Strong shilling hits Kenya’s regional export earnings

The shilling has performed better against the dollar this year compared to key regional trading partners, potentially hurting export earnings from these markets.

Data compiled by financial services firm African Alliance shows that the currencies of Uganda, Tanzania, Rwanda and Egypt have depreciated at a faster rate to the dollar than the Kenya shilling, which is 0.8 per cent up on the dollar year-to-date at 101.45 units, having exchanged within a tight band all year.

On the other hand, the Uganda shilling has depreciated by 0.2 per cent to the dollar this year, the Tanzanian shilling by 1.8 per cent, the Egyptian pound by 11.9 per cent and the Rwanda franc by 5.9 per cent.

“A number of factors have kept the shilling stable this year, including healthier inflows, the awareness in the market that the CBK has the muscle to intervene in case of volatility and lower oil prices.

“If our trading partners’ currencies weaken to the dollar at the same time, then our exports there will become more expensive,” said a commercial bank treasury official.

Kenya’s key export destinations in the region include Uganda, Tanzania, Rwanda, Egypt, DR Congo, Somalia and South Sudan.

Data from the Kenya National Bureau of Statistics shows that in the first five months of this year, Uganda imported goods worth Sh21.5 billion from Kenya, Tanzania Sh12.9 billion and Egypt Sh9 billion.

With their currencies weaker, importers in these countries will be forced to pay more to purchase dollars to pay for Kenyan goods. The spending power of their customers will also be dented through higher inflation, potentially reducing their buying power.

Positive note

At the same time, Kenyan exporters, on account of a stronger shilling, will have to charge more in dollars in order to cover production costs.
On a positive note, the weakening of the Egyptian pound is good for Kenyan importers, who bought goods worth Sh25 billion from the North African economy last year.

This would ease some of the pain that the importers are set to feel with the strengthening of the South Africa rand, which is 13.9 per cent stronger to the dollar this year.

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Among African countries, South Africa was the biggest source of imports for Kenya in the first five months of the year at Sh18.3 billion.

Going forward, analysts expect that the shilling will remain stable, based on expectations of good inflows from horticulture, tea and NGOs, while the weak oil prices will continue to be a positive.

“Despite the medium-term threat to its trade profile, as Brexit may require trade deal renegotiation, Kenya is likely to continue to benefit from weaker oil prices in the very near term.

“The CBK now expects the current account deficit to end the year at 5.5 per cent of GDP. While our own projection is for a slightly wider deficit, we nonetheless expect relative Kenya shilling stability to persist,” said Standard Chartered chief economist for Africa Razia Khan in an economic research note.

Huge capital goods imports are also levelling off as major projects move beyond the initial setup stage, easing pressure on the current account.
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