The pinch of a fading shilling
- While the prevailing forex exchange (FX) is largely the domain of banks, the Central Bank of Kenya (CBK) and importers the impact of a weaker shilling trickles down to Mwananchi.
- The greater imports costs will lead to a rise in the prices of standard imports including petroleum products, industrial machinery, iron and steel, motor vehicles, plastics and pharmaceuticals.
- Nevertheless, a weaker shilling bears the positive effect of increasing a country’s export competitiveness by lowering the cost of goods. However, this gain is muted if key exports are reliant on imported inputs.
On January 2, 2020, Ksh.101.34 would have been enough to get your hands on a US dollar, today, you would require Ksh.110.97 to close the same transaction.
More Kenyan shillings are required in the swap for dollars while less US dollars are needed to end up with more of the local currency in your pockets.
The local unit has effectively lost 9.5 per cent of its value against the US dollar since the start of the year.
While the prevailing forex exchange (FX) is largely the domain of banks, the Central Bank of Kenya (CBK) says the impact of a weaker shilling trickles down to mwananchi.
Kenya is currently experiencing a currency depreciation described as a fall in the value of a currency in a floating exchange rate system largely due to changing economic fundamentals.
Kenyans are expected to run up to higher costs for goods particularly on imports as a weaker shilling sets off a greater inflation rate.
Higher import costs from more shillings going into foreign currency purchases is expected to expand the country’s balance trade on greater import costs to that of exports.
In 2019 for instance, Kenya’s balance of trade worsened to Ksh.1.209 trillion as the value of exports slumped by 2.9 per cent while the value of imports rose by 2.4 per cent to Ksh.1.806 trillion.
The greater import costs will lead to a rise in the prices of standard imports including petroleum products, industrial machinery, iron and steel, motor vehicles, plastics and pharmaceuticals.
According to data from the 2020 Economic Survey by the Kenya National Bureau of Statistics (KNBS) the assortment of goods represented about 49.5 per cent of all imports into the country in 2019.
The costlier products are expected to creep up on the average consumer basked represented in the consumer price index (CPI) and monthly inflation rates which feature FX-dependent products such as electricity, LPG gas and fuel products.
The current inflation rate of 5.3 per cent (revised) in November is already the highest since May this year.
Kenya Power which has some of its costs in US dollars for instance charges a Foreign Exchange Fluctuation Adjustment (FEFRA) levy on monthly electricity billions.
“The greatest impact of a weaker shilling will be in inflation as we make large imports on average. A weaker shilling means Kenyans will be paying more for these goods,” said Genghis Capital Head of Research Churchill Ogutu.
A weaker shilling is additionally expected to be a pain on the National Treasury as its external debt serving costs rise from a weaker local currency.
According to data from the exchequer, Kenya’s external debt servicing costs stand at Ksh.334.3 billion in the year to June 2021 and largely feature payments in US dollar terms.
A weakened shilling is expected to bloat these payments widening Kenya’s weighty debt burden.
“A weaker shilling also raises external debt redemption costs. As the shilling weakens, Kenya’s external debt obligations rise,” added Ogutu.
The shilling is largely expected to remain in free fall in upcoming months with some analysts seeing an even deeper low for the local unit from the current historical slump.
The weakening of the unit however remains largely a puzzle as most of Kenya’s macroeconomic metrics remain resilient despite the pandemic.
The country’s Current Account Deficit (CAD) is for instance expected to hold steady at 5 per cent of GDP for the year.
Meanwhile, high frequency data shows exports in nine months through to December rose by Ksh.30 billion to Ksh.479.7 billion.
At the same time, imports over the same period slacked by more than Ksh.100 billion to Ksh.1.2 trillion.
Additionally, remittances have held up growing by 7.1 per cent through the first 10 months of the year to October to stand at Ksh.328.5 billion from Ksh.306.6 billion at the same time last year.
Nevertheless, a weaker shilling bears the positive effect of increasing a country’s export competitiveness by lowering the cost of goods. However, this gain is muted if key exports are reliant on imported inputs.
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