Consumers gain, exporters pain as shilling hits 99 to the dollar

The shilling has strengthened to below 100 units to the dollar for the first time in 10 months, yielding gains for consumers who are set to feel an ease in the cost of goods and services but loading pain on exporters who will get less earnings from their sales.

The Kenyan currency breached the psychological 100 units to the US dollar in Thursday’s trading, buoyed by continued heavy foreign exchange inflows that are outweighing demand.

Banks were bidding for the shilling at an average of 99.85 units at close of trading Thursday, against an average asking price of about 100.15 units to the greenback.

The move below the 100 mark comes after sustained gains against the dollar in the past two weeks, when the shilling has also been helped by tightening liquidity in the market.

“Dollar supply is outpacing foreign currency demand, leaving the shilling on the front foot,” said Commercial Bank of Africa in a note on the currency.

The shilling is also gaining against the euro, exchanging at about 113.88 units, below the 114 level for the first time since May 2017.

Kenya is predominantly an importing country, meaning the strengthening shilling is likely to be felt across the economy in the form of either stable or lower price of fuel, medicines, vehicles and machinery.

A stronger shilling is welcome news for importers who are now spending fewer shillings to buy dollars to pay for goods from abroad.

Petroleum products

A significant cost factor in the economy is the price of petroleum products, which accounts for between 15 to 20 percent of the total import bill.

Lower petrol prices filter through to the other items in the inflation basket, notably food, due to the transport factor in the price of goods in the country.

Inflation for February stood at 4.14 percent compared to 4.7 percent in January, the Kenya National Bureau of Statistics (KNBS) announced Thursday, reflecting lower costs of fuel during the month.

In this month’s pump price review, the Energy Regulatory Commission (ERC) cut the maximum price of a litre of diesel in Nairobi by Sh6.28 to a 13-month low of Sh95.96, while petrol went down by ShSh4.12 per litre to Sh100.09.

Other than importers, the stronger shilling will also be welcomed by Treasury mandarins for its positive effect on the country’s foreign debt load.

The foreign currency exposure on Kenya’s public debt, which stands at Sh5.27 trillion (of which Sh2.72 trillion is external debt) has been a source of concern.

Experts have been warning that a depreciation of the shilling would raise not just the base debt load but also interest payments significantly, straining the country’s ability to service this debt.

The stronger shilling means that the Treasury (and CBK as its fiscal agent) will spend fewer shillings in procuring dollars to service the external loan obligations.

Exporters of tea, flowers, coffee and other commodities as well as the service sector such as tour operators are however set to book less shillings for every dollar earned from their sales.

Local exporters

The depreciation (or lesser strengthening) of currencies of key export markets including Uganda, Tanzania, Pakistan and Egypt against the dollar this year has further eroded their ability to afford Kenyan goods, a disadvantage for local exporters.

“When we have a strong shilling, it affects our foreign earnings since we earn less per unit on exports. It also affects our balance of payments’ current account as we are likely to experience an avalanche of finished imports as a result of being cheaper as opposed to when the shilling is weak,” said Kenya Association of Manufacturers chief executive Phyllis Wakiaga.

“On the other hand, a strong shilling in the short to medium term would improve on the cost of importing industrial machinery and raw materials, especially for sectors that exhaust their manufactured goods in the local market.”

The bulk of Kenya’s flower sales are in Europe, meaning that payments are made in dollars as well as euros and British pounds.

The stronger shilling against the global currencies therefore means that they are earning less, although they get some relief since their import costs are in dollars and the pound is gaining against the shilling.

Flower sector

Kenya Flower Council chief executive Clement Tulezi Thursday said the sector enjoys a boost in earnings when the shilling weakens against the three currencies, and vice versa.

He, however, said that they hope the current round of appreciation will not have a big impact if sales volumes keep growing like was the case last year when horticulture earnings rose by 33 percent to Sh153 billion.

“The effect will not be as big… we can still rely on our better networks in the market compared to competitors like Ethiopia to help us keep growing,” said Mr Tulezi.