Policy Conversations on The De-dollarization of Kenya’s Foreign Currency Reserves

Executive Summary

Trends by the emerging economies of China and Russia to reduce the use of the dollar and the SWIFT payment platform in their dealings are expected to have ramifications for developing economies like Kenya. The gradual political and economic undercurrents are influencing other countries to adopt strategies that shield them from adverse exposure to the US fiscal and
monetary policies. The weaponization of the dollar system against countries operating divergent to US interests has forced them to pursue multilateral trading arrangements where they can use their local currencies or non-dollar currencies. In Kenya’s situation, there is a need to appreciate the significant cost of dollar based trading in international trade. The country suffers significant exposure from foreign exchange loss and strained supply to the dollar which aggravates the depreciation of the Kenyan shilling. Likewise, policies by the US Federal Reserve to increase interest rates have accelerated dollar denominated capital flight from developing economies to safe havens in the Global North. While policy analysts estimate that the dollar system will continue to dominate as the world’s reserve currency, de-dollarization partnerships and alternative trading systems are growing and threatening the dollar. An anticipated fightback by the US against de-dollarization is
expected due to the potential negative impacts on her economy, and geopolitical and economic leadership status in the global arena. Kenya and other developing economies should analyze and navigate the dynamic geopolitical and geo-commercial ecosystem to advance their development, economic, and national security interests. Policy interventions should shield the country from risks due to reliance on the dollar system while adapting to fluid global realities