Exports gain as UK pound rallies against the shilling
This file photo shows a cashier displaying multiple denomination US dollar and British pound Sterling banknotes in central London on October 4, 2016.
A unit of Sterling pound has rebounded to a five-and-a-half month high against the shilling, portending better export earnings for fresh produce to the United Kingdom but inflating the cost of imports from the European country.
The shilling on Monday traded at 145.48 units against the pound, the highest since June 13 when it was 146.44.
The gain on the pound follows a raise in interest rates by 75 basis points from 2.25 per cent to three per cent on November 3 on the back of high inflation in the UK, the largest rate hike since 1989, increasing the cost of borrowing to the highest level since late 2008.
The depreciation of the shilling against the pound sets the country up for the increased cost of imports.
Kenya sells agricultural produce such as cut flowers, vegetables, fruits, coffee, and tea to the UK, and in turn buys vehicles, machinery, and alcoholic beverages like spirits, pharmaceuticals, and electronics from the European country.
Export earnings
The gain in the pound is expected to increase export earnings, however, could shrink the trade surplus with a rise in import bills.
Exports to the UK dropped by 10.8 per cent to Sh23.8 billion in the six months to June, despite the trade between the two countries in favour of Kenya, as imports increased by 2.7 per cent to 17.3 billion over the period.
The pound had on September 29 hit a low of 128.15 amid a proposal by the UK government to scrap among them income tax for the wealthy, which was later reversed leading to a gain by the foreign currency.
A stronger shilling against the pound and the Euro means reduced earnings for horticultural exports, which largely depend on the UK and EU markets.
The weakening of the shilling against the pound comes on the backdrop of the depreciation of the local currency to a record low against the dollar.
The shilling yesterday traded at 122.08, which continues to feel pressure from higher demand for the US currency by importers, especially petroleum products and industrial supplies, and interest rate hikes.
The dollar and pound have been surging against other global currencies on the back of adjustment of interest rates to control soaring inflation that has also led to rising yields for debt in the markets, making it difficult for developing economies such as Kenya to borrow.
