Consumers face tough times in the dollar’s fall

The weakening of the US dollar against major world currencies is pointing to a looming shake-up of the pricing of imported goods and services for Kenyan consumers in the coming months, even as some market players welcome it as a positive development in the war against counterfeits.

Since January the Japanese Yen and Chinese Yuan have appreciated against the greenback by 20 per cent and climbed eight per cent higher against the shilling — translating into higher cost of imports from both countries.

Japan and China are Kenya’s biggest sources of farm and industrial machinery, motor vehicles and electronic consumer goods where the impact of major changes in pricing is immediately felt in the local markets.

The shilling closed trading yesterday at Sh98.67 to the yen down from Sh81.53 in January while the Chinese Yuan has moved from Sh11.09 in January to 12.20 during the same period.

This is the highest point that the Japanese Yen has climbed against the shilling since 2004, while the Chinese currency stands at a two-year-high versus the shilling in what currency traders attribute to the gains that the two currencies have made against the dollar.

Yesterday, the dollar slipped further against other major currencies as the US Federal Reserve signalled a possible return to expansionary monetary policy or quantitative easing to support the country’s wavering economy.

Since last month, China, Japan and the US have taken strong policy positions on their currencies in what is now feared to be brewing a “currency war” that has sucked in the International Monetary Fund (IMF).

Failure by the IMF to resolve the matter at its ongoing annual spring meetings in Washington DC has generated fears of a possible escalation of the currency wars with serious ramifications on frontier economies such as Kenya.

“There looks to be no basis for agreement on currency imbalances from the weekend meetings and the US looks set to continue to pursue loose monetary policy going forward,” Reuters quoted Neil Mellor, currency strategist at Bank of New York Mellon, saying.

The US and Europe have been prodding China to revalue it currency, a demand that Beijing has warned could lead to a “disaster for the world.”

Currency market analysts said appreciation of major currencies such as the Yuan and Yen could have far reaching effects on Kenya, raising the cost of imports and increasing the public debt burden.

For instance importers of vehicles from Japan said a strong Yen poses the threat of increasing the cost of imported goods that will have to be ultimately passed on to consumers.

“Most of our clients are the government and NGOs and as usual unexpected costs like currency changes are passed down to clients,” a senior official with Toyota East Africa, Mr Raul Bitnager said.

“We however are going to stop more orders and wait to see if the government of Japan is going to intervene,” he said.

Japan is a major source of both new and used cars and other machinery that currently dominate Kenyan roads.

Dr Samuel Nyandemo of the School of Economics at University of Nairobi told Business Daily that a flexible Yuan could disrupt the flow of trade between Kenya and China as the cost of capital goods imports that are dollar denominated rise, pushing up the cost of production in Kenya and eroding all the possible gains in consumer market.

Besides, the appreciation of the Yuan is also seen to bear the risk of altering the value of trade and investment between Kenya and China.

Kenya’s imports from China have grown by more than 300 per cent in the last four years to rank third behind Saudi Arabia and India at more than Sh75 billion worth of imports compared to Kenya’s exports to China which stood at Sh2.5 billion in 2009.

Kenya’s main imports from China include telecommunication equipment, office machinery, industrial machinery, motor cycles, rubber tyres, flat rolled products of iron and steel.

A significant rise in the cost of these products means consumers will have to dig deeper into their pockets to purchase the same amount of goods.

“Many people are turning to China today for a wide range of goods and any climbs in the Yuan will definitely hurt many hearts,” Cecily Wairimu, a small-scale dealer in Chinese merchandise said on phone.

Some market players however said the strengthening of the Yuan would boost their business by discouraging trade in counterfeits.

A rise in the value of the Yuan, for instance means, the cost of imported fake goods especially mobile phones and other communication equipment will rise, cutting back dealership in counterfeits while giving room for manufacturers of genuine products sourced from other locations to flourish.

Faster rise

“When the Yuan appreciates the price of importing fake telecommunication equipment from China increases tilting the market share towards us” said the spokesperson of Nokia Kenya Dorothy Aoko.

Four months ago, the Bank of China announced that it had ditched the policy of pegging the Yuan against the dollar, setting stage the ongoing currency wars.

Chinese Premier Wen Jiabao last week said acceding to the demands for a faster rise in the renminbi could cause social unrest in his country.

“Do not work to pressurise us on the renminbi rate,” he told the Financial Times. “Many of our companies would have to close down, migrant workers would have return to their villages and if China saw social and economic turbulence, then it would be a disaster for the world.”

The policy shift by China, though expected to last up to three years before its effects are fully realised, is certainly expected to creep into the Kenyan economy where the Asian nation’s role has continued to grow steadily since 2003 when President Kibaki assumed power.

China is, for instance, the main financier of major infrastructure projects such as the ongoing construction of the Nairobi-Thika Highway, the Nairobi-Namanga road, Nairobi-Oloitokitok road and the Nakuru-Eldoret highway.

The Chinese government is also a partner in the ongoing expansion and modernisation of Nairobi’s Jomo Kenyatta International Airport.

China is also looking up to funding the construction of the Lamu Port, which is expected to improve Kenya’s maritime business.

Statistics further showed that in the next financial year of 2010-2011 Kenya is expecting Sh16.79 billion financing from the Chinese government, making it the single largest bilateral donor to the country.

The funds will be used for the Nairobi-Thika Highway improvement project, Nairobi Eastern and Northern Bypass project and drilling of Olkaria IV Geothermal wells.

Some currency dealers however moved to quell fears of further appreciation saying that China and Japan would not allow their currencies to appreciate to heights that might hurt their manufacturers.

“China being the biggest exporter, an expensive Yuan would hurt their exports and this is not something Chinese authorities are ready to do,” said Joshua Anene of the Commercial Bank of Africa.

But apart from the Yuan and Yen the local currency has also had a difficult run against other currencies such as the Euro and the Indian rupee.

The strengthening of the euro has particularly triggered fresh hope among horticulture exporters, on the improved economic sentiments.

The EU is the single largest market for Kenya horticulture exports. Horticulture has since become the largest forex earner having overtaken tourism.

“We are hoping to recoup losses since the year has been quite tough for us,” said Ms Jane Ngige, the CEO of Kenya Flower Council said.

The depreciation of the dollar has also helped ease pressure on oil prices outside the US, thus granting some relief for net importers such as Kenya.

A rise in petroleum prices has the impact of pushing up the cost of transport and ultimately the cost of goods and services renewing inflationary pressure in the entire economy.

Petroleum and metal products are Kenya’s largest import items that account for about 35 per cent of the total import bill.