Import costs set to rise as shilling hits new three-year low
Weak shilling is set to push up inflation that has been rising since January. PHOTO | FILE
What you need to know:
Commercial banks on Monday quoted the shilling at 97.90/98.0 to the dollar — a new low since November 2011.
Weakening of the local currency is expected to push up prices of consumer and capital goods
The shilling on Monday weakened to a new three-year low against the dollar in what is set to increase the cost of imported goods.
Commercial banks quoted the shilling at 97.90/98.0 to the dollar — a new low since November 2011. The local unit closed at 97.40/50 in last Friday’s trading.
The shilling has been under pressure since the beginning of the year due to falling revenues from tourism, tea and horticulture – the key foreign exchange earners – amid concerns over a rising import bill.
“There’s still some bit of dollar-buying this morning. It (shilling) is supported by tight liquidity in the market. It’s because today we expect the payments from the bond and bills,” Martin Runo, senior trader at Chase Bank told Reuters on Monday.
The weakening local unit has raised the prospects of pushing up living costs in a country that largely depends on imports for its consumer and capital goods, especially fuel and industrial raw materials.
Tourism, once the highest foreign exchange earner, has borne the brunt of terror attacks that has prompted Western countries to issue travel alerts.
This has cut foreign tourist arrivals over the past year and led to the closure of more than 40 hotels at the Coast due to low bed occupancy. The number of international visitors dropped to 1.3 million from 1.5 million in 2013.
The effects of the strengthening dollar have already been felt at the pump after the energy regulator this month raised fuel prices to the highest level this year.
The Energy Regulatory Commission also this month increased the forex adjustment levy by the biggest margin since August 2013, reflecting the impact of the weakening shilling on household budgets.
The forex levy comprises expenses incurred in foreign currency by power generators such as KenGen, the independent power producers as well as Kenya Power.
Reduced dollar inflows from the underperforming key sectors come against a rising import bill, negatively impacting on the country’s balance of trade. Official data shows that Kenya’s current account deficit widened to Sh1.08 trillion last year from Sh911 billion in 2013.
Kenyans are likely to feel the pinch as the shilling weakens further, with imported consumer products, fuel and motor vehicles becoming more expensive.
The expensive imported commodities are expected to push up inflation which has been rising steadily since January to an eight-month high of 7.08 per cent in April, largely driven by a rally in food prices.
Importers of capital goods, including those implementing infrastructure projects, are also facing higher costs.
The Central Bank of Kenya (CBK), which is awaiting the appointment of a governor, has recently intervened in the currency market with direct dollar sales to prop up the shilling.
Lower liquidity in the money markets has also failed to offer the shilling much support but has helped slow down the rate of depreciation and cutting volatility, according to dealers.
Tight liquidity makes it expensive to hold dollars, which in turn supports the shilling. The CBK has periodically reassured the market that it has sufficient reserves to support the shilling if necessary, and is also ready to apply appropriate monetary policy instruments to minimise exchange rate volatility.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
