Analysts: Shilling remains stable despite Trump's aid freeze

US President Donald Trump's economic onslaught to put America first has raised questions about how the Kenyan shilling, which has stabilised for almost a year, will fare in these unpredictable times.

The recent halt on aid programmes facilitated by the United States through the US Agency for International Development (USAID) with a huge footprint in the country, is one of the ways the country receives foreign currency which helps stabilise the exchange rate.

USAID channelled over Sh84 billion to fund various projects in the country last year, including the World Food Programme and health services.

Banks even have special products tailored specifically for Non-Governmental Organisations (NGOs), pegging on funding that usually streams in US currency.

One such product involves agreements to safeguard NGOs from fluctuations in the global financial markets through a fixed exchange rate.

A sizeable number of these NGOs get funding through USAID. In 2023, USAID’s budget for programmes in Kenya stood at Sh56.6 billion ($435 million).

 This is part of a Sh325 billion ($2.5 billion) budget for 2022-2025. Additionally, the US slashing its budget to the United Nations (UN) may also affect Kenya, owing to Nairobi's status as a regional headquarters for the UN and its agencies.

But Churchill Ogutu, an economist at IC Group opines that these budget cuts by the US may not hurt the shilling.

“I don’t think it will have an impact for the simple reason that the USAID has huge impacts on particular sectors like health and NGO funding, they tend to be project financing. This is money that comes in and straight to the particular project so it does not really have a bearing on the foreign exchange reserves,” he told The Standard.

He said foreign exchange reserves tend to be largely determined by disbursements from the International Monetary Fund (IMF), World Bank (WB) and Eurobond. 

This, he noted is what the Central Bank of Kenya (CBK) uses to intervene in the market whenever there is a hiccup. “I am seeing some muted impacts, in as much as yet, USAID (financing) is quite impactful. I am seeing some muted impacts, as much as yet, it is quite impactful on the projects but in terms of usurping where the foreign exchange in the case of the shilling and the dollar, I don’t think it will have an impact,” he explained.

The shilling currently retails at Sh129 against the US dollar with the amount titling above Sh130 when buying or selling depending on the bank or trader. Just a year ago, the shilling was averaging Sh160 to the dollar.

Efforts by President William Ruto’s administration to offset the Sh320 billion ($2 billion) as per the then exchange rate in January 2024 before June safeguarded the shilling that was plummeting helplessly in the financial markets.

On February 7, 2025, all USAID direct employees were placed on administrative leave globally. This is except for designated personnel for critical functions.

“For USAID personnel currently posted outside the United States, the Agency, in coordination with missions and the Department of State, is currently preparing a plan, in accordance with all applicable requirements and laws, under which the Agency would arrange and pay for return travel to the United States within 30 days and provide for the termination of personal services contractor (PSC) and Institutional Support Contract (ISC) contracts that are not determined to be essential,” said USAID.

USAID’s footprint in Kenya extends beyond the known health and governance-related projects. For example, USAID is key in assisting importers get entry into the US markets through the US-Africa Trade Desk, a public-private partnership with Proper Africa.

Just recently, in September 2024, USAID kicked off a Sh212 million ($1.6 million) Women Entrepreneur Incubator Programme that purposed to support 45 women-owned businesses, targeting micro, small and medium enterprises (MSMEs) with capital and mentorship.

At least 135 businesses were to take part in the programme that is in partnership with Strathmore University.

A research paper authored by Daniel M’Amanja and Oliver Morrissey titled Foreign Aid, Investment, and Economic Growth in Kenya: A Time Series Approach, published by the Centre for Research in Economic Development and International Trade, University of Nottingham, cites foreign aid as key in the foreign exchange.

It describes it as ‘free’ foreign exchange. The paper states that increased demand for imports requires additional foreign exchange and foreign aid provides part of it.

“The foreign exchange constraint arises because investment requires imported capital goods and the ‘free’ foreign exchange available from export earnings may be insufficient; as aid is in the form of foreign exchange, it permits a higher level of (capital) imports,” the paper says.

But CBK Governor Dr Kamau Thugge, who is also the chairperson of the Monetary Policy Committee (MPC) on Wednesday, while reviewing the Central Bank Rate (CBR), noted that the bank’s foreign exchange reserves stand at Sh1.2 trillion ($9.07 billion) - equivalent to 4.3 months of import cover continue to provide an adequate buffer against any short-term shocks in the foreign exchange market.

He said diaspora remittances and tourism arrivals, significant sources of foreign currency, increased by 18.0 per cent and 14.6 per cent respectively last year, with the current account deficit being more than fully financed by capital and financial inflows.

This resulted in an overall balance of payments surplus of Sh190.6 billion ($1,466 million).

This surplus together with IMF disbursements resulted in a buildup of gross reserves by Sh357.4 billion ($2,749 million) in 2024.

“We don’t see much of an impact on the exchange rate from the freezing on aid,” said Dr Thugge on Thursday during the MPC press briefing.

He said what could impact the foreign exchange is a change in the prices of oil or diaspora remittances.

“What could affect the exchange rate is perhaps if there is the significant reduction in remittance from the US which we do not see happening or an increase in oil prices which will increase our import bill,” he said.