Shilling’s fall against dollar signals rise in cost of living

Money Markets

A lady sells cereals at Nyeri market on April 13, 2015. In addition to the expected rise in the cost of living (inflation), a weaker currency has a wider impact on the economy, especially on interest rates. PHOTOS | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Kenya is a net importer of consumer goods such as petroleum, processed foods and clothing as well as raw materials used by its nascent manufacturing industry, whose costs are expected to rise with a weaker shilling pushing up the rate of inflation.
• The shilling has in the past been seen as overvalued to the dollar and some economists have advised the authorities to allow it to depreciate gradually.

The Kenyan shilling continued its slide against the major world currencies, signalling a looming rise in the cost of living in a country that is over-dependent on imported goods.

The shilling closed yesterday’s trading 10 cents weaker at 94.35 to the dollar, staying on a losing path that started last month and moving closer to breaching the psychological mark of 95 units to the dollar as rising demand for the dollar continued to weigh against weak inflows.

Kenya is a net importer of consumer goods such as petroleum, processed foods and clothing as well as raw materials and machinery used by its nascent manufacturing industry, whose costs are expected to rise with a weaker shilling pushing up the rate of inflation.

A weaker shilling, however, has the impact of making Kenyan exports more affordable and should therefore help drive volumes, besides translating to better earnings for every dollar.

Analysts, however, said overreliance on imports means the economy could wipe out any benefits the importers may get from a weaker shilling, leaving consumers in a worse position.

“Taking all the market factors into consideration, a weaker shilling would increase inflationary pressure and ultimately result in a higher cost of living,” said Ecobank Kenya country treasurer Bobby Otieno.

“Reduced inflows from tea and tourism sectors, payment of dividends by multinational companies and a reduction of inflows via forex bureaus with the crackdown on terrorism financing have significantly impacted the forex reserves.”

Inflation stood at 6.31 per cent in March up from 5.61 per cent in February – a figure that is still within the Central Bank of Kenya (CBK) target of between 2.5 and 7.5 per cent.

READ: Inflation up 6.31pc in March as cost of food rises

In addition to the expected rise in the cost of living (inflation), a weaker currency has a wider impact on the economy, especially on interest rates.

“If inflation goes up above the CBK’s target margins, the CBK will be forced to increase the base rate. This will in turn increase the cost of credit to the private sector and ultimately slow down the rate of growth,” said Commercial Bank of Africa senior dealer Joshua Anene.

Kenya imported goods worth Sh1.618 trillion in 2014, up 15 per cent or Sh210 billion more compared to Sh1.408 trillion in 2013, according to the Kenya National Bureau of Statistics (KNBS).

The value of imports rose only marginally by Sh32 billion or 6.5 per cent — from Sh504.3 billion to Sh537.1 billion — meaning that Kenya’s trade deficit widened by Sh177.7 billion to Sh1.08 trillion. The imports were mainly in form of capital goods for infrastructure projects, fuel and manufactured goods.

The KNBS’s producer price index (PPI) for the first quarter of 2015 also shows that the overall cost of production for manufacturers increased by 1.52 per cent compared to a decrease of 1.23 per cent recorded in the fourth quarter of 2014.

“The main contributors to the first quarter increases were manufacture of food products (up 1.79 per cent), manufacture of beverages (up 2.52 per cent) and manufacture of rubber and plastic products (up 2.85 per cent),” the KNBS says in the PPI report.