The conflicting accounts given by Deputy President Rigathi Gachagua and Central Bank of Kenya Governor Patrick Njoroge underscore the burden President William Ruto’s administration is struggling with due to a depreciating shilling and foreign exchange (forex) crisis.
Mr Gachagua yesterday charged that“a forex currency shortage” had hampered oil imports, claims Dr Njoroge was quick to dismiss, explaining that CBK plays no role in the trade because oil importers obtain foreign exchange from commercial banks, exposing the growing concerns about the dollar shortage and what’s causing it.
The country is spending more to repay runaway external debt and importers are paying more to ship goods from overseas, passing on the additional cost to consumers.
National Treasury Cabinet Secretary nominee Njuguna Ndung’u will shortly fly into the weak shilling and high cost of living maelstrom, twin concerns that nearly cost him his job amid a parliamentary investigation a decade ago and which he must now find solutions to.
The weaker shilling, while a boon to exporters who are earning more from selling their produce abroad, has increased the cost of importing goods and services, pushing inflation to a 63-month high and burdening households with a runaway cost of living.
Inflation hit a record high of 9.2 per cent in September after the prices of fuel, electricity and food shot up, driving up the cost of essential goods and services. It is the highest year-on-year inflation rate in five years, matching the 9.2 per cent inflation rate recorded in June 2017.
The shilling dropped to another record low of Sh120.77 against the dollar on Monday, marking a 6.75 per cent drop from the start of the year when it was exchanging at Sh113.13. The shilling has also continued to add to the debt burden, pushing public debt to cross the Sh8.61 trillion mark for the first time in July.
About 68.1 per cent of Kenya’s Sh4.299 trillion external debt is denominated in the US dollar, 18.3 per cent in the Euro, and 5.7 per cent, 5.4 per cent and 2.3 per cent in the yen, yuan and sterling pound respectively. The government is paying more to settle its debt in dollars.
“Overall, the national government external debt stock increased by Sh9.04 billion from Sh4.29 trillion in June 2022 to Sh4.299 trillion in July 2022. This was attributed to disbursements and exchange rate depreciation,” said the Treasury.
A report by Treasury to Parliament in May warned that the situation could soon become untenable.
“About 52 per cent of Kenya’s debt is held in foreign currencies and this poses a fiscal risk in the event of depreciation of the Kenya shilling. Exchange rate depreciation could lead to increase in debt service beyond what is budgeted for in the Consolidated Fund Service,” stated the 2022 pre-election economic and fiscal report. Currency depreciation also led to a surge in electricity cost last month, with Kenya Power’s agreements with independent power producers denominated in dollars.
A weak shilling has fuelled demand for the dollar at a time high global crude oil prices, coupled with the recovery of the economy from the Covid-19 pandemic, pushed up demand for imports. This has exacerbated the demand for dollars by importers to pay for goods. Yesterday, banks could not reveal the current dollar supply situation in the banking sector when contacted by the Nation.
“I do not have that data. We will need to do a survey and find out,” said Kenya Bankers Association (KBA) Chief Executive Habil Olaka.
The resulting forex shortage has hit the economy hard, with importers revealing that banks are rationing their daily supply of dollars to manage the high demand.
Mr Gachagua on Sunday waded into the matter by claiming the country is facing a shortage of foreign currency to import fuel. The DP was trying to paint a grim picture of the country’s financial woes, using the opportunity to urge Kenyans to give the Dr Ruto’s administration more time to fulfil its pledges, especially on lowering the cost of living.
“We have insufficient foreign exchange and the Central Bank does not have enough foreign currency to import fuel,” DP Gachagua told Citizen TV in an interview on Sunday.
CBK was, however, quick to counter Mr Gachagua’s claim and, within hours, released a statement arguing that Kenya has sufficient forex to meet its import obligations.
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“CBK does not supply foreign exchange for transactions other than for the national government or CBK’s operations. Oil importers, therefore, obtain their requisite foreign exchange from the commercial banks and not CBK,” said Dr Njoroge in a statement.
Kenya is a net importer of goods, and between January and March, this year, imported goods worth Sh384 billion, more than it exported, an increase from the trade deficit of Sh317 billion in the same quarter last year. Demand for dollars has remained high at a time diaspora remittance, Kenya’s largest source of foreign exchange, has faltered in recent months amid high inflation.
Diaspora remittances have fallen five months consecutively since March dropping to $310.5 million (Sh37.49 billion) in August which is the lowest since $309.9 million (Sh37.42 billion) in September last year, according to data from the CBK.
Kenya relies on diaspora remittances, exports, grants and aid, foreign loans and foreign direct investment for its forex supply. Last month, the CBK boss had attempted to explain, without revealing much detail, the cause of the dollar shortage crisis, likening it to the Goldenberg scandal. The scandal saw Kenya lose billions of shillings after it subsidised gold exports in a bid to increase forex earnings, but which instead saw individuals smuggle gold into the country to earn the higher export price.
“There are people who wanted to [take us back to the Goldenberg era] ... I don’t want to get into the details because they’ll ask me where the proof is. I don’t have the proof,” Dr Njoroge told newly elected MPs during their induction. In 2012, Prof Ndung’u, then the CBK governor, survived ouster thanks to last minute amendments to a report of the parliamentary select committee on decline of the Kenyan shilling against foreign currencies.
The recommendation for the ouster of Prof Ndung’u, who served between March 2007 to March 2015, was expunged by MPs as they approved the report by the committee chaired by then Wajir West MP Adan Keynan, which reprimanded commercial banks and set the stage for changes to how CBK is managed.
A decade later, Prof Ndung’u will be expected to address a similar headache of a weak currency that is increasing Kenya’s debt burden without extra borrowing, should his nomination be approved by Parliament.