CBK’s liquidity squeeze set to dampen credit driven import trade, raise cost of goods
The much anticipated appreciation of the shilling might not result in affordable commodity prices despite a marked decline in key raw material prices on the world market.
Importers of raw materials such as oil and steel who rely on financing from banks are being forced to pay higher interest rates after the Central Bank of Kenya hiked its lending rate from 11 per cent to 16.5 per cent early this month.
CBK’s move, meant to tame inflation and strengthen the shilling, has resulted in high interest rates that will push up prices of commodities sold by companies.
Bank officials and players in the financial sector said the rising cost of credit could erode gains from CBK’s efforts to stabilise the shilling.
Renaissance Capital, a Nairobi based research and investment firm, said in a November 3 report titled Risk to Credit Growth Rises, but Positive for Current Account Deficit that the current liquidity squeeze will dampen credit-driven import trade while increasing the cost of imported goods.
“This is especially negative for sectors that are exposed to the credit boom story — particularly trade which is one of the biggest recipients of credit,” said Renaissance Capital.
For instance, the Energy Regulatory Commission (ERC) this week introduced a new price adjustment ratio to protect oil marketers against the rising cost of credit.
Protect marketers
ERC introduced an additional Sh0.60 to be charged on every litre of fuel bought to cover oil importers against the high cost of loans, adding that the new move will protect marketers from running into losses.
Kennedy Butiko, a senior dealer at Bank of Africa, told the Business Daily that importers were paying up to 35 per cent interest on loans following CBK’s hiking of the lending rate two weeks ago.
“The interbank rates have increased to above 30 per cent and it has become difficult for us to advance money,” said Mr Butiko.
He said that they mainly rely on interbank lending since CBK has reduced the number of times banks borrow through the overnight window to twice a week, beyond which the institutions invite the regulator’s investigation to check use of the funds.
CBK said in a circular two weeks ago that any bank that borrows more than twice a week will have to show what the money was used to finance.
“Traders have to lend at 35 per cent because the interbank rates have gone beyond 30 per cent,” said Gerrishon Kanori, a dealer at Bank of Africa.
Mr Kanori said that CBK should balance between money supply and fighting inflation, adding that the bank was using too much might to give support to the shilling which could have the impact of maintaining the high cost of living.
Mr Jeremiah Kendagor, a trader at Kenya Commercial Bank, said that a good number of importers, especially smaller investors, rely on credit facilities such as overdrafts to finance imports.
The credit helps to sustain a continuous flow of supplies.
Slackening commodity prices on the world market in the last five months were expected to narrow Kenya’s large current account deficit as the country was to spend less on imports and help to pull manufacturers back to the profit growth path, but this has not happened.
Kenya’s trade balance has instead deteriorated from negative Sh58 billion in July to negative Sh89 billion in August as shown by the latest CBK data.
This is however expected to improve as importers shy away from high financing costs.
Prices of oil and steel have shed 13 per cent and 11 per cent respectively in the last five months, cutting Kenya’s spending on the two most important commodities on the country’s import bill.
The price of steel, which is key in the construction industry, has dropped by 11 per cent from $580 a tonne to $515 a tonne giving players in the sector room to cut losses.
Expensive borrowing
Prices of copper and aluminium, the metals are used to make electrical cables, have dropped by 17 per cent with copper dropping from $9,006 a tonne to $7470 while aluminium dropped from $2557 a tonne to $2111.
“The high cost of borrowing is going to annul the anticipated foreign exchange gains since no one can afford billions of money to buy enough stocks that last them until they sale everything,” said Mr Shamji Patel, the managing director of Kenwesfal, manufacturers of electrical cables.
Experts expected that declining commodity prices on the international market, thanks to the spreading Euro debt crisis, would help to ease inflation locally by dampening demand for key raw materials.
Manufacturers such as Athi River Mining and East African Portland Cement have seen their earnings drop due to persistent high commodity prices and unfavourable exchange rates.
Crude oil prices will, however, remain high this month due to the weak shilling at the time of placing orders.
Manufacturers who have been raising the price of goods to cover against volatile commodity prices and the weak shilling were hoping to start cutting prices as commodity prices ease, but this has not happened.
On the contrary, they are likely to maintain the prices or even raise them.
Kenya Association of Manufacturers (KAM) chairman Jaswinder Bedi said that CBK was taking drastic measures that might deny local consumers benefits of declining global prices of raw materials.
“We are going to see more firms make losses because this new borrowing rates demand that manufacturers keep away from borrowing,” said Mr Bedi.
Dealers in metals such as Devki Steel Mills said that the high cost of loans would reduce activities in the construction sector, slowing down consumer demand for steel and other related metal products.
“We are set for lower sales this time despite the fact that the cost of doing business has increased, meaning that we have to slow down production,” said Devki Steel Mills managing director Raval Narendra. The firm makes iron sheets, steel bars, and cement.
The price of coal, which is used widely in powering cement grinding machines, has dropped by 10 per cent pushing down energy expenses. Industrialists have welcomed the move, coming at a time when electricity costs are high.
Kenyan manufacturers who heavily rely on imported cotton were early this year laying off employees due to high operating costs, but a 34 per cent drop in cotton prices in the last five months heralds good tidings for them.
Kenya imports about 150 thousand bales of cotton annually to supplement local production of 30 thousand bales.
Boost exports
Last year, makers of uniforms increased prices with hotels spending more on garments such as towels. For instance, the price of school shirts rose by 25 per cent from Sh250 in January to Sh400 in June this year. Mr Geoffrey Mwau, the Economic Secretary at the Finance ministry, however said that a strong shilling would boost exports of manufactured goods.
He said that even though the credit squeeze in the Euro area has lowered commodity prices, it could hurt horticulture and beverage exports to the region.
“The financial crisis that is now biting Italy could hurt our exports to Europe next year,” said Mr Mwau.
Kenya imported 1.5 million tonnes of crude oil and 700,000 tonnes of steel last year, which accounted for 30 per cent of the country’s import bill.
A decline in the import bill will help narrow the large current account deficit, which is positive for Kenya’s growth and stabilisation of the shilling.
