Weak shilling wreaks havoc on economy as retail prices go up

Anyone who needed convincing that the weakening of the shilling was wreaking havoc on Kenya’s economy may find lot of persuasions from last week’s events.

First, Central Bank of Kenya switched off the country from the global foreign exchange system, pushing the industry two decades back when technology was an alien.

The message was sent to the industry as circular, with all banks running the Electronic Brokerage Services (EBS) required to stop using the facility and “to seek specific approval from the Central Bank immediately before any further business.”

But it is the economic indicator figures released by the Kenya National Bureau of Statistics (KNBS) which gave a clearer picture.

The pace of economic growth is frizzling out, the body charged with collecting and analysing economic statistics for the government noted.

In the second quarter, April-June, the pace of growth slowed to 4.1 per cent compared to 4.6 per cent realised in the same quarter in 2010.

This was the first slowdown since the havoc wreaked by the post-election violence in 2008.

The slowdown, KNBS noted, is directly correlated to the weak shilling.

“The period under review was characterised by a turbulent macro-economic environment, mainly driven by rising inflation and exchange rate depreciation,” KNBS noted.

The indication is that the effect will be more pronounced in the third quarter (ending Saturday) where the turbulence on the shilling has been highest.

It is this period that the shilling depreciated to hit Sh104 to the dollar. On July 1, the shilling was trading at Sh89.36 to the dollar.

The effect of this, however, is still visible when looked through the inflation figures.

Released the same day, the measure of change in commodities prices shot up in September to a high of 17.32 per cent up from 3.21 per cent record in September 2010.

“This is a very worrying time for the manufacturing sector, which has seen decreased demand in the last quarter, as Kenyans come face to face with the reality of high prices which have eroded their purchasing power,” said Kenya Association of Manufacturers (KAM) chief executive Betty Maina.

“Unfortunately, to cushion themselves against increased cost of production, manufacturers have no option but to pass some of the costs to consumers through increased prices,” she said.

With Kenya being a heavy reliant of fuel, imported goods – raging form machineries to processed food – weak shilling means that the imports are becoming more expensive which translate to high retail prices.

Government figures show that the value of imports increased to Sh308 billion mainly on accounts of increased imports of petroleum, manufactured goods, machinery and transport equipment.

The country only exported goods worth Sh124 billion. The iron of this is that it this difference, technically known as current account deficit, which is one of the key factors that weigh down the shilling.

The bigger the difference the more it likely that a country’s currency will cede ground to other currencies.

A week ago, economists at African Development Bank (AfDB) blamed the high inflation and a volatile exchange rate as the reasons for downgrading Kenya’s economic growth rate forecasts to 3.5-4.5 per cent from their earlier forecast of 4.5-5 per cent.

Players in the import business reckon that the volatility of the shilling is set to put pressure on the cost of living to touch the 20 per cent mark before the end of the year.

And for the first time since the liberalisation of the telecommunication industry 11 years ago, airtime business witnessed its first price hike.

On Friday, Safaricom announced a 33 per cent increase in calling rates citing a double-digit inflation and a weak shilling which have pushed up the cost of doing business.

Volatility of the Kenyan currency has also has seen Housing Finance suspend a planned borrowing.

The mortgage financier was expected to return to the debt market before end of the year to raise Sh3 billion, the second and final tranche of the Sh10 billion bond that was approved by the Capital Market Authority last year.

Commercial banks have also hiked up their borrowing rates in tandem with increase in government own borrowing rates, which have hit a 10-year high.

The latter present an interesting scenario, where, as Central Bank alters monetary policies to aid the shilling and slowdown inflation, it ends up upsetting the lending rates.

One as conscious move to reduce the amount of money in the economy, thus reduce rate of consumption of goods, which in turn reduces the imports and reduced import means less demand for the dollar, easing pressure on the shilling.

Collateral damage is that this end up slowing down the economy.