Weaker shilling piles cost pressures on consumers

The shilling has weakened to a near five-month low against the US dollar, pressured by a faster growth in imports which has spurred a higher demand for the greenback than cash inflows from exports and Kenyans abroad.

Forex traders quoted the Kenyan currency at an average of 109.80 units against the US dollar on Thursday afternoon, marginally weaker than the 109.71 closings on Wednesday.

This was the weakest level since late March when it oscillated between 109.75 and 109.85 before appreciating slightly to a year-to-date high of 106.54 units on May 10 on expectations of loan inflows from the International Monetary Fund ($410 million or Sh45.02 billion) and the World Bank Group (Sh82.35 billion).

“The weakness is largely a result of a [supply-demand] mismatch. The heavy demand is generally from importers, but it’s difficult to pinpoint the sector which is driving the demand,” said a forex trader at a tier-one bank.

A weaker shilling means importers spend more on bringing in goods such as petroleum products and raw materials for factories, piling up input costs for firms which are usually passed onto consumers through purchase price increases for goods in a net import economy.

Exporters of horticulture, tea, and coffee who are largely paid in dollars and Euros, however, benefit from the depreciation of the Kenyan currency as they end up earning more when they exchange the payouts at banks or forex bureaus.

Latest official trade data shows exports rose at a slower pace of 16.27 percent to Sh368.79 billion in the half-year period through June than imports’ 27.69 percent climb to Sh991.57 billion on the back of increased expenditure on refined petroleum products, machinery, and materials for factories.

“Even if exports remain strong over the coming quarters, the rebound in oil prices will increase Kenya’s import bill,” analysts at London-based consultancy Capital Economics wrote in a report on August 5.

“Combined with a slow return of international tourists, the current account deficit will remain wide. This will put downward pressure on the shilling.”

Diaspora remittances have remained strong, growing 19.86 percent in the January-June period to $1.75 billion (Sh192.15 billion), while tourist receipts have nearly dried out on Covid-induced travel rules.

The Central Bank of Kenya (CBK) has the option of deploying its sizeable foreign exchange reserves to iron out volatility on the shilling. The dollar reserves have fallen $432 million (Sh47.43 billion), or 4.49 percent, from a recent high of $9.621 billion (Sh1.05 trillion) on July 15 to $9.189 billion (Sh1.02 trillion) on August 19.