Nairobi bourse feels the heat of dollar scarcity as global economic shocks hit

Saturday April 30 2022

Manufacturers have warned that scarcity of US dollars in Kenya’s forex market will increase the cost of products. PHOTO | FILE


Nairobi Securities Exchange (NSE) has found itself in a crisis attributed to scarcity of US dollars in the forex market.

The EastAfrican has learnt that the bourse managers are concerned with the drop in supply of the US currency with fears that it could hit foreigners who control more than 50 percent of the daily trading activity on the stockmarket.

The latest development has been compounded by the Russian-Ukraine crisis which has injected negative shocks to the global economy with spillover effects witnessed in other economies, manifested mainly through commodity price hikes.

“Obviously it is not good for foreigners. I think one of the reasons why Kenya has been an attractive investment destination is that we have a liberal foreign currency regime where you can at least take forex in and out. So when you begin to have this kind of restriction it does affect the appetite of foreign investors in the market.

‘‘But we are hoping that this is temporary and with time the situation will improve,” said Paul Mwai, chief executive of AIB-AXIS Capital Ltd and vice chairman of NSE.

“If it persists it will affect the overall foreign investor appetite for the local market. Actually the bigger concern for foreign investors would be that the shortage could be a sign of a currency that is weaker and that is being restricted. So foreign investors are being affected because people are expecting that perhaps the Kenyan shilling should be depreciating against the dollar. But I don’t think the unavailability of dollars could be a long term problem,” added Mr Mwai.


Foreign investor activity at the Nairobi bourse fell to 54.88 percent in the three months to March from 57.73 percent in the three months to December 2021, according to data from the Capital Markets Authority (CMA).

According to the market regulator, NSE has historically recorded foreign investor participation in the range of 60 percent to 70 percent between 2019 and the first half of 2021.

“However, with increased global economic shocks, the market has suffered loss in its foreign investor participation levels in recent months with March 2022 recording the lowest level of 47.89 percent,” says CMA

“This reflects the risk posed by increased capital outflows calling for the Kenyan industry to be more strategic in increasing the profile of domestic investors in the country. This is what has enabled countries such as China and the US to remain resilient over the years.”

According to CMA, the Covid-19 pandemic, the uncertainty on the 2022 elections and the seemingly tough economic context pose key risks to steadying the recovery of domestic capital markets.

Kenyan manufacturers raised red flag over the shortage of the US dollars in the economy more than two weeks ago, arguing that the move is putting more pressure on the local currency, making imports expensive and fuelling more inflation. The Kenya Association of Manufacturers (KAM) said the dollar crunch has strained relations with suppliers, at a time competition for raw materials has intensified globally due to rising demand amid lingering supply chain constraint.

The Kenya Bankers Association confirmed the dollar shortage in the market, and advised customers to alert banks much earlier in cases where large amounts of foreign currency are required to allow the lenders to source the same from the market.

The industry’s lobby group attributed the dollar shortage to strong demand in the market as companies remit dividends and meet their overseas supplier obligations in the wake of the strong post Covid-19 recovery.

“However the supply of foreign currency continues to grow supported by receipts from the country’s main exports and strong remittances inflows.

‘‘This we believe will stabilise in due course and the market will revert to normal,” Habil Olaka, the association’s chief executive said in a statement last week.

“In the meantime, the industry is in constant discussion with the Central bank to ensure that the current imbalances are addressed as quickly as possible to bring the market back to normalcy,” added Olaka.

The National Treasury said it will be reviewing the currency composition of its external debt to reduce currency volatility that has seen the cost of its US Dollar denominated loans increase by two percent in barely four months.

National Treasury director-in-charge of Debt Management Haron Sirma told The EastAfrican that the proposal is aimed at reducing foreign exchange costs related to exchange rate movements.

“On the external debt stock, we seek to match the currency composition with the country’s foreign exchange holdings to the extent possible,” said Mr Sirma.

“The characteristics of a country’s external debt by currency should mirror the foreign currency inflows through exports, remittances etc.,’’ added Dr Sirma.

This minimizes forex costs through exchange rate movement.”

The Kenya shilling posted its lowest intraday level of 116.04 to the US dollar on Tuesday (April 26), according to data compiled by Bloomberg

Kenya borrows externally in five major currencies with the bulk of it (67 percent) being in the US Dollars.

Others are Euro (19 percent), Japanese Yen (six percent), Chinese Yuan (six percent) and Sterling Pound (two percent).