Expatriates make huge gains from weakening shilling

Kenya’s expatriates and employees of multinational firms who are paid in dollars but buy goods and services in shillings are the biggest winners of the ongoing weakening of the local currency against the US dollar. 

A weaker shilling means the same amount of dollars is now converting for much more than it did a year ago — effectively inflating the salaries of those paid in the hard currencies.

Employees of international institutions such as the United Nations, diplomatic missions and multinationals top the list of those who are enjoying an exchange rate-related pay rise.

“In the current exchange rate climate, those being paid in dollars are king,” said Aly-Khan Satchu, an independent analyst.

“A weak shilling also makes Nairobi cheaper in hard currency terms, and therefore international companies should find Nairobi cheaper.”

The shilling has depreciated by 13 per cent since the beginning of the year to 102.15 as per Thursday’s commercial bank rates, meaning anyone earning a salary in dollars has had his or her pay rise by a similar margin.

The gain is even higher at 16.5 per cent compared to July 2014, when the shilling exchanged at 87.70 to the dollar.

The Central Bank of Kenya (CBK) Thursday moved to calm market jitters by issuing a statement indicating it was taking appropriate measures to to eliminate “disorderly market developments” in the foreign exchange market.

The bank said it had adequate foreign exchange reserves to deal with volatility in the market and was ready to enhance its market operations.

“The CBK stands ready to enhance its open market operations and other measures, including intervening through the direct sale of dollars to commercial banks to stem a sharp depreciation of the shilling. The CBK will also work closely with the National Treasury to strengthen the coordination of monetary and fiscal operations,” said CBK governor Patrick Njoroge, adding that there was still a positive outlook by the private sector and improved confidence in the economy as Kenya’s image on the global stage improves.

ALSO READ: CBK moves won’t halt shilling’s fall, economists say

At current levels, the exchange rate has also effectively shielded those paid in dollars from inflation, which stands at 7.3 per cent.

At today’s exchange rate, an expatriate on a monthly package of $5,000 would earn Sh510,000 compared to Sh438,500 a year ago, translating to a gain of Sh71,500 before factoring in any other contractual pay increases they may have enjoyed in the period.

For multinational companies with operations in Kenya, a weaker shilling offers an opportunity 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. 

Deloitte East Africa chief executive Sammy Onyango reckons that the expatriates who stand to benefit most from the exchange rate are those whose expenses are local, as opposed to those who remit their dollars abroad to pay for expenses such as mortgages and children’s education.

“Some insist on the hard currency pay because they have other things to pay for back home, thus end up spending most of their pay overseas. On the balance, these ones may not see much benefit from the conversion rate,” said Mr Onyango.

While a weakening shilling boosts expatriates’ pay, any reversal would in turn result in a reduction of disposable income.

“A majority though have predominantly localised expenses. We, however, try to encourage the employees to take their contracts in local currency to avoid these exchange complications,” said Mr Onyango.

A British consultancy Mercer last month ranked Nairobi as the world’s 104th most expensive city in the world out of the 207 surveyed, down from last year’s position 117.

READ: Nairobi up 13 slots on the world’s most expensive cities list

The weakening currency should therefore offer the expatriates some relief, placing them in a special class of those who are not feeling the pain of exchange rate turbulence.

The Mercer survey looks at the comparative cost of more than 200 goods and services in each location, including housing, transportation, food, clothing, household goods and entertainment.

It is designed to help multinationals and governments determine compensation and allowances for employees on international assignments.

Nairobi, which stood at position 147 just two years ago, is now deemed to be more costly for expatriates than European cities such as Berlin, Madrid, Glasgow and Stockholm and above Seattle in the United States.

It was ranked the second most expensive city in East Africa this year after Kigali, which is ranked 97th. Dar es Salaam and Kampala are in position 179 and 184 respectively.

“Just as foreign exchange costs create headwinds for many multinationals, currency fluctuations — driven by economic and political unrest — are contributing to the cost of expatriate packages,” said the Mercer report. 

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

Kenya’s current account deficit has continued to grow in recent months, saddled by a steep increase in imports of both capital and consumer goods.

Economists expect the increase in the cost of imports to lower the appetite for imports thus reducing or slowing down current account deficit.

Exporters, who are paid in euros such as flower and horticulture producers are, however, missing out on the gains because the shilling has gained 6.3 per cent against the euro in the past one year to exchange at 111.55 units.

Other potential gainers are currency dealers who have seen the volume of trade rise as investors bulk up on dollar positions to hedge against further depreciation.

A number of dealers are 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.

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

According to the latest statistics by the Central Bank of Kenya, remittances for May stood at $129 million or Sh12.7 billion at the exchange rate at the time. A similar amount of dollars remitted today would be worth Sh13.2 billion, a gain of half a billion shillings.