How Trump's tariff wars might hurt Kenyan shilling and trade

How President Donald Trump’s economic policies might affect diaspora remittances features in the economists’ watch-list, who note that inflows from the Middle East and China may fill the gap the United States has left in the economy.

A negative change in diaspora remittances could hurt the shilling whose stability to a bigger extent depends on how much Kenyans send back home. Transfers from the US contribute the largest in the diaspora remittances basket with data showing that in January 2025, more than Sh30 billion was sent back home.

This is slightly more compared to January 2024 when the figure stood at Sh28.7 billion ( $221 million). Remittances from the US averaged Sh26 billion ($200 million) every month with annual figure surpassing Sh300 billion. In 2024, this figure was Sh341.7 billion.

As these experts note of a possible inflation in the US markets courtesy of rival economies like China retaliating with the same tariffs imposed by President Trump, high prices of goods and services might affect how much Kenyans send back home.

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Standard Bank Regional Chief Executive - East Africa Patrick Mweheire noted that while there is the expectation of financial outflows from countries such as Kenya due to the key developmental role the US plays, there are also some inflows as Kenya looks into China and the Middle East. “The hole (created by the US) might not be completely filled but I believe there would be some other stronger partners to step in. Ultimately, Africa remains one of the most attractive places to invest in,” he said during the full-year release of Stanbic Holdings 2024 financial results.

Mr Mweheire said there is the expectation that President Trump will self-correct at some point. “Tariff wars have no winners. Those 25 per cent tariffs placed on Mexico, Canada and China have also been placed on the US by the same countries,” he said.

“This is going to backfire. In a way, all these prices will work themselves into inflation and it would bring some overheating in the economy.” A higher inflation in the US means higher prices of goods and services and squeezed earnings which will then affect diaspora remittances into the country.

Diaspora remittances have been key in stabilising the Kenyan shilling, especially last year when the currency had slid beyond the Sh160 mark against the US dollar.

This challenge on remittance was also noted by Stanbic Bank Kenya’s Chief Financial and Value Officer Dennis Musau. “The market will give us opportunities in 2025 but it will also give us challenges,” he said giving a forecast of what the lender expects in the year.

“If you pick the US, there is a lot to unravel about what it is going to mean for remittances which are a big source of currency flows and what it will mean to some of the sectors which they (the US) support like health,” he explained.

 A strong diaspora remittance is one of the grounds the Monetary Policy Committee chairperson who is also the Central Bank of Kenya (CBK) Governor Dr Kamau Thugge, announced lowering of the base lending rate from 11.25 per cent to 10.75 per cent on February 5, 2025.

“Diaspora remittances and tourist arrivals increased by 18.0 per cent and 14.6 per cent respectively in 2024. The current account deficit was more than fully financed by capital and financial inflows, resulting in an overall balance of payments surplus of $1,466 million (Sh,” said Dr Thugge.

For months now, the shilling has been oscillating at Sh130 against the dollar. However, with the withdrawal of USAID, a key contributor to some of the country’s crucial sectors such as education and health on President Trump’s order, questions remain about how far these effects will have on the economy.

Banks are among those who will be affected as some of their clientele are non-governmental organisations (NGOs) whose contracts have been cut short as a result of President Trump’s order on USAID, America’s development agency. This means not only loss of clients but also reduced foreign currencies.

Stanbic Bank Kenya and South Sudan chief executive Joshua Oigara said from a geopolitics perspective, Kenya and Egypt seem to have a special place for the leader of the free world.

 “Our biggest issue is on supporting programmes around development. USAID is a multibillion-dollar programme for Kenya,” he said citing malaria funding and job cuts as the pain points of this withdrawal.

“That is where we see a big concern for us. For tariffs, we do not see that as a massive issue unless it is global. We haven’t seen something like the removal of The African Growth and Opportunity (Agoa) for example. We don’t think he will make that move without the congress,” said Mr Oigara.

Agoa allows select African countries, Kenya included, to access the US markets duty-free.

For countries such as South Sudan however, he said the scenario is different. “Everything runs on United Nations support which is 80 per cent US government.”

USAID spends close to Sh130 billion ($1 billion) on different programmes on the continent. In 2021, this figure stood at Sh106 billion.

In 2021, USAID’s budget for the continent was Sh109.6 billion ($843 million). In 2023, USAID’s budget for programmes in Kenya stood at Sh56 billion.

In an earlier interview with The Standard, Churchill Ogutu, an economist at IC Group opined that while the development assistance provided by USAID is massive for Kenya, its withdrawal will have a muted effected on the shilling.

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

It was the same stand that CBK Governor Dr Thugge had.

“We don’t see much of an impact on the exchange rate from the freezing of aid. What could affect the exchange rate is perhaps there is a 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,” said Dr Thugge.

Christopher Legilisho, an economist with Standard Bank Group, said in the long run, the US dollar is expected to weaken as the tariffs weigh down on the preferred trade currency. This is even as he noted that the US dollar appreciated when President Trump was elected in November last year.

“Ever since President Trump was elected in November last year, the dollar has strengthened consistently. But over the longer term, in two or three years, we anticipate the dollar will weaken against other currencies,” he said during a presentation at a recent pension meeting.

During the 5th DTB Economic and Sustainability Forum held in February 2025, the Institute of Economic Affairs chief executive Kwame Owino pointed out the discrepancy in the financial market of stable shilling against the US dollar that has been appreciating since President Trump came into office.

“If you look at the Kenya shilling, for the last eight or nine months, it has been very stable in the range of Sh128 and Sh129. I don’t know what magic is keeping it there. In that same time, the US dollar has appreciated,” he said.