The value of the Shilling has taken a knock due to “imported inflation”. Photo/FILE
A record rally in key global currencies against the shilling in the last few weeks has heightened Kenya’s exposure to imported inflation.
This lays a heavier burden on the local manufacturing sector already hard-hit by high energy prices even as the government rules out intervention.
A basket of key currencies with a strong bearing on the cost of Kenya’s imports has rallied to culminate in record highs this week, raising the costs of imported goods.
The US dollar, the Japanese yen, the sterling pound, the euro, and the chinese yuan are currently trading at historic highs to the shilling.
The shillings touched lows of 83 before correcting to 82.80 to the dollar, the lowest level since 2004 with the sterling pound rising to levels last seen in 2008 to trade at Sh135.
The Chinese yuan has also consolidated gains to stand at the highest level since it was depegged in June last year at Sh12.59 to the shilling.
The euro consolidated gains this week to touch it highest point to the shilling since 2004 to trade at 114 to the shilling.
The Japanese yen rallied sharply to gain three shillings in the last four days against the shilling to trade at a record level of Sh101 to the yen, the lowest level since 2004 according to data from the central bank.
The aggregate result is a shake up in returns from exports and imports with the cost of imports rising further at a time when the commodity market is already experiencing high prices.
High oil prices
Traders in the currency market said the local shilling is under pressure from a number of commodities including the high oil prices amidst low inflows from agricultural exports.
Dealers also said that the repatriation of returns by the corporate sector has also weighed down the shilling.
“Its basically corporate demand. It is also the time when dividends are being repatriated and this has increased demand for foreign exchange in the corporate sector,” said Chris Muiga, the head of trading at Kenya Commercial Bank.
Market players also attribute the low trading levels of the shilling to low yields in the bond market that has subdued demand from foreign players and consequently demand for the shilling by foreign investors in the bond market.
Returns from agricultural exports and remittances especially from Europe are expected to rise supported by the weak shilling against both the euro and the sterling pound.
The appreciation of the even though expected to enhance gains for horticulture exporters, could increase the cost of construction machinery and equipment imported from Europe.
Demand for quality second hand construction equipment from Europe has risen. High oil prices last month saw the transport component of inflation rise by 4.3 per cent followed by food and non alcoholic drinks at 1.7 per cent with inflation rising to 6.5 per cent last month from 5.4 per cent in January.
Dealers said demand for oil further outstrips inflows from agricultural exports and that the shilling was likely to slide even lower.
The shilling lost further against other major currencies following political sentiments.
Currency dealers said the shilling will tread in much weaker margins this month against major world currencies.
Dealers said that this is the time for the repatriation of dividends in corporate Kenya hence demand for the dollar is high.
