The shilling is expected to weaken at least until the general election, with import demand outweighing currency inflows, barring any Central Bank dollar sales.
Importers are bracing themselves for higher prices after the Kenya shilling last week hit a near six-month low due to dollar demand from oil companies, food importers and firms paying dividends to investors abroad.
The shilling is expected to weaken at least until the general election, with import demand outweighing currency inflows, barring any Central Bank dollar sales.
Imports of maize for the government subsidised flour programme are among key items likely to be affected. From the beginning of the year, the shilling has lost 1.2 per cent against the greenback to close to a one-year low of Ksh104. At the start of last week, commercial banks quoted the shilling at Ksh104.15 to the dollar. It was last near this level mid-January, when it touched Ksh104.20.
Products likely to be affected by the drop of the shilling are electronics, machinery and intermediate goods for manufacturing goods such as steel. This is likely to result in a rise in the inflation rate which could be fuelled further by the increase of cash in circulation as campaign money swamps the economy.
Car dealers are already feeling the pinch of the drop in the shilling, with Car Locus CEO Phineas Njeru saying that they are only importing to order.
“The increase in the cost of the dollar is being passed on the car buyers and few are willing to pay $500 more for a vehicle,” said Mr Njeru.
Car sales has also been affected by the capping of in interest rates, which the government introduced to make loans affordable.
As a result, commercial banks are more stringent when appraising customers seeking loans.
“The evaluation from the banks is more personal, if you are looking to finance a car, for example a Toyota Premio going for $12,000. Apart from the tedious process the banks take one through, you end up getting like 40 per cent of the money that you need, which does not help you,” said Charles Munyori, the Kenya Auto Bazaar Association secretary.
Eliud Mulama, a Kenyan who imports household and kitchen appliances as well as used clothes from the United States says all the expenses have shot up due to the weak shilling.
“When you travel to the US to buy merchandise, hiring labour, containers and buying the goods is now higher due to the weak shilling, meaning the goods you bring to Kenya will be expensive and not many people willing to buy them,” said Mr Mulama.
He says the cost of clearing a 40-foot container at the port has also shot up from $8,000 three years ago to $20,000.
Ample ammunition
Over the last six months there has been shuffling in the price of oil with a rise from $50.3 per barrel of crude in the last quarter 2016 to $54.7 in the first quarter of 2017. One of the net effects has been the widening the current account deficit which stood at $4.6 billion at the end of Quarter One of 2017.
“This will continue presenting a pressure point for the local unit in the months ahead,” said Julians Amboko, senior research analyst at Stratlink, a financial advisory firm.
Traders project that the Ugandan shilling will be trading at the stable Ush3,600 level in the next week, helped by hard currency inflows from coffee exporters and charities.
Last week, commercial banks quoted the Ugandan shilling between Ush3,595 and Ush3,605, compared to the previous week where they quoted the shilling to the dollar between Ush3,603 to Ush3,610, reported Reuters news agency.
“Coffee is doing very well in terms of inflows,” said one trader at a leading commercial bank. He added that charities will also likely be converting dollars to pay salaries.
The Tanzania shilling is expected to remain stable as it traded between Tsh2,235 and Tsh2,245 to the dollar last week. It could, however, weaken if demand for the dollar increases from the construction and energy sectors.
During the Monetary Policy Committee press conference last week, Central Bank of Kenya Governor Patrick Njoroge said Kenya’s foreign reserves were adequate.
“Whereas the Central Bank’s usable foreign exchange reserves have been declining from the $8.3 billion high witnessed in May 2017 to the present level of $7.9 billion, a 4.6-month import cover still gives us confidence that there is ample ammunition to stave off wild swings by the local unit," said Mr Omboko.
The weakening shilling may cost taxpayers more in the maize subsidy programme where the government has been importing the maize to subsidize high flour prices.
A fall might spill over to inflation which is already above the desired range. Inflation in June fell to 9.2 per cent from 11.7 per cent in May.
The country has been experiencing a rise in the prices of basic commodities, putting them beyond the reach of the estimated 50 per cent of the population that live below the poverty line and spend less than Ksh206 ($2) per day. Expensive food and fuel lifted inflation to the highest level since June 2012.
The rally in food prices has been attributed to the prevailing drought, coupled with the ongoing recovery of petrol and diesel prices in the global markets.
