A currency exchange broker prepares a transaction at a brokerage. The slide of the Kenyan shilling against the US dollar does not augur well for the country’s debt payment.

| File | Afp

Pain of the weakening shilling for consumers

Kenyans will dig deeper into their pockets to pay for goods and services following the continued weakening of the shilling against major world currencies in recent weeks.

The shilling traded at a mean of Sh111.12 against the US dollar on Tuesday, according to data from the Central Bank of Kenya (CBK), the lowest it has fallen since December 21 last year, when it dropped to Sh111.44.

The local currency has been steadily falling in recent weeks amid increased demand for the US dollar by importers as demand for goods locally jumps up due to the reopening of the economy that has seen a rapid rise in consumption. 

President Uhuru Kenyatta has gradually lifted all major Covid-19 containment measures, including the dusk-to-dawn curfew, reinstatement of full carrying capacity of public service vehicles (PSVs), inter-county travel, coupled with resumption of international travel and trade. 

This has sharply increased demand for goods and services across all sectors, including manufacturing, construction, trade and tourism, resulting to more importation of goods.

Kenya heavily relies on imports of petroleum, wheat, maize, machinery and equipment, pharmaceuticals and textiles among other products to satisfy local demand, with Asia being the main source of most of the imports followed by Europe, Africa, America and Australia and Oceania.

Economist Tony Watima said because most consumer goods in Kenya are imported on a continuous basis, the effect of a weaker shilling is felt almost immediately.

The cost of inputs used in manufacturing, fuel and electricity prices will rise, as well as the cost of servicing Kenya’s huge debt.

For instance, the energy regulator recently increased the price of electricity by 27 cents to Sh1.03, the highest since July (Sh1.16) from 76 cents last month, following weakening of the shilling through the Foreign Exchange Rate Fluctuation Adjustment (FERFA), which is adjusted monthly.

This means that for every four units that electricity consumers use this month, they will pay an additional shilling to Kenya Power at the end of the month on weakening of the shilling alone, a move that will hit hard power users, particularly large consumers such as manufacturers.

This will also be reflected in fuel prices. To shield fuel importers from fluctuation of the shilling, depreciation of the currency is catered for in the landed cost of the product before the fuel is offloaded at the port.

“Every time the shilling weakens, the cost of imports goes up because importers have to pay more for the same quantity of goods. Kenya relies heavily on these imports, which are brought into the country on a daily basis, which means the effects are felt pretty quickly,” Mr Watima said.

This is also set to increase the cost of paying Kenya’s piling external debt, which has hit Sh4.01 trillion. CBK data shows Kenya’s foreign exchange reserves, which are used to repay external debt and to cover for imports, have fallen to $9.22 billion (Sh10.23 trillion) last week, down from $9.34 billion (Sh10.37 trillion) in July. 

Treasury data shows 65.3 per cent of Kenya’s Sh4.01 trillion external debt is denominated in US dollars, 19.7 per cent in euros, 6.5 per cent in Japanese Yen, 2.6 per cent in Sterling pounds and 5.7 per cent in Chinese Yuan.

“Another effect is that Kenya will spend more on its debt-servicing obligations. When the shilling weakens, Kenya spends more to repay its external public debt, which is repaid in dollars. This hugely increases the burden of paying debt,” the economist said.

Rising volume of imports comes following a dip in the value and volume of imports into the country last year due to global travel and trade restrictions for much of the year due to the pandemic.

This saw total volume of trade decline to Sh2.28 trillion in 2020 from Sh2.4 trillion in 2019, following a higher decline in imports coupled with a moderate growth in total exports, according to the Economic Survey, 2020.

It also saw a reduction of Kenya’s trade deficit to Sh999.9 billion, down from Sh1.2 trillion in the previous year.