Why the Central Bank Expects the Shilling to Stay Stable as the Middle East Conflict Intensifies.

Central Bank of Kenya Governor Kamau Thugge expects the shilling to remain relatively stable, supported by strong foreign exchange reserves and continued financial inflows despite disruption from the Middle East conflict.

Speaking at the 23rd East African Banking School Conference in Diani, Thugge said CBK expects the country to maintain reserves equivalent to between 5.5 and six months of import cover during the year. He described the buffer as sufficient to absorb domestic and external shocks, including a possible El Niño event or further escalation of the conflict.
“In short, we still expect a fairly strong balance of payments position this year, notwithstanding what is happening in the Middle East,” he said.

That position has already been strengthened by a recent rise in reserves. Kenya’s foreign exchange reserves increased by $954 million over two the past weeks to approximately $14.1 billion, equivalent to about six months of import cover, supported by World Bank DPO VII financing and proceeds from the Kenya Pipeline Company divestiture. The buffer could grow further once proceeds from the government’s partial divestiture of its Safaricom stake are reflected in CBK’s accounts. “We’ve seen the monies from the Safaricom transaction. It is yet to hit our reserves position, but I think it’s just about to,” Thugge said

He said the Safaricom proceeds could lift reserves to nearly $16 billion, or almost seven months of import cover. Nedbank’s planned $855 million acquisition of a 66% stake in NCBA is also expected to provide an additional foreign exchange buffer. These inflows are particularly important because the Middle East conflict has disrupted two major sources of foreign currency for Kenya. Gulf states account for about 10% of Kenya’s remittances, or approximately $500 million, while slightly less than 10% of its exports are sold to the region. With both channels affected, Kenya’s current account deficit, the shortfall that arises when the country pays more abroad than it earns from exports, income and transfers widened more than CBK had anticipated.

Despite the disruption, Thugge said foreign direct investment and other financial inflows should help offset the pressure on Kenya’s external accounts and maintain a strong balance of payments position. Together with the country’s reserves, this is expected to keep the shilling relatively stable after trading between KSh120 and KSh130 against the dollar since March 2024.