Weak shilling erodes gains from exports

The weakening of the local currency is expected to pile pressure on the country’s balance of payment, eroding gains from the recent surge in exports.

The shilling’s slide will make imports more expensive although exporters are expected to benefit from the windfall.

For instance, the shilling is exchanging at Sh81 to the dollar compared to Sh74 a year ago, meaning importers will spend seven shillings more to buy a dollar.

Ideally, a weaker currency is preferred for an export-based economy as exports earn more.

But the gains are not likely to offset rising costs of imports as import bill is higher than exports revenue.

According to analysts, the weakening of the currency comes at a critical time when the local businesses are rebuilding their investments through imports of capital goods to boost output.

“The weakening of the shilling will adversely impact dollar-denominated imports, especially of capital expenditure, which will raise the overall cost of the final products,” said Mr Judd Murigi, the Head of Research at CfC Stanbic Financial Services.

Mr Murigi says the weakening of the shilling was as a result of a stronger dollar, bolstered by the ongoing flight to safety by investors due to the debt crisis in Europe.

The country’s balance of payment has been clawing back from deficit following the recent high growth of imports due to the drought that ravaged the country.

Famine pushed the Kenya to import even basic foodstuff like maize and beans.

“The country’s current account which captures imports and exports bill is still struggling to regain lost ground but the overall balance of payment is improving due to strong capital and financial accounts,” said Mr Murigi.

According to the Central Bank of Kenya’s (CBK) latest Monthly Economic Review (MER), the country’s balance of trade has improved over the last year.

“Kenya’s overall balance of payments improved from a deficit of $706 million in the year to February, 2009, to a surplus of $469 million in the year to February, 2010. The improvement reflects a surplus in the capital and financial account which offset the deficit on the current account,” says the March MER.

According to the CBK, the improvement on the trade deficit was due to a decline in the value of nominal imports.

For instance, for the period under review, the value of imports declined by $928 million.

“The decrease in the value of merchandise imported during the period was mainly due to the oil import bill falling to $2,266 million from $2,837 million due to low oil prices in the international market compared with a similar period in 2009. In addition, import bills for machinery and transport equipment declined to $2,995 million from $3,179 million during this period,” says CBK.

But the weakening of the shilling is likely to reverse the gains made so far as it will require more local units to purchase the same dollar bills to pay for the capital goods and intermediate material for the final production of commodities.

The ongoing recovery of the economy and the expectation of a wider market following the start of the East African Common Market Protocol will create room for businesses to increase their capex to meet the growing demand for commodities.

Analysts see the expanded EAC market as the best chance for Kenya to grow its exports as it boast of a more advanced manufacturing sector, a superior service industry and well endowed human resource.

On the flipside, a weaker shilling will present fresh opportunities for the country ‘s main export commodities as they will fetch better prices.