How plunging UK pound against dollar is affecting Kenya

A trader holding ten pound sterling notes as a customer pays for goods at Whitechapel Market in east London. PHOTO | AFP

A unit of sterling pound has fallen below Sh130 levels against the shilling for the first time since the peak of Covid restrictions, portending lower cost of imports from the UK, while hurting export earnings for farm produce to that European country.

The shilling opened trading on Tuesday at 129.97 units against the pound before losing a bit of ground to exchange around 130 units later in the afternoon.

The UK currency fell to a record low against the globally-bullish US dollar on Monday as markets reacted to last weekend's UK's biggest tax cuts in 50 years which have raised the cost of the UK government borrowing.

The weakening of the pound against the dollar is reflected in other markets partly because the greenback, the US currency, serves as the global benchmark in foreign exchange markets.

The shilling appreciated 3.42 percent against the pound on Monday, the biggest gain in nearly 14 years.

Central Bank of Kenya data shows the shilling last appreciated at a faster pace of 3.82 on January 20, 2009.

Trade between the two countries is tilted in favour of Kenya, meaning local exporters are net losers as the pound weakens.

Kenya National Bureau of Statistics data, for instance, show exports to the UK amounted to Sh49.4 billion last year against Sh33.6 billion in imports — a trade deficit of Sh15.8 billion.

Kenya mainly sells agricultural produce such as cut flowers, vegetables, fruits, coffee, and tea to the UK and largely buys vehicles, machinery, alcoholic beverages like spirits, pharmaceuticals and electronics.

Kenyan cut flower exporters estimate the weakening pound is wiping out as much as 15 percent of earnings from the UK, compounding liquidity challenges brought about by elevated cost of production locally.

“Our exporters have standing contracts with the buyers and those contracts are done in local currency of the buyers, in this case, the sterling pound,” Kenya Flower Council (KFC) chief executive Clement Tulezi told the Business Daily.

“We are incurring a lot of production costs on the shilling which we cannot recover on the pound when you are selling. You need a stable currency to cushion you.”

The pound is among the major international currencies that have been falling against the bullish US dollar amid continued increases in interest rates by the Federal Reserve, the American central bank, to curb runaway inflation.

The Euro has also dropped to a 20-year low against the dollar this year amid the risk of recession.

CBK data shows the shilling has appreciated 14.52 percent against the pound since the beginning of the year, while the Euro is down 9.02 percent to just below 117 units of the shilling.

About a fifth of Kenya’s cut flower exports are sold to the UK, Mr Tulezi said, with the bulk of the consignments sold to the 27-member European Union bloc through Amsterdam.

A stronger shilling against the pound and the Euro means reduced earnings for horticultural exports, who largely depend on the UK and EU markets.

“With [inflationary] pressure that people in Europe have, especially on energy costs, they are cutting expenditure on things like ornamental where cut flowers fall. We are also incurring a lot of production costs on the shilling which we cannot recover on the pound when you are selling,” Mr Tulezi said.

“This year the market has, therefore, been horrible. It is not working in favour of the growers. A lot of farms are struggling with liquidity challenges because money is not coming as they had expected.”

The BBC reported on Tuesday that the Bank of England will "not hesitate" to hike interest rates to curb inflation after the pound fell to a record low against the US dollar.

The Bank said in a statement it was "monitoring developments closely" and would make a decision on any action in November.

The weaker pound is, however, expected to make imports from the UK cheaper in a boost to importers in lower costs that could also translate to consumers in lower commodity prices.

The strengthening shilling against the pound will also slightly ease Kenya’s external debt burden, with 2.3 percent of Kenya’s external debt load of about Sh4.3 trillion denominated in the UK currency as the end of June.

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