Weak shilling sets consumers up for steep rise in cost of goods

The shilling on Friday continued its drift towards 100 units to the dollar, setting up consumers for a turbulent future expected to be dominated by a steep rise in the cost of goods and services.

The Kenyan currency closed the week’s trading at 99 units to the dollar and traders said they expected the trend to continue this week with the possibility of touching the 100 mark.

Kenya is a net importer of goods and the steep rise in the cost of imports that comes with a weaker shilling will be passed on to consumers in the form of higher costs.

Household spending on food, which accounts for the biggest share of the consumer price index, has been rising since the beginning of the year, pushing inflation to an eight month high of 7.08 per cent.

In addition to the direct price increase on imported food, the cost of locally-produced food is also expected to rise as farmers contend with higher priced inputs, especially animal feed.

The Association of Kenya Feed Manufacturers (Akefema) said the weaker shilling had piled pressure on costs, setting the stage for price increases.

Kenya imported 1.22 million tonnes of unmilled wheat (a key ingredient in animal feeds) worth Sh33.8 billion in 2014, according to the Kenya National Bureau of Statistics.

“I would not be surprised to see prices rise if the shilling does not strengthen soon,” said Akefema secretary- general Jeremy Ashworth, adding that different companies will follow different strategies to mitigate price increases.

Mr Ashworth said it was inevitable that some of the additional costs would have to be passed on to the consumers as margins are not very wide in the industry.

“The sector is one of low-margins, high-volume sales leaving little room except to react with an increase in prices,” he said.

Kenya also imported 459,165 tonnes of rice worth Sh15.3 billion, 458,940 tonnes of maize seeds worth Sh9.3 billion, 228,834 tonnes of sugar molasses and honey worth Sh12 billion, and 622,343 tonnes of animal and vegetable fats and oils worth Sh50 billion.

Buyers of luxury goods such as motor vehicles will also have to dig deeper into their pockets to satisfy their desires as importers raise prices in line with the prevailing exchange rates.

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Car sellers expect not only to factor in the increased dollar cost on new imports but also to price older stock more expensively to meet the higher cost of replacing it.

“We can definitely see the prices going up. For instance, a $10,000 (Sh980,000) car could attract a basic price increase of at least Sh80,000 on account of the shilling’s depreciation this year alone,” said Kenya Autobazaar Association chairman Charles Munyori.

The weaker shilling also means motorists will pay higher prices at the pump. This is coupled the with the ongoing recovery of global crude prices.
Last week’s monthly review of petroleum prices pushed up the price of a litre of super petrol in Nairobi by Sh3.54 to Sh92.89, while that of diesel rose Sh1.86 to Sh79.34.

Manufacturers, who are enjoying higher earnings from exports as a result of the shilling’s weakening, face the risk of losing the gains to high cost of imported raw materials.

Flower exporters said a stronger dollar could not have come at a worse time citing its impact on their costs in the wake of reduced earnings due to the weakening of the Euro against the shilling.

Kenya Flower Council chief executive Jane Ngigi said that about 70 per cent of producers’ costs are paid in dollars while earnings, which come mainly from European markets, are Euro denominated.

“With the dollar now in the high nineties and the shilling strengthening to the Euro, production costs are much higher. Only our wage bill, which accounts for 30 per cent of the total costs, is paid for in shillings,” Ms Ngigi said, adding that producers are also facing immense challenges with value added tax refunds.

Traders expect the shilling to continue sliding with the rise in dollar demand, even though tight liquidity in the money markets has helped temper the rate of depreciation.

The shilling has shed 9.5 per cent against the dollar in the first five months of this year as have most world currencies.

In recent weeks, the Central Bank of Kenya (CBK) has had to sell dollars directly to the market to control volatility besides tightening the rules governing speculative trading especially at forex bureaus.

Traders said volatility is likely to be tempered by the fact that some of the major dollar customers have taken out longer period hedges.

The CBK’s decision to review the pricing formula for Term Auction Deposits — funds banks deposit at CBK for more than seven days — from the previous maximum pegged on the Central Bank Rate (currently at 8.5 per cent) to a new maximum rate of CBR plus 2.5 percentage points is also likely to aid liquidity mop up efforts in the money markets.

The Monetary Policy Committee has, however, brought forward its next meeting to June 9, raising expectation of a looming interest rate rise in response to the prevailing market conditions.

One fixed income dealer said Kenya is likely experiencing a flight of short term or speculative capital usually injected into markets by hedge funds in search of high returns.

“In the short term such capital flight will cause pain in the economy, but so long as the money that has been invested in the real sectors of the economy for the long term stays, the shilling should stabilise in the end,” said the dealer.

“If there is a rise in the Central Bank Rate, however, it will help control flight of capital by raising the yield appeal of the shilling.”