Year the shilling endured the biggest test yet

shilling-note
shilling-note

The Kenyan shilling hit historic lows in 2022, hiking the cost of servicing foreign debt and inflating the cost of living making it one of the worst years for the local currency trading against the dollar.

The depreciation pushed up the cost of imported goods including cars, electronics, farm inputs, fuel, second-hand clothes and electricity.

By December 28, the currency had shed 8.9 percent of its value, translating to 10.12 units against the dollar to exchange at 123.26 from 113.14 in January.

The performance was worsened by the Russia and Ukraine conflict that triggered global oil inflationary pressures and demand for the dollar from importers and manufacturers.

But it is the US rate hikes that put the Kenyan shilling under its biggest test yet.

“The Kenya shilling has weakened majorly on account of the stronger dollar that has been salient through this year," said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).

"The Russia-Ukraine war together with the rate tightening cycle engineered by developed markets' Central Banks has shored up dollar strength. On the local scene, the foreign exchange (FX) shortage from anecdotal evidence has played a part in KES weakness."

Demand for dollars locally has gone up significantly this year in line with the strengthening of the dollar after Russia’s war in Ukraine which struck in February disrupting global supply chains and affecting the availability of items such as wheat, edible oil and fertiliser, thus raising their prices.

Manufacturers in April said they were facing challenges accessing dollars from local banks to fund capital goods imports and affecting negatively their ability to settle obligations to oversee suppliers in a timely manner.

Pwani Oil Products Ltd, the manufacturer of Freshfri and Fry Mate cooking oils, moved to bill its goods in dollars for local buyers, citing difficulties accessing enough stock of the US currency to purchase raw materials from abroad.

The dollar shortage was also on the back of the full reopening of the economy in 2021, which unleashed pent-up demand for both consumer and capital goods.

It was exacerbated by rising in interest rates in US to counter the ballooning cost-of-living crisis on rise of food, fuel and electricity costs.

Servicing costs for dollar-denominated loans have gone up for the government due to the further weakening of the shilling, which has raised the cost of buying the greenback locally to pay external lenders.

Foreign currency debt has increased by Sh185.3 billion to Sh4.36 trillion in October from Sh4.17 trillion recorded in December despite a decline in the amount of dollar-debt from $36.90 billion to $35.93 billion due to repayment.

The foreign exchange fluctuation adjustment (FERFA) charged on the total cost of electricity has also gone up to Sh2.07 per kilowatt-hour (kWh) from Sh0.73 per kWh in December 2021, rising bills for households and businesses.

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 country’s trade deficit widened by 23.1 percent in the 10 months period to October 2022 to Sh1.37 trillion compared to the same period in 2021 in Sh1.11 trillion on surging imports.

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.

As a result, the country’s inflation surpassed the Central Bank of Kenya’s (CBK) upper bound target of 7.5 percent since in June with inflation recorded in November at 9.48 percent.

However, the weakening of the Kenyan currency is expected to raise gains for exporters of agricultural products such as tea, coffee and horticulture who are largely paid in dollars as they will end up earning more.

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