Weak rupee rocks trade between India and Kenya

The trade imbalance between Kenya and India is expected to widen in the coming months as the rupee continues to weaken against the US dollar, analysts said.

A weak rupee means Kenyan exports to India – priced in dollars – have become more expensive risking a slowdown in their consumption in India. 

In recent weeks, persistent shocks in the Indian and Pakistani economies have seen other currencies, including the Kenyan shilling, strengthen against the rupee, making their exports cheaper while raising the cost of imports.

The Indian rupee last week depreciated to its lowest level of about 66 units to the dollar – having dipped by the single largest margin in 18 years last Monday.

This year alone the shilling has gained 21 per cent against the rupee, according to official Central Bank of Kenya data.

In Pakistan, which is Kenya’s largest tea market, the rupee has lost 20 per cent of its value against the greenback in the past two years, making Kenyan exports more expensive.

These huge currency swings are already frustrating Kenya’s efforts to increase the volume of her exports to India and close the huge trade gap that has widened in the past three years as India expanded its trade with East Africa’s largest economy. 

A weakening rupee has been blamed for last year’s 20.2 per cent drop in the value of Kenya’s exports to India.

Kenya exported goods worth Sh7.5 billion down from a high of Sh8.1 billion the previous year, showing waning competitiveness of local goods in the Indian market.

Indian exports to Kenya rose to Sh187.7 billion over the same period, causing a major trade imbalance between the two countries.

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The list of Kenya’s exports to India includes salts, vegetables, roots, tubers, tea, leather and wool. The country imports refined petroleum oils, medicine, iron, electric power machinery, textiles, food processing machines and motor vehicles from India.

Analysts have linked the rupee’s downward slide to growing demand for the greenback and decreased interest from foreign investors in India’s weak economy.

The Business Times of India last week referred to the rupee’s weakening as a “free fall” and a “crisis”.

India’s Finance ministry grumbled that the rupee had overshot its true value, making it the worst-performing emerging markets currency.

The rupee fell below its psychologically important level of 60 units to the dollar last month and last week traded at an average of 65 units to the dollar.

Key players in Kenya’s tea sector said it has been a good time exporting to India and Pakistan but any further depreciation of the rupee against the dollar – which strengthens the shilling – may discourage them from buying as much going forward.

Tea exports are bought from the Mombasa auction in dollars meaning that Indians and Pakistanis have to change their rupees into the US currency before they can trade with Kenya.

For Indians and Pakistanis trading with the outside world, those dollars are becoming expensive by the day eroding their ability to consume imports.

“We are concerned about the exchange rate in Pakistan and India, because our buyers there need to get dollars to trade with us and these are very big markets for us,” said Elvis Nduati, the deputy general manager at Mombasa-based Prudential Tea Brokers (EA).

Mr Nduati said that between January and July this year, Pakistan was the single-largest importer of Kenyan tea having bought 58 million kilos.

During the same period, India bought 2.4 million kilos of tea from Kenya. For Kenyan importers, the impact of the rupee’s problems in India and Pakistan is not easy to delineate.

“I could say yes and no on the question of whether we are adversely affected by the rupee’s depreciation as importers. We have to buy our goods in dollars, and this makes them cheaper. But the reality is that our suppliers are facing problems back at home,” said Nimeet Dodhia, a director of Spinners and Spinners, which imports textiles from India.

“Indian businesses are struggling because importing oil has become very expensive with a weaker rupee and the Syrian crisis. When the local currency depreciates so much as the rupee has in the past few days, then businesses get disorganised,” said Mr Dodhia.

Though India is a big economy, it has suffered a series of economic problems in recent times linked to a much lower export base. India’s weakening economy is expected to give China a chance to increase its share of the global export pie.

India’s GDP is expected to grow at less than four per cent but inflation pressure has steadily risen to stand at about five per cent.

The Pakistan rupee is suffering due to the erosion of foreign exchange reserves after the country paid $393 million to the International Monetary Fund early this week. The country is trying to find ways to shore up its reserves of about $5.2 billion.

This is lower than Kenya’s $6 billion in reserves, despite the fact that Pakistan’s GDP is more than $230 billion or six times the size of Kenya’s $40 billion.
Pakistan is also teetering towards double-digit inflation having hit 8.7 per cent in July.

Pakistan Finance minister Ishaq Dar added a new twist to the rupee debate with an announcement that the “Pakistani rupee will be stabilised through natural devaluation.”
That means the dollar will only become more expensive for the buyers of Kenyan tea.

Pakistan is Kenya’s fourth-largest export destinations after Uganda, Tanzania and the United Kingdom.

Mr Nduati said concern about Pakistan had heightened recently because the depreciation of rupee against the shilling had just accelerated in the past few days.

Exports to Pakistan fell in the past two months to Sh1.5 billion in May and Sh1.4 billion in April compared to Sh3.1 billion in January and Sh3.3 billion in February and Sh1.8 billion in March.

Mr Nduati said the drop in tea exports was enough to cause alarm with regard to Pakistan.

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