Shilling drops to new record low on Euro fears

Prof Njuguna Ndung’u Central Bank of Kenya director. Kenyan currency weakened to a record 96.11 units to the greenback in Tuesday’s trading, before easing to 95.83 on the influence of international currency swings. File

The shilling sank to an all-time low against the dollar Tuesday as investor jitters about a worsening public debt crisis in Europe increased demand for US currency denominated assets.

The Kenyan currency weakened to a record 96.11 units to the greenback in Tuesday’s trading, before easing to 95.83 on the influence of international currency swings.

The investor flight from the euro to perceived safety of the dollar strengthened the US currency, pushing the shilling to its lowest ever exchange rate to the greenback.

“Markets are only adjusting to the debt crisis in the euro zone where the markets have seen a massive investor flight from tradable securities dominated in the Euro,” said Hakim Sheikh, a forex dealer at KCB.

The depreciation is a test to Central Bank of Kenya’s resolve last week to protect the battered local unit from further weakening. Investors increased sales of securities denominated in Euros after the downgrade of both Italy and Greece’s credit ratings.

Mr Sheikh said the shilling had come under intense pressure from investors dumping sovereigns bonds and equities in the Euro zone as they seek safety in the dollar.

The fall seen in the local currency is not peculiar to Kenya, all frontier markets that have strong trade ties with member countries of the European Union have also suffered similar depreciations.

The continued fall of the local currency is the now the single biggest factor pushing up the country’s import bill, dominated by petroleum and capital goods.

Higher energy costs have a bearing on the shopping lists of every household as manufacturers are likely to raise their selling prices to protect their margins, which increases prices of foods and all other consumer goods.

Already, the Energy Regulation Commission has announced a new power billing formula that raises the cost of electricity to Sh8.2 per unit beginning next month, more than double January charge of Sh3.8 per unit. (Read: Consumers in a tight spot as power bills hit an all-time high)

While the sovereign downgrades might be happening thousands of miles away, its reverberations will perhaps be felt the most in the ordinary Kenyan household whose shopping basket consists of the most basic needs that often do not have cheaper alternatives.

The cost of living and the performance of the local unit against major global currencies is closely related because Kenya imports more than it exports, while most the international trade is billed in dollars.

The shilling has slumped by about 17 per cent to the greenback since January this year, tracking the inflation rate which has steadily soared to 16.67 per cent from 5.42 per cent. The free-falling shilling prompted President Mwai Kibaki to direct CBK to take action, a call that currency dealers say could be beyond the banking sector regulator’s scope. (Read: Kibaki call for forex support expected to buoy shilling)

President Kibaki’s pleaded with the IMF to release some $509 million in foreign currency under a previously-agreed loan facility to bridge the balance of payments, currently tilted heavily in favour of imports.

“The swings we are witnessing on the shilling are only a reflection of the events happening on a much bigger stage in the global financial markets,” said Mr Sheikh.

Kenya, he noted, was more exposed than most of her peers because its foreign currency inflows are mostly derived from non-essential consumption including flowers and tourism- both of which are likely to be dropped first from the priority spending lists for most households as the austerity measures are taken reduce the debt levels.

Mr Steve Lagat, a dealer at CFC Stanbic Bank said that the depreciation of the shilling in early trade Tuesday was helped by customers who released dollars to the currency market, but predicted that the shilling still faced further weakening.

“We at best expect the shilling to hold steady at around 96, but it could easily fall further,” said Mr Lagat.

The decision to raise the indicative lending rate by the CBK’s Monetary Policy Committee last week, he said, had helped in injecting new confidence in the local market, a factor that could support the shilling at the prevailing levels.

Among the austerity measures that the European Central Bank will institute for the struggling economies of Portugal, Italy, Spain and Greece include raising revenues by increasing taxes and slashing expenditure.

The Euro area governments are also widening tax brackets, and laying off state workers and implementing wage cuts. Greece has already raised taxes and cut its budget, as a first step towards cutting its public debt that has caused discomfort amongst its peers in the economic block.

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