Shilling’s fall sets stage for renewed inflation pressure
The shilling on Thursday continued its downward spiral against major world currencies, signalling a reversal of inflation pressure that has been easing in the past three months.
The Kenyan currency touched a new low of 87.90 to the dollar, down from 83.30 units to the greenback in April.
Dealers attributed the movement to insufficient dollar inflows arising from foreign investor flight from low yielding government debt and high demand for the dollar from oil importers.
Manufacturers warned of a possible rise in the cost of consumer goods should the pressure on the shilling persist — pointing to renewal of inflation pressure.
“We are looking at spiralling costs in the coming days that will force manufacturers to hedge against potential forex losses with higher prices,” said Vimal Shah, the chief executive of Bidco East Africa.
“At the end of the day whether we hedge or not we will have to pass on higher prices to the consumer,” said Sumayya Athman the managing director of National oil Cooperation (Nock).
The price of petrol hit the Sh121 mark early last month, a level last seen in December 2011 when the mean monthly exchange rate was at Sh83.24.
The shilling has traded in the range between 83 and 87 to the dollar throughout May.
The rate at which the cost of goods and services rose slowed down in the last six months, falling from 19.72 per cent in November to 12.22 per cent last month but manufacturers said the trend may not hold if the volatility in the market continues.
The prices of basic commodities such as maize, cooking fat and rice, are among those that could immediately rise because Kenya is a net food importer.
The decline in inflation has been partly attributed to the fall in commodity prices globally with the drop in eurozone demand but exchange rate turbulence is expected to reverse the gains, setting consumers up for tough times ahead.
Bhatia Surendra, the deputy managing director at Athi River Mining, a cement manufacturer, said the continued rise in coal prices pointed to a looming rise in the cost of manufacturing that would ultimately be borne by the consumer.
“We may not suffer as such since we export part of our products but those who sell in the local market will have to adjust prices upwards,” he said.
The gap between Kenya’s earnings from exports and the national import bill had widened to Sh290.1 billion by the end of March, piling pressure on the shilling.
The current account deficit revealed in the latest quarterly report by the office of the Controller of Budget, shows a 54.4 per cent deterioration in the balance of trade for the first quarter of 2012 from the same period last year - meaning that local demand for dollars is on the rise.
The Treasury has partly attributed the shilling’s fall to high demand for dollars by companies with foreign ownership that are repatriating end of year dividends.
On Thursday, the Central Bank sold an undisclosed amount of dollars, lifting the Kenyan currency by more than one unit to trade at 86.40 but dealers said the rate was only temporary because the interventions were not sustainable.
To moderate excess liquidity in the money market during the week ending May 23, the Central Bank mopped up Sh10.5 billion through the repo market and Sh5.1 billion through sale of foreign exchange in the interbank market.
“The regulator seems to have decided to fight volatility with more dollars after realising that the few dollars they were selling were not making much impact,” said Solomon Alubala a senior trader at Cooperative Bank.
The shilling is also reeling from widespread dollar strength as investors seek safety in dollar-denominated assets by dumping the Euro.
Dickson Magecha, a trader at Standard Chartered was quoted by Reuters saying that banks had also increased their search for dollars because customers were panic buying. “They want to lock in before it goes higher,” he said.
Importers are also hedging their positions by increasing their dollar reserves to avoid losses associated with a weak shilling when importing raw materials.
Some traders said importers were taking forward hedge contracts since the drop in Treasury Bill interest rates had reduced the cost of hedging.
Market analysts said that the yield on government debt would continue to fall in response to the decline in inflation.
The yield on 91-day Treasury bills declined to 9.8 per cent at last week’s auction from 20.79 per cent tagged on similar paper sold on January 12.
The 182-day bills slid to 10.9 per cent last week compared to more than 20 per cent in January.
Fred Mueni, the director of Tsavo Securities, said that the three-month Treasury bill rate is unlikely to fall below 9.8 per cent, adding that most of the people buying government debt now are small players.
Mr Mueni said the depressed economic conditions in Kenya will result in low taxes this year making the Treasury to borrow more from the domestic market.
He said the hard economic times abroad will not allow Europe and the US — which are the major lenders — to allocate more money to developing countries.
“There is no excess liquidity for those countries to keep for international development budgets,” said Mr Mueni.
The CBK’s efforts to prop up the shilling by selling dollars in the market drove down its reserves down by 1.7 per cent last week.
The usable official foreign exchange reserves held by the Central Bank closed at Sh363.9 billion ($4,549 million) equivalent to 3.86 months of import cover as at May 24, 1.7 per cent below Sh370.1 billion ($4,627 mill ion) which is equivalent to 3.92 months of import cover the previous week.
The average interbank volumes transacted increased to Sh11.27 billion in the week ending May 23, compared to Sh7.30 billion in the previous week showing increasing market activities.