The euro and sterling pound has strengthened by double-digits since hitting recent lows against the shilling late last September, offering a slight reprieve to fresh produce exporters while raising debt servicing costs.
Central Bank of Kenya data show the shilling has weakened 12.11 per cent against the euro and 15.93 per cent to the British currency in less than three months, driven by improving economic sentiment in Europe.
The shilling opened trading Tuesday at 129.63 units against the euro compared with 115.62 levels on September 29, while the pound exchanged 150.68 units in early hours compared with 129.63 units lows on September 27.
A depreciating shilling against the euro and sterling pound means increased earnings for horticultural exporters who largely rely on the 27-member European Union (EU) and the UK markets.
The bulk of Kenya’s horticultural produce like cut flowers are sold to the EU through Amsterdam, while some consignments, including vegetables, are exported directly to the UK.
The strengthening euro is, however, expected to make imports from Europe costlier which could translate to price growth for consumers of imported goods such as high-end vehicles, machinery and alcoholic beverages like spirits.
A stronger euro will also increase Kenya’s debt burden, with 18.8 per cent of the country’s external debt load of about Sh4.36 trillion denominated in the Eurozone currency in October.
Okisegere Ojepat, the chief executive of the Fresh Produce Consortium of Kenya, said the gains from strengthening the euro and pound against the shilling will be clawed back by dollar-denominated costs such as freight charges and raw materials.
“The ups and down in foreign exchange markets work both ways. For now, it works well for exporters but it is a challenge to importers,” Mr Ojepat said.
About 72 per cent of Kenya’s cut flower exports — the largest source of horticultural earnings — are paid in euros, while about a fifth of the consignments is paid in the pound.
The euro and the pound have rebounded marginally from their recent falls against the globally bullish US dollar following interest rate hikes by the Federal Reserve, the American central bank, to curb runaway inflation.
For example, the euro was down 9.66 per cent against the shilling in the year through late September while the pound had lost about 14.33 per cent in that period, according to CBK data.
However, the potential slowing down of rate hikes by the US Fed coupled with the European Central Bank’s decision in late October to increase interest rates has reduced the appeal of the dollar as a safe haven for investors, while boosting the EU currency.
The euro is now 1.28 per cent stronger against the shilling year-to-date, while the pound is 0.68 per cent weaker since the beginning of the year, pointing to their best runs in recent months.
This comes at a time inflation in Eurozone has shown signs of easing, a boost to Kenyan fresh produce exporters.
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In November, for instance, Eurozone inflation fell for the first time in 17 months, coming in at 10 per cent from a record 10.6 per cent in October.
This will likely increase the purchasing power of households and firms, potentially boosting non-priority expenditure on ornaments like cut flowers.
“That is a good thing for us because they have slightly more disposable income that allows them to buy more,” Mr Ojepat said.
“When they recover, we expect they will buy more unlike when they were hard hit economically because that had affected their purchasing power.”
Double-digit inflation on the back of higher energy and services costs in Europe has this year hit Kenya’s horticultural export amid elevated production costs and prolonged dry weather locally.
Latest data collated by the CBK, for example, show earnings from cut flower exports fell 15.21 per cent in nine months through September to $357.3 million (Sh43.88 billion) from $421.4 million (Sh51.75 billion) in the same period last year.
“We were optimistic at the beginning of the year and we were looking at full recovery in 2022 because we had seen good signs in 2021 in terms of sales,” Kenya Flower Council chief executive Clement Tulezi said last September.
“But when the Russian war came in, we were subjected to high prices of fuel and other inputs coupled with inflation in Europe and weakening of the currency we use for international trade.”