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Winners and losers from the shilling’s record fall

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Central Bank Governor Kamau Thugge before the Senate Committee on Finance and Budget at the County Hall, Nairobi on Monday, December 4, 2023. PHOTO | DENNIS ONSONGO | NMG

Expatriates, Kenyans with foreign currency-denominated salaries, exporters and recipients of diaspora remittances have marked a significant windfall from the weakening of the shilling against major world currencies.

Their fortune is in sharp contrast to that of importers, individuals paying school and college fees overseas and borrowers in hard currency, who have suffered forex losses from the weaker local currency.

Over the past year, the shilling has shed 22.2 percent, 27.2 percent and 25.3 percent in value against the US dollar, the British pound and the euro, handing holders of such currencies who are residents of Kenya notable foreign currency gains.

An individual earning $2,000 a month has, for instance, realised gains of Sh70,575.60 after the shilling moved from Sh123.58 on January 8 last year to Sh158.87 on January 8, 2024.

Earners of pounds saw the largest boost over the period by gaining an extra Sh110,316.40 in local currency terms from the depreciation of the local currency.

“If your salary is in dollars and you receive $2,000 and you live in Kenya, you will be gaining throughout as long as the Kenya shilling is losing,” notes David King’oo, an economist.

Gains are nevertheless limited in the case of contractors and consultants whose hard currency earnings may not be paid out directly in forex but are instead pegged on a negotiated spot rate at the time of contracting.

Recipients of diaspora remittances have also marked gains from the weakening of the shilling as they receive more in local currency for the same amount of hard currency wired to them in different periods.

A dispatch of 2,000 euros would, for instance, be converted to Sh348,574.20 as of January 8, 2024 compared to Sh260,348.20 at the same time last year, resulting in Sh88,226 in gains.

Exporters also start 2024 on the back of significant gains, with the weaker shilling having incentivised buyers of Kenyan goods to procure larger volumes.

The tourism industry has also gained from a weaker shilling that has inspired additional spending by international visitors.

Dividends for the industry are, however, limited to spending outside of air ticket purchases and hotel bookings which are already primarily set in hard currency.

This implies that a tourist will usually use hard currency to cater for flights and accommodation, with spending in local currency being reserved for activities such as buying local artefacts from residents.

“International visitors coming to Kenya come mainly through destination management companies and tour operators who already price their services in foreign currencies. Benefits from the depreciation of the Kenya shilling will only apply to the extra spend with is usually small in comparison,” said Mohammed Hersi, a hotelier and a past chairman of the Kenya Tourism Federation.

In contrast, individuals paying fees overseas have marked forex losses as they are required to part with more in local currency terms.

For importers, the depreciation has meant an increase in local currency used in making external purchases or reducing the quantity of purchases to be made.

Moreover, companies with hard currency borrowing have seen a spike in debt service costs as both principal and interest payments rise in local currency terms.

The government has not been the consequences of a weaker currency as its own external borrowings swell, requiring more in resources to service both the outstanding principal and periodic interest payments.

Residents and expats can accumulate foreign currency mainly through employment or export earnings and stand to make gains when the shilling depreciates against the respective foreign currency earned.

Both parties can, however, earn hard currency through forex purchases in local currency.

The opportunity of simultaneous purchase and sale, known as arbitrage, is nevertheless limited as depreciation in local currency is often accompanied by shortages in hard currencies while hoarding and accumulating foreign currency spikes.

“When the Kenya shilling is losing, the economy will tend to squeeze the availability of foreign currency thereby limiting the opportunity to exploit the difference,” added Mr King’oo.