Markets & Finance

Dollar shortage stalls Kenya’s trade with Southern Sudan

dollar

Kenyan companies say their money is stuck in South Sudanese banks because it cannot be converted into dollars that can be used to replenish their supplies or brought back home, leading to a near-paralysis of their operations. Photo/REUTERS

Kenya is under pressure to sign a currency exchange agreement with South Sudan and stem a trade crisis caused by an acute shortage of dollars in the world’s newest country.

Kenyan companies say their money is stuck in South Sudanese banks because it cannot be converted into dollars that can be used to replenish their supplies or brought back home, leading to a near-paralysis of their operations.

The currency crisis was brought to the fore by budget airline Jetlink’s decision last week to stop flights to Juba, citing inability to draw more than Sh170 million ($2 million) from its South Sudanese operation.

A number of hotels and import businesses owned by Kenyans in South Sudan have also closed shop, according to the Kenyan Diaspora Association of Southern Sudan.

The absence of an exchange rate for the Kenyan shilling against the South Sudan pound has made it even more difficult for Kenyans working in the neighbouring country to send money back home or convert it into local currency.

The Kenyan ambassador to South Sudan, Cleland Leshore, said Central Bank of Kenya (CBK) officials are discussing with their South Sudan counterparts how best to deal with the crisis.

The negotiations are centred on the possibility of signing a memorandum of understanding (MoU) on convertibility of the shilling versus the South Sudanese pound.

Mr Leshore said CBK had sent numerous delegations, including governor Njuguna Ndung’u, to South Sudan in recent months to discuss the MoU.

“I think they are finalising on the agreement, the situation is going to improve once it is signed,” he said.

South Sudan has suffered a dollar crunch since it stopped oil exports following a disagreement with its northern neighbour over fees payable for the use of the pipeline that transports the oil to Port Sudan for export.

Juba has maintained a tight grip on the dollars available, directing it to the purchase of food, medical supplies and other critical expenditure.

The dollar shortage is expected to ease early next year following South Sudan’s decision last week to resume oil exports through Port Sudan.

South Sudan ambassador to Kenya, Majok Guandong, also confirmed that negotiations between CBK and Bank of South Sudan were ongoing.
“Kenya is South Sudan’s most important trading partner, making the obstacles posed by the scarcity of dollars one of the most pressing issues as we speak,” said Mr Guandong in a telephone interview.

The CBK, however, denied that any such negotiations have taken place stating that the bank’s officials had only held routine consultations with their South Sudanese counterparts.

“The Central Bank of Kenya and Bank of South Sudan have held and continue to hold consultative meetings on a wide range of central banking issues. These meetings began right from the time South Sudan became a republic and the Bank of South Sudan established,” said the CBK.

South Sudan has emerged as an important trade partner for Kenya since gaining independence from the North in 2010.

The Kenya National Bureau of Statistics has not yet separated trade data between Kenya and the two Sudans, though Mr Leshore said there are more than 30,000 Kenyans in South Sudan, majority of them engaging in business.

“Only a small fraction of that population is employed in banks and non-governmental organisations,” he said.

The importance of South Sudan as Kenya’s trading partner is also marked by the fact that two public service buses with a capacity of about 250 people arrive in Juba from Nairobi every day, while more than 20 trucks ferry goods cross the common border every day.

Kenya’s exports to the two Sudans increased by 86 per cent to Sh18.8 billion between 2006 and 2010, while imports almost doubled from Sh86 million to Sh167 million, according to the Economic Survey 2012.

Gideon Mungai, the chairman of Kenyan Diaspora Association of Southern Sudan, said the group has been expressing its exchange rate frustrations through the Kenyan embassy in South Sudan.

Mr Mungai said the dollar shortage facing Kenyan businesses in South Sudan would ease with the signing a currency recognition agreement between Nairobi and Juba as Kampala has done.

The Ugandan shilling is tradeable to the South Sudan pound at the rate of Sh700 for every pound.

Mr Mungai said the slow pace of negotiations has hit Kenyan businesses hard.

“At first we were told that the IMF had to confirm the South Sudan pound. Now it has been confirmed, but what we are seeing is some form of currency war caused by Kenya’s refusal to recognise the South Sudan currency,” said Mr Mungai.

South Sudan became the 188th member of the International Monetary Fund (IMF) in April this year.

The IMF membership and confirmation of the South Sudan pound as an official currency was, therefore, an important step meant to make the currency acceptable to its trading partners.

The pound is currently changing against the dollar at the rate of three to one dollar.

The Bank of Southern Sudan’s control of foreign exchange trading has starved most sectors — such as manufacturing, aviation and retail — of dollars forcing them to wait for long periods that have culminated in cash-flow challenges.

Jetlink’s suspension of operations last Thursday was preceded by a statement citing an acute scarcity of foreign currency in South Sudan, since January.

The airline said the scarcity had made it difficult to meet short term obligations, especially the purchase of fuel, leading to the suspension of operations.

“It has been hard; our banks can no longer give us credit. We have asked the government to intervene and are waiting to see what happens,” said the airline’s managing director, Elly Alluvale, in a telephone interview.

Kenya exports a wide range of goods to South Sudan including cement, roofing materials, food, petroleum products and electricity cables, making it one of Juba’s key trading partners.

Top on the list of Kenyan companies that have been hit hardest by the currency crisis are East African Breweries, Mabati Rolling Mills, Hass Petroleum, Crown Paints, local airlines and cement manufacturers.

Edible oil processor Bidco East Africa says sales at its Jinja plant in Uganda have dropped by more than half due to lack of US dollars in Southern Sudan.

“At the moment there is nothing going on but demand is strong. We are waiting to see whether the problem will be solved anytime soon,” said Mitul Shah, the Bidco head of Sales.

Upfront payments

Rakesh Rao, CEO of Crown Paints, said his company has been demanding upfront payments to offset part of the cost before shipping merchandise. It then allows clients to stagger payments over a long period.
Nixon Ooko, Fly 540’s director of compliance and government affairs, reported similar challenges, adding that it takes up to 90 days to get paid.

Sanjeev Gadhia, the chief executive of Astral Aviation, a local cargo airline, said that though his airline is not hard hit for now because most of the cargo moves from Nairobi and is paid for here he sees business going down in the near future as demand from South Sudanese traders dwindles.

“We carry cargo for traders and if they do not have money to buy goods, we can only expect a decline in demand in the long run,” he said.

Jetlink’s decision to suspend operations came after a long struggle with the South Sudanese authorities to have part of its money paid.

The airline even wrote to South Sudan’s central bank governor Kornelio Mayik in August to release some money to support its operations.

Mr Mayik in turn wrote to one of the airline’s bankers asking it to extend credit to Jetlink as the country sorted out its currency issues but as of Friday last week nothing had happened.

Kenya Private Sector Alliance (KEPSA) says smaller companies that export to South Sudan have been hardest hit given that their operations depend on cash transactions.

“They cannot wait for long to get their money back unlike big companies,” said Mr Patrick Obath, the chairman of Kepsa.

In South Sudan as in many countries, the US dollar is the currency of choice for external trade while the Sudanese pound is used for domestic transactions.

Kenyan commercial banks with operations in South Sudan said they stopped issuing Sudanese pounds for Kenya shilling account holders and vice versa after the central bank of Southern Sudan stopped them from trading the Southern Sudanese pound against the US dollar to check dollar outflows from the market.

“We even stopped our Automatic Teller Machine (ATMs) services because the central bank of South Sudan was keen on capping dollar outflows from their country,” said a senior official in a local bank with operations in Southern Sudan.

The Southern Sudanese pound has recently become extremely volatile making it risky for local banks to hold as it exposes them to foreign exchange losses.