Weaker shilling makes life cheaper for Nairobi expats

A weaker shilling and low inflation rate helped Nairobi to improve its standing on the list of the world’s most expensive cities for expatriates, the latest global cost of living report says.

The report by New York-based consultancy Mecer shows that the Kenyan capital improved 12 places from last year to stand at position 116 as a weaker shilling increased the purchasing power of expatriates who are mostly paid in dollars.  

“The main reason that caused Nairobi’s drop in the ranking is a weakening of the shilling against the US dollar (more than 10 per cent decrease) during the period in review,” Anna Panek of Mercer said.

The improved ranking means Nairobi has become a little cheaper for expatriates compared to other cities in the world. Mecer surveyed the cost of living in 209 cities across the globe for this year’s report.

Employees of multinational companies and those working for non-governmental organisations and diplomatic agencies are mostly paid in hard currency such as the US dollar which they convert to local currency to buy what they need.

The Kenyan shilling has shed 10.9 per cent to the greenback since March 2015 when a similar survey was done — meaning expats are getting more shillings for the same amount of dollars.

The exchange rate-related pay rise points to a growth in the purchasing power of the expatriates during the period when inflation averaged six per cent.

“We observed some price increases for both goods and services and rental accommodation costs in Nairobi, but it has not offset the devaluation of the currency,” Ms Panek said.  

The survey tracks the prices of food, housing, clothes, transport, household goods and entertainment in dollars for comparison across the world and uses New York as the base city.

This year’s survey was conducted in March and serves as a guide for multinationals and diplomatic offices in determining allowances of workers in overseas jobs. 

Generally, expatriate life is expensive compared to that of Kenyans with average rent in Nairobi’s posh estates, popular with the foreign workers, standing at more than Sh155,000 a month. A four-bedroom villa in Nairobi’s Ridgeways Estate, which has a clubhouse, swimming pool and jogging track, for instance, costs Sh300,000 per month.

The Kenyan capital is home to the United Nations Environment Programme (Unep), multinational companies and diplomatic missions whose employees are mostly paid in US dollars or euros.

The shilling ceded ground to the dollar in the review period due to falling revenues from tourism — a key foreign exchange earner — and a huge import bill that requires dollars to transact.

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The Kenyan currency hit a low of Sh106 last September compared to Sh91 in March last year. It is currently trading at Sh101 to the greenback.

A weak shilling has the effect of inflating the dollar, pound and euro-denominated pay of expats who ultimately find it easier to buy goods and services in the local currency. Such exchange rate swings means expatriates make big purchasing power gains in local markets compared to those paid in the local currency. 

An expat on a monthly salary of $5,000, for instance, took home an equivalent of Sh455,000 in March last year when the shilling was at Sh91. That amount would have risen to Sh505,000 this year based on exchange rate fluctuations, or a 10.9 per cent pay increase.

In Africa, Nairobi is ranked the 17th most expensive city while Chad’s N’Djamena and Angola’s Luanda are the only African cities in the top 10 list of most expensive cities globally at position nine and two respectively.

Despite the improvement, however, Nairobi kept its dubious distinction as East Africa’s most expensive city, followed by Kigali (139), Dar es Salaam (174) and Kampala (187).

The improved ranking for the Kenyan capital should in the near term ease pressure for wage increments on United Nations agencies, diplomatic missions and multinationals companies with operations in Nairobi.

Attract and retain foreign investment

It should also help improve the city’s ability to attract and retain foreign investment, expatriates and tourists.

A weaker shilling also offers multinationals a golden window to negotiate lower dollar salaries for incoming expatriates, who peg their pay demands on the prevailing cost of living in the country of posting.

This is especially true for multinationals or agencies that get their dollars from outside the country and who do not have to suffer the pain of buying dollars at the local rates for purposes of paying salaries.

Ordinarily, buying dollars at current levels for purposes of paying salaries would increase the wage bill, thus raising the employer’s costs. 

Oil-rich Luanda, which had topped the list in recent years, slipped to position two owing to the weakening of its local currency. Hong Kong topped the table.

The world’s least expensive cities for expats is the Namibian capital, Windhoek, followed by South Africa’s Cape Town and Bishkek in Kyrgyzstan, the survey says.

A poll by Economist Intelligence Unit (EIU) that was released in March also said that the weakening of the shilling had improved the cost of living for expats in Nairobi.

Other than expatriates, exporters should also be enjoying a boost in earnings from the strong dollar, which could boost the local production of goods, thus creating jobs.

Currency dealers are yet another batch of beneficiaries who have seen the volume of trade rise as investors bulk up on dollar positions to hedge against further depreciation.

Dealers are often paid commissions above their main salary depending on the volumes of trade they generate for banks, and some have annual bonuses which are also dependent on hitting their targets.

Recipients of diaspora remittances are also in line to gain more per dollar.

Kenya’s current account — the difference between the value of exports and imports — deficit has continued to grow in recent years on a huge import cost compared to a lean export receipt, piling pressure on the shilling.
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