Currencies

Shilling at 10-month low of 111.12 to the dollar

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The Central bank of Kenya, Nairobi. FILE PHOTO | NMG

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Summary

  • The shilling on Tuesday hit a 10-month low against the dollar, signalling higher cost of imported goods and inflation.
  • Commercial banks quoted the local currency at an average of 111.12 units against the greenback Tuesday, weakening further from 109.21 units at the start of the year.
  • This means importers will spend more on consumer and capital goods such as machinery and fuel, piling up input costs in a country that largely depends on shipped products.

The shilling on Tuesday hit a 10-month low against the dollar, signalling higher cost of imported goods and inflation.

Commercial banks quoted the local currency at an average of 111.12 units against the greenback Tuesday, weakening further from 109.21 units at the start of the year.

This means importers will spend more on consumer and capital goods such as machinery and fuel, piling up input costs in a country that largely depends on shipped products.

Major imports include cars, medicine, and pharmaceuticals products, plastics, electronics clothing, and shoes.

Economist Tony Watima said the depreciation is a result of an artificial shortage of dollars accompanied by global demand for goods.

The shilling has this year been largely cushioned by inflows from external loans from lenders such as the IMF and the World Bank, a Eurobond issued in June, and higher inflows from diaspora remittances and agriculture exports.

“We had high reserves from IMF facility and Eurobond, but they have dwindled partially due to repayment of loan obligations and the issue of dividends from companies such as Safaricom,” said Mr Watima.

“The high demand for dollars and declining reserves are forcing banks to hold on dollars because they are not sure how CBK will react to it and handle reserves issue.”

He added that the CBK’s dollar sales in the open market had been reduced while banks had been forced to use their deposits, prompting them to set a higher margin.

Foreign exchange reserves have been declining in the last six weeks to stand at Sh1.02 trillion currently.

‘’The usable foreign exchange reserves remained adequate at $9.228 billion 5.64 months of import cover as at October 21. This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the EAC region’s convergence criteria of 4.5 months of import cover,” said the central bank in its weekly bulletin last Friday.

The depreciating shilling threatens to pile fresh pressure on fuel prices, which have stoked public anger.

Last month, Kenyans were spared from the rising prices when State House intervened and directed the Energy and Petroleum Regulatory Authority (Epra) to reduce the price of super petrol and diesel by Sh5 and that kerosene by Sh7.28 per litre despite an increase in the landed cost of the fuel.

Petrol is retailing at Sh129.72 per litre, diesel at Sh110.6, and kerosene at Sh103.54.

The products would be retailing at Sh136.34, Sh118.01, and 108.54 per litre respectively, were it not for the intervention.

Crude oil prices increased by 1.6 percent to $73.50 per barrel in September from Sh72.34 in August. The weaker shilling translates to an even higher hit on consumer pockets in Kenya.

The continued pressure follows increasing dollar earnings from exports and tourism unmatched by the demand from importers.

Latest data shows the import bill has been increasing since April to Sh172.95 billion in August, a 26 percent jump compared to Sh137.77 billion in the same period last year, dropping marginally compared to Sh177.16 billion in the previous month.

Export earnings rose by 13 percent over the period to Sh61.34 billion compared to Sh54.16 billion.

Tourism is slowly recovering, with international arrivals now making up 20 percent of hotel accommodation.