on October 10, suggesting an element of management of the market by the CBK, which has denied this view.
Forex traders have attributed the renewed pressure on the local unit in recent days largely to falling supply of dollars.
The shilling has been relatively stable since mid-2024, exchanging between 129 and 130 levels on increased dollar inflows from diaspora remittances, dollar-denominated borrowing, agricultural exports and return-chasing offshore investors.
The currency has averaged 129.30 this year, reportedly supported in part by the Central Bank’s crawling-peg strategy, which allows gradual, controlled adjustments in response to inflation and external sector conditions.
But global institutions expect this stability to soften going forward.
According to the December 2025 FocusEconomics Consensus Forecast, based on feedback from seven international firms, the shilling is likely to trade at 134 per dollar by end-2026, and slipping further to 138 by end-2027.
The analysts see persistent fiscal deficits due to revenue shortfalls, widening current account deficit and elevated external financing needs amid gradual erosion of purchasing power as the biggest drivers of projected gentle weakening in the next two years.
“The shilling is expected to gradually weaken against the dollar through 2026 due to persistent fiscal and current account deficits and an uptick in inflation,” analysts at FocusEconomics wrote in the outlook report. “A potential IMF deal reinforcing fiscal discipline is an appreciatory risk.”
A depreciating shilling means higher costs for imports such as industrial supplies into factories, fuel, and machinery and spare parts, while also pressuring foreign debt servicing costs projected at Sh586.46 billion this fiscal year ending June 2026.
Imports, for example, edged up 1.16 percent in first eight months of the year to Sh1.81 trillion, while exports dropped 2.20 percent to Sh745.20 billion, signaling more demand for dollars than supply.
Kenya’s fiscal deficit this fiscal year ending June 2026, on the other hand, is projected at Sh923.2 billion, or 4.8 percent of gross domestic product (GDP).
An elevated fiscal pressure poses a risk to the continued stability of the shilling because the budget shortfall is bridged by increased domestic borrowing — effectively printing money— which result in devaluation of the currency when the increase in supply of local unit is not matched by demand.
UK-based Capital Economics projects the steepest depreciation among the forecasters surveyed in the report, seeing the shilling touching 140 levels in 2026.
Analysts at Oxford Economics expect the currency at 138 next year and 150 in 2027, while Standard Chartered places its forecast at 133 in 2026 and 139 the following year.
Fitch Ratings and Fitch Solutions are more moderate, seeing the shilling exchange at 131 next year, before weakening to 133-134 levels in 2027, while Citigroup Global Markets and the Economist Intelligence Unit (EIU) forecast the local to sell at mid-130s levels across the two years.
These projections come on the back of the CBK maintaining that the shilling’s current stability reflects improved confidence in the economy and increased dollar inflows.
“The Kenya shilling has remained stable, supported by diversified foreign exchange inflows from diaspora remittances, horticulture, tea exports and offshore banks as well as confidence in the economy, particularly with the recent upgrade of Kenya’s credit rating by S&P Global Ratings,” CBK Governor Kamau Thugge said on October 8.
“The expectation is that the stability will continue given momentum in the balance of payments and the narrowing of the current account deficit.”
Analysts have maintained the “crawling peg” approach — which has allowed small, predictable adjustments in the exchange rate to align with economic fundamentals such as inflation and current account conditions — has helped anchor the shilling in a narrow trading band of between 129.22 and 129.24.
“Since February 2024, the exchange rate has been remarkably steady at Sh129 to Sh130 per US dollar, with indications the Kenya shilling would have appreciated more were it not for the central bank’s proactive reserve accumulation strategy,” analysts at global credit rating agency Moody’s wrote in a note on July 22.
“Despite these positive developments, external debt service needs remain large, averaging about $3.5 billion annually in interest and principal payments. Meeting these obligations without eroding the central bank’s reserve buffer will require continued access to concessional and market-based external financing.”
