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Understanding Currency Depreciation: The Case of the Kenyan Shilling Vs. the US Dollar

What Is Currency Depreciation?

Currency depreciation is a fall in the value of the system of money in general use in a particular country relative to that of other countries. As a global currency, the U.S dollar is always in demand because of its value for trading purposes. It can, therefore, dictate the strength of currencies that are used in particular localities.

The Kenyan shilling has steadily depreciated against the U.S dollar (15% over the past year).

What does this mean?

Kenyans will now have to spend 15% more shillings than they would have had to a year ago, to buy the same amount of dollars. 

Any money not invested a year ago has also lost its value by 15%. Therefore, if you had KES 1,000,000 a year ago and you didn’t invest it, it will currently be worth the same as around KES 850,000 today. But what causes the weakening of a currency?

What Causes Currency Depreciation?

There are various reasons why the Kenyan shilling has lost value against the dollar including:

  • Interest rate hikes by the Federal Reserve Bank of the United States. This has resulted in the US dollar rising in value relative to other currencies, including the Kenyan shilling. This is because higher interest rates make it more attractive for investors to hold USD.
  • Increased dollar demand from oil retailers and general goods importers. This has been exacerbated by the Russo-Ukraine conflict that triggered global oil inflationary pressures. 
  • Policy changes and economic reports have dampened the investment outlook in Kenya. Investors make decisions based on projected outlook. The perceived ultra-aggressive taxation policy in Kenya has pushed investors away while others began selling their interests to fund capital deployment in other jurisdictions.
Effects Of Currency Depreciation In Kenya
  1. Increased cost of living – A depreciated currency leads to an increase in the prices of imported goods and services, leading to a rise in the cost of living. This, in turn, affects the purchasing power of individuals and reduces their disposable income.
  2. Reduced foreign investment – A depreciated currency makes investments less attractive to foreign investors, leading to a reduction in foreign investment inflows. This can lead to slower economic growth and development.
  3. Increased Government debt – A depreciated currency leads to an increase in the cost of servicing foreign debt. This can result in the Government accumulating more debt, leading to a higher debt burden.

How Can You Benefit From Currency Depreciation With Ndovu?

To protect your wealth from currency depreciation, we recommend holding some of your personal finances in USD denominated assets. This is because the dollar is a more stable and predictable currency than the Kenyan shilling. Moreover, holding USD assets provides a way to diversify your portfolio and reduce the risks associated with the Kenyan shilling.

At ndovu, we provide easy and affordable access to US Dollar based investments by way of our ETFs (Exchange Traded Funds).

What are ETFS?

Simply put, an exchange-traded fund, is an investment fund that allows you to buy a large set of individual stocks or bonds in one purchase. Once you select an ETF, you’re invested in multiple companies at once which is a terrific entry point into investing if you don’t know where to start.

ETFs have historically been proven to be an excellent countermeasure to inflation. As the dollar continues to strengthen, diminishing the purchasing power of currencies such as the Kenyan shilling, one should consider dollar denominated ETFs to protect themselves from currency depreciation and inflation.

At ndovu, we offer a wide range of ETFs, including the Gold ETF, Halaal ETF, Techie ETF and Healthcare ETF. With as low as $50 you can begin your investment journey and build your wealth in USD. 

Sign up here to get started.

Disclaimer: Ndovu does not offer any guarantees on returns. The quoted return reflects the fund’s past performance for the past year. 

Disclosure: Ndovu is a regulated Robo-Advisory platform operated by Waanzilishi Capital Limited (‘Waanzilishi’). Waanzilishi is a fund manager licensed by the Capital Markets Authority (Kenya) and a Data Controller Registered by the Office of the Data Protection Commission.

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