Economy

Power, car prices to rise as shilling hits new low

shilling

A trader counts coins at his kiosk in Nyeri. PHOTO | JOSEPH KANYI | NMG

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Summary

  • The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which has become a political headache for the government.
  • The shilling has been on the backfoot since mid-May when it stood at Sh106.40 on the combination of weak inflows and strong dollar demand across sectors.
  • Exporters such as tea and coffee producers are the winners in the shilling’s depreciation, which has the effect of making their products more competitive in the international markets.

The cost of imported goods like cars, electronics and second-hand clothes as well as that of electricity will increase further ahead of the festive season after the shilling fell to a new all-time low of 112.07 units against the dollar.

The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which has become a political headache for the government that has recently been forced to offer fuel subsidies to defuse social tension.

The shilling has been on the backfoot since mid-May when it stood at Sh106.40 on the combination of weak inflows and strong dollar demand across sectors, traders said.

Kenya imports a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery, whose costs are rising as the shilling weakens against the dollar.

Exporters such as tea and coffee producers are the winners in the shilling’s depreciation, which has the effect of making their products more competitive in the international markets besides boosting their revenue in local currency terms.

The Treasury will also feel the heat of the weakening shilling as Kenya’s debt costs are also rising, a burden to taxpayers who are reeling from the mounting debts.

“The dollar was around 106 in April and we are currently buying it between 112 and 114 depending on the bank. So, if you are buying a car worth $10,000 that is Sh80, 000 more,” said Charles Munyori, the secretary-general of Kenya Auto Bazaar Association, which represents used car dealers.

Used car prices in Kenya have risen by up to 33 percent over the past six months on costly imports and a weak shilling.

The volatile shilling looks set to increase electricity prices through higher forex levy in power bills, reflecting the impact of the strengthening dollar on household budgets.

The forex levy comprises expenses incurred in foreign currency by power generators such as KenGen, the independent power producers as well as Kenya Power.

The wobbly shilling is likely to reverse the decline in the forex levy, which dropped to Sh0.76 per unit in November bills from Sh1.04 in October.

The shilling came under pressure this week as the supply of dollars in the market dried up, with traders citing a reluctance among banks to sell to each other, and customers holding onto their holdings in fear of further depreciation.

It opened the week trading at 111.80 units to the greenback, before touching the 112 level for the first time on Tuesday and easing further to 112.07 yesterday.

A trader at a bank who requested anonymity for fear of repercussions from the Central Bank of Kenya (CBK) said that banks were selling the shilling at a higher price than what was officially quoted.

The source said there was dollar scarcity but fears of reprisals from CBK has seen banks limit the volumes they sell at the higher prices.

“The reality on the ground is that people are buying at about a shilling higher than what is officially quoted. That is what happens when there is no price discovery and those who have the dollars take advantage,” the source said.

The shilling has come under pressure following the reopening of the economy last month when the Covid-induced night curfew was lifted, with businesses reporting rising demand for goods that have translated to higher dollar demand from importers.

Demand for consumer goods has particularly gone up now that there is optimism about the recovery of the economy, which expanded by 10.1 per cent in the second quarter of this year. Consumers had been reluctant to spend during the worst of the Covid-19 months due to uncertainty over jobs and income.

There are also higher imports of industrial goods as manufacturers — who are among the biggest dollar buyers in the market— race to fill demand amid a return to full production activity and longer operating hours.

Imports were already on a recovery path this year ahead of the removal of the curfew, rising by 27 percent to Sh1.34 trillion in the eight months to August compared to the corresponding period in 2020.

The rate of import growth has therefore outstripped that of exports, which grew by 15.6 percent in the period to Sh489.6 billion thus widening the trade deficit to Sh852 billion from Sh630 billion.

Exporters will, however, welcome the weaker shilling as it translates to higher earnings from overseas when they remit the proceeds of their sales.

Kenyans receiving money from relatives abroad are also counting the forex gains on the hard currency which they exchange for shillings before spending locally.

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