• According to CBK, inflation has increased from 5.73% in 2021 to 8.71% in 2023 and will experience another steep increase during the year.
• The Digital Economy Blueprint, developed by Smart Africa, has focused on Kenya’s digital economy.
• According to its government, 50%-55% of jobs in Kenya will rely on digital skills by 2030.

Kenya is a name that often comes up as one of the pioneers of web3 in Africa. This East African country has undergone a massive digital transformation over the past decade. Kenya’s digital economy has inspired its peers. Today countries such as Tanzania, Uganda and Rwanda have taken the next step in ushering the 4th Industrial Revolution to East Africa. Furthermore, despite initially rejecting the concept of digital currency, Kenya is slowly warming up to its lucrative potential. However, in recent times, Kenya’s fiat currency has steadily declined, causing mass panic within its economy. As the value of the Kenya shilling loses its grip, what does this entail for its digital economy?

Can it stop its fiat currency from hitting rock bottom? Or is turning towards concepts such as CBDC the only remedy for Kenya’s economy? These are the question we are about to answer.

The decline of Kenya’s fiat currency

Initially, the Kenyan shilling held its against the likes of the dollar almost a decade ago. In 2010, the value of the Kenyan Shilling to the dollar was Sh76.2246. However, what led to the growth of Kenya’s digital economy also split the end for its fiat currency, the Covid pandemic.

Since the beginning of 2020, the value of the Kenyan shilling has lost at least 27% against the US dollar, falling from sh99 to 136.80. This roughly means that Kenyans must spend 27% more to buy the dollar than they would in 2020. 

This sudden decline in fiat currency has spiralled its economy into chaos, and 2023 is the worst. 

Inflation affects its people.

According to CBK, inflation has gone up from 5.73% in 2021 to 8.71% in 2023 and will experience another steep increase during the year.

The decline of Kenya’s fiat currency has sent a wave of aggression throughout the country. Kenya’s opposition party, led by Raila Odinga, has rallied nationwide protests within the past few months. He attempted to address the high rate of taxation amid the high inflation rate.

Also, Read Kenya: A huge cryptocurrency marketplace chained by its regulations.

According to data from the KNBS, households currently pay 13.3% more to put food on the table than they did a year earlier. This generally creates a significant shift for the typical “mwananchi” in Kenya. Food makes up over a third of the expenditure of an average Kenyan family, and increasing its prices will significantly influence the overall shift in cost. This has affected other critical industries within the country. This is all caused by the steady decline of its country’s fiat currency.

Kenya’s digital economy and stance on digital currency

Kenya is renowned for having one of the fastest-growing digital transformations in Africa. Recently Flutterwave fintech, a unicorn startup in Africa, deemed Nairobi the East African hub. This is due to its numerous technological advancements and web3.

Like many others in Africa, Kenya rejected the concept of digital currency. In 2015, Governor Patrick Nojoroge of the CBK declared that digital currencies would never be considered legal tender for the country. In 2022, he renewed his claim and stated that he would be mad if he would even accept the concept of Bitcoin as a legal tender.

Reign of Mpesa in Kenya’s digital economy

Despite this sudden change of heart, it is no new concept to the East African country. Kenya is among the first countries to experience the idea of Decentralized Finance through the well-known MPESA application.

The fintech service existed long before the concept of applying Bitcoin as a legal tender existed, and many acknowledged its success. During the previous financial year, Mpesa registered 19.9 billion transactions in a single year. Currently, the maximum transaction value Mpesa handles is at most Ksh 300,000. This is a feat other fintech industries have struggled with.

Also, Read Over 4 million Kenyans lost their monies to the ongoing crypto crash.

Due to the success of Mpesa, Kenya’s digital economy took off with little hindrance. Its most noticeable turning point occurred around the same time the value of the Kenyan Shilling dropped in 2020. With businesses and residents on lockdown, enterprenuers had to develop a way of sustaining their livelihood.

This led to the growth of Ecommerce, one of the fastest-growing economic activities in Kenya, only rivalled by its fintech industry. The Kenyan government also took an interest towards this newly developed economy. It has set in motion various plans that offer Kenyan youth the chance to expand the country’s digital economy.

For instance, the Digital Economy Blueprint, developed by Smart Africa, has focused on Kenya’s digital economy. It builds on the Kenyan National Digital Master Plan 2022-2032 by identifying the digital skills of ICT professionals as the country’s main economic pillars. 

Furthermore, the government has also promised to rain 20 million citizens in digital skills and establish the Digital Literacy programme. This new program is set to incorporate advanced skillsets that will educate its citizens on digital skills aiding in developing several projects. President William Ruto has also focused on improving Kenya’s digital transformation and incorporating digital currency.

Effects and mitigation of the failing fiat currency to Kenya’s digital economy.

With the value of the Kenyan Shilling dropping for almost a year, it has led to a ripple effect throughout the country. It has affected consumers directly and forced other industries to increase prices or lower their workforce. Unfortunately, Kenya’s digital economy is no exception.

As its fiat currency drops, it causes a domino effect on its digital economy. For instance, when an online shopping application still uses the same standard payment service, most consumers notice that the price differs between 2022 and 2023. This, in turn, reduces the number of customers. Thus, forcing the E-commerce business to look for alternative means to make a profit.

However, if an online business accepts alternative payments, such as digital currency, the price fluctuation will be steady compared to the former. This will force users to turn to digital money, such as stablecoins which offer stability. Nigeria uses the same concept, where most individuals have their assets in digital currency rather than in its naira form. By applying this concept, the fiat currency will continue to decline due to internal factors such as low demand.

CBDC might be the Key

One of the reasons why Kenya’s digital economy is steadily thriving despite the lack of professional skills is its ability to adapt. Unfortunately, the government’s stance on its inability to acknowledge digital currency as a financial product has hindered it. This means that big businesses cannot accept digital currency as a form of payment without running the risk of arrest. Unfortunately, if the value of the Kenyan shilling continues to decline, I won’t be surprised if the user opts for a “backdoor route.”

Despite the domino effect, there is some hope for the country’s fiat currency. Its openness to CBDC might salvage its declining economy. CBDC is simply a digital currency issued by the Central Bank. The primary concept of CBDC is to provide more resilience, safety, greater availability and lowers costs than private forms of digital money.

Also, Read Kenya: the place of Blockchain, web3 and Crypto under the new administration.

In addition, its availability and scalable nature will ensure that each citizen can use it. This increases financial inclusion, which in turn increases its demand. In addition, CBDC can curb various issues, such as money laundering, which has plagued the Kenyan country for some time. For those who might not have noticed, one of the primary reasons Kenya had to redesign its fiat currency was to cut off the supply of fake money, significantly reducing its value.

Conclusion

Kenya’s digital economy is currently thriving due to its steady digital transformation. According to its government, 50%-55% of jobs in Kenya will rely on digital skills by 2030.

Thus implementing some form of digital currency, such as CBDC or stablecoins salvaging its failing fiat currency. Unfortunately, this will take some time as the Kenyan government continues to search for a better way of implementing its new policies and laws to govern the implementation of digital currency.