Economy

Shilling for first time hits Sh116 against the dollar

CURRENCY
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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, traders said.
  • Kenya imports a wide range 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.

The Kenyan shilling has for the first time crossed the Sh116 mark against the dollar, setting the stage for costly imported goods such as cars, electronics, farm inputs and second-hand clothes as well as that of electricity amid a shortage of the US currency.

The shilling closed trading at Sh116.1 to the dollar, compared to Tuesday’s Sh115.99 and has depreciated from Sh113.13 at the start of the year.

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.

“The decline is due to the ongoing dollar shortage. Nothing has changed and we see it continuing to lose ground. CBK [Central Bank of Kenya] is also struggling to keep their reserves above the import cover," said Kenneth Minjire, senior associate for debt and equity at stockbroker AIB-AXYS.

The shortage forced industrialists to start seeking dollars in advance as it puts a strain on supplier relations and the ability to negotiate favourable prices in spot markets.

It is the product of increased dollar demand being driven by increased shipments of raw materials and equipment in the wake of the recovering economy and local companies disbursing dividends to foreign investors.

This has seen firms hedge against further weakening by stocking up on dollars or holding on tightly to their greenback reserves.

"One USD (dollar) purchase transaction used to take one working day. However, due to the daily cap manufacturers now have to plan 2-3 weeks in advance, depending on the dollar requirements for specific consignments," Mucai Kunyiha, the chairperson of Kenya Association of Manufacturers (KAM), said via email.

"Planning in advance for foreign currency payments has resulted in an increase in working capital."

Kenya imports a wide range 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.

This has seen manufacturers and importers transfer the additional shipment costs to consumers, upping inflationary pressure in an economy where households are grappling with expensive basic items like fuel, soap, cooking oil and food.

Consumer inflation rose to 6.47 percent year-on-year in April from 5.56 percent a month earlier, triggering a slowdown in customer demand.

Kenyan private sector activity fell in April, hurt by rising consumer inflation and supply shortfalls for some goods.

The S&P Global Kenya Purchasing Managers’ Index (PMI) dropped to 49.5 from 50.5 a month earlier. The 50.0 mark separates growth in activity from contractions.

"Kenyan companies saw a renewed deterioration in business conditions in April, as PMI survey data signalled a decrease in customer demand in response to rising consumer prices and living costs," S&P Global said in text accompanying the survey.

"A solid fall in output was also registered as firms experienced supply shortfalls for a number of items and a near-record rise in input prices."

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.

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

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.

Demand for dollars locally has gone up significantly this year in line with surging imports following the full reopening of the economy, which has unleashed pent-up demand for both consumer and capital goods.

Higher petroleum and food import costs due to the ongoing war between Russia and Ukraine have also strained the country’s forex stocks.

Used car prices in Kenya have risen by up to 55 percent over the past year on costly imports and a weak shilling.

The volatile shilling looks set to increase electricity prices through higher forex levy on 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 #ticker:KEGN , the independent power producers as well as Kenya Power #ticker:KPLC .

The wobbly shilling is likely to put pressure on the forex levy, which has remained unchanged at 0.76 per unit since the start of the year.

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