Growing trade between China and Kenya has led to the consideration of shifting from trading using the US Dollar to the Chinese Yuan. As early as 2015, the Kenya Bankers Association said more financial institutions were increasing their uptake of the Yuan. China is Kenya’s leading import source and a major export destination.
The growing Chinese community in the country makes the Yuan a more attractive currency to trade with than the US Dollar. In 2022, more banks added the Yuan as a reserve currency over the USD. The International Monetary Fund stated that more central banks will hold at least 2.9% of their reserves as Yuan within the next ten years. However, other reports say it will be 5.8% instead.
Why is Kenya likely to switch to the Yuan?
The situation is more urgent for Kenya because of an acute USD shortage. The dollar reserves have depleted to their lowest in eight years. The value of the Kenyan shilling is plummeting against other currencies. Remittances from abroad have also contributed to the shortage.
Read also: How Remittances From Abroad Have Boosted The Kenyan Economy For The Last Decade
The Central Bank of Kenya said the shortage has breached the East African Community forex reserves policy. It states that a country must have at least four months’ worth of foreign reserves to cover imports. The country has been below this level since January. As of early March 2023, CBK revealed that the reserves remain at $6.6 billion, down from $6.9 billion in February. This is only enough to cover 3.69 months of exports.
The dollar shortage has led to inflation and a higher cost of living. Currently, the shilling is trading against the dollar at Ksh. 133. The country is yet to recover from the economic crisis caused by the pandemic, which limited exports and limited inflow of the dollar. The Kenya Association of Manufacturers said many businesses are struggling because of the dollar shortage. The dollar is the only way they can buy and import supplies. In the ensuing deficiency, Kenyans also cross into Tanzania to find dollars.
Other world events, such as the Russian invasion of Ukraine, caused fuel price hikes and further inflation. In addition, the US Federal Reserve Bank has reduced the dollar supply to reduce inflation within their country. Due to the growing trade between China and African countries, Kenya might decide to increase its Yuan reserves to avoid any more escalation of the current economic upheaval.
Is this the way?
China has become a stronger economic power after Russia swapped using the Yuan for currency following US sanctions on Russia. China has also enacted policies to strengthen the Yuan against the dollar by easing the flow of its currency into the markets where trade is heavy.
However, Kenya may not need to change to the Yuan if it followed Zambia’s footsteps in lowering inflation. Zambia was able to lower inflation rates against the dollar. In August 2021, the inflation rate was 24.4%. But in June 2022, it lowered to 9.7%. Zambia restructured its debt using an IMF bailout package of $1.4 billion dollars to strengthen the Kwacha against the dollar. This helped contain the price hikes of supplies that resulted from the pandemic and the Russian invasion of Ukraine.
Zambia also removed the 5% customs duty on importing cattle and breeding chickens. This reduced food prices. The central bank in Zambia also increased forex supply to the market, lowering the demand for the US dollar.
But the Kenyan government will still likely see the Yuan as a suitable foreign exchange currency because of the ongoing de-dollarisation trend taking over in the global south. India and China have launched programs to use their local currencies to trade internationally and reduce dollar reliance. The Reserve Bank of India opened accounts in East Africa, allowing local traders to conduct business in the Rupee. Saudi Arabia also announced the possibility of listing oil prices in Yuan.
Ultimately, this could help stabilise African economies trading in the Yuan if it takes over as a major global reserve and trading currency. It’s possible that this could lead to a lower cost of living and better purchasing power for local citizens, but whether this will be adopted remains to be seen.
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