Life can only get harder as Kenya shilling slides

Kenyans should prepare for harder times ahead as the shilling continues to lose its value against major trading currencies.

Economic analysts say a sustained weakening of the shilling, especially against the US dollar, will spark a new round of commodity price increases in the domestic market.

This would result in high fuel, maize and electricity prices, some of the most consumed products by businesses and households. Fuel and power also affect the cost of manufactured products.

“If the shilling continues to depreciate, food and fuel prices will remain high,” a senior economic analyst at Standard Chartered Bank, Ms Razia Khan, said.

A weak shilling means importers are spending more money in foreign exchange to buy dollars for purchasing goods in the international markets, pushing up the cost of those commodities.

Fears of a rise in commodity prices have clouded the expected importation of five million bags of maize to bridge a deficit in local supply until the next harvest later in the year.

While the maize will come in duty-free after a government waiver to help lower food prices, analysts warn that relief will be wiped out by a weak shilling.

Gains wiped out

“For each of the commodity imported, its Kenya shilling price will be higher,” an economist with an international organisation, who requested not to be identified because of the sensitivity of the matter, said.

“For exports, their gains are being wiped out by high domestic prices.” It will be a jump from the frying pan into the fire for Kenyans, who have endured high inflation — the aggregate cost of living — since November last year when it was under 5 per cent, peaking at 12.95 per cent in May.

On Wednesday, the Central Bank of Kenya (CBK) said it would act on speculators driving down the shilling after the unit fell to a new low against the dollar at Sh91.90, causing anxiety in the market.

“Having analysed the current trading by individual banks and their parents or branches globally, we are ready to take appropriate and corrective action to make sure the foreign exchange interbank market is truly driven by market events and fundamentals,” CBK governor Njuguna Ndung’u said in a statement.

It is feared that fuel prices will go up at the next review in mid July, as importing companies spend more to buy refined and crude oil.

High fuel prices affect the entire value chain of commodities — from manufacturing to retail — and the costs are often borne by the consumers.

“Petroleum products are imported using US dollar,” Mr Kaburu Mwirichia, the director-general of the Energy Regulatory Commission, which regulates fuel prices, told the Nation. “So the weaker the shilling, the higher the local prices.”

Electricity bills are likely to rise if the shilling remains weak — first because of the impact on diesel-generated power and from the forex conversion component.

The cost of electricity rose in May due to increased use of the expensive diesel-driven power generators.

Kenya Power and Lighting Company last month increased the fuel cost adjustment — an item on the bills linked to the amount of electricity generated from fuel — from Sh5.73 to Sh6.15, the highest level since April 2010. This will increase again if the price of fuel goes up.

While exporters are believed to benefit from a week shilling because they get more shillings on conversion from the dollar or euro, some say the impact is absorbed by high domestic prices and input costs.

Mr Neill Willsher, the managing director of Africa Finlays Horticulture, which exports to Europe, said the benefits are being eroded by the high inflation and increased freight charges.

“It’s getting in through one pocket,” he said, “and getting out through the other.” Analysts have called on CBK to intervene.

“The Central Bank must send a policy signal to the market to change perception,” said Ms Khan. “This should have been done a long time ago.”

Prof Ndung’u, however, said doing so early would have worsened the situation as the volatility is also linked to international events like the debt crisis in Europe that has caused an investor flight to the dollar.