Weak Kenya shilling wreaks havoc on consumers

Kenyan banks have reacted cautiously to a Central Bank move to raise its interest rate by four per cent.

The Kenya Banker’s Association, the industry lobby, welcomed the CBK move on Thursday, saying, it “sends the right signal to the market”.

But the industry is worried about the effect of higher interest rates on business — it will lead to loan defaults and less interest income. (READ: Loan pain as CBK raises interest rates)

But there was little doubt that banks will follow the CBK, which raised its Central Bank Rate (CBR) from seven to 11 per cent on Wednesday.

KBA chief executive officer Habil Olaka said in an email: “There will be pressure for banks to adjust upwards which will slow down their credit expansion as demand for the loans will go down.

“This will impact also the existing loans that are at floating rate as they may consequently be adjusted upwards.”

He praised CBK’s move, saying, it had shown that the bank was ready to make painful decisions to stem rising inflation and stop the free fall of the shilling.

“This move will help rein in inflation and slow down the credit expansion, which will reduce the demand on the forex hence decrease the pressure on the shilling,” Mr Olaka said. 

But the banks’ most immediate worry is that more expensive loans mean a higher rate of default.

“Also the increase in lending rates slows down demand for borrowing hence reduced base on which to accrue interest income. This effectively reduces the revenue and hence profits,” he said.

CBK has been accusing banks of hoarding dollars to profit from a collapsing shilling.

The shilling has been one of the poorest performing currencies in the world this year having depreciated by up to 26 per cent in value against the dollar to touch historic lows of Sh104 last week. (READ: Panic as Kenyan shilling hits lowest level)

Meanwhile, the prices of imported second hand cars, medicine, petrol and spare parts have shot up as the full impact of a depreciating shilling begins to hit consumers’ pockets.

A used top-of-the-range Toyota Prado from Japan, which used to retail at an average Sh3.4 million just three months ago, is now retailing at around Sh4 million.

The region’s biggest referral hospital, Kenyatta National Hospital, has seen the cost of putting up and equipping a new specialised unit for treatment of tuberculosis jump from the budgeted Sh44 million to Sh54 million.

For cancer patients needing chemotherapy, the cost of treatment for one month has shot up from an average Sh19,000 to Sh22,000.

The total cost of treating breast cancer at KNH last year was approximately Sh500,000 but this now averages Sh650,000.

The head of the Leprosy, TB and Lung Diseases division Dr Joseph Sitienei told the Nation that the performance of the Kenyan shilling had delayed the opening of a 15-bed capacity unit at KNH intended for the treatment of tuberculosis.

Steel, an important component in the construction industry, is selling at Sh100 per kilogramme, up from Sh70.

Mr Job Omondi of International Automobile Auction in Nairobi, said a Toyota Prado, which used to cost Sh3.4 million in January was now going for Sh4 million, a Toyota Wish Sh1.2 million, up from Sh850,000 while a Toyota Probox Sh750,000, up from Sh600,000.

Mr Omondi said demand for new cars had gone down due to the battered shilling with most buyers resorting to old cars that were still in good condition.

The price of medicine has also gone up with Carboplatin, which is used in cancer treatment, now selling at Sh2,500, up from Sh1,900.

Mr Samuel Ochieng’ of the Consumer Information Network said the prices of transport, food, electricity and telecommunication services have also increased.

“Kenyans are suffering. The recent months have seen prices of virtually everything including telecommunication services going up. This is because Kenya is a net importer of goods. We import more than we export,” Mr Omondi said from Nakuru.

Mr Ochieng said sugar, which sold at less than Sh100 a kilo in January was now retailing at Sh200 while the mobile phone calling charge, which had dropped to Sh1 per minute, is now Sh4.

The cost of maize flour has more than doubled since December last year. A 2-kg packet of maize flour is selling at Sh130 up from Sh70 in December.

The shilling has shed 21 per cent against the dollar over the past month to settle at 101 units to the US unit.

On Wednesday, the Central Bank of Kenya increased its key interest rate by 400 basis points, from 7 per cent to 11 per cent, in a move to stabilise the shilling.

The move was meant to attract investors back to the country and strengthen the flow of much-needed dollars.

Very conservative

Ms Joy Kiiru, a lecturer at the University of Nairobi School of Economics and a member of the African Economic Research Consortium, says the CBK governor was “very conservative” in his way of handling the shilling’s depreciation.

“He chose to use basic economic theory. The problem here being that every theory has its own assumptions.

“The question then becomes whether the assumptions that validate a given theory hold in reality,” Ms Kiiru said.

She said the full impact of the CBK action would be felt once the commercial banks have fully adjusted their lending rates.

She said the governor should have handled the issue of the falling shilling differently although she agreed that he had limited policy space.

She said there was a huge underground economy in Kenya and that the governor needed to tighten monetary policy.

Reported by Wachira Kang’aru, Lucas Barasa and Joy Wanja Muraya