Weak shilling sets consumers up for steep rise in cost of goods

Money Markets

The shilling has shed 9.5 per cent against the dollar in the first five months of this year as have most world currencies. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Kenyan currency expected to touch 100 units to the dollar mark, setting in motion inflation pressure.
• Kenya is a net importer of goods and the steep rise in the cost of imports that comes with a weaker shilling will be passed on to consumers in the form of higher costs.

The shilling on Friday continued its drift towards 100 units to the dollar, setting up consumers for a turbulent future expected to be dominated by a steep rise in the cost of goods and services.

t The Kenyan currency closed the week’s trading at 99 units to the dollar and traders said they expected the trend to continue this week with the possibility of touching the 100 mark.

Kenya is a net importer of goods and the steep rise in the cost of imports that comes with a weaker shilling will be passed on to consumers in the form of higher costs.

Household spending on food, which accounts for the biggest share of the consumer price index, has been rising since the beginning of the year, pushing inflation to an eight month high of 7.08 per cent.

In addition to the direct price increase on imported food, the cost of locally-produced food is also expected to rise as farmers contend with higher priced inputs, especially animal feed.

The Association of Kenya Feed Manufacturers (Akefema) said the weaker shilling had piled pressure on costs, setting the stage for price increases.

Kenya imported 1.22 million tonnes of unmilled wheat (a key ingredient in animal feeds) worth Sh33.8 billion in 2014, according to the Kenya National Bureau of Statistics.

“I would not be surprised to see prices rise if the shilling does not strengthen soon,” said Akefema secretary- general Jeremy Ashworth, adding that different companies will follow different strategies to mitigate price increases.

Mr Ashworth said it was inevitable that some of the additional costs would have to be passed on to the consumers as margins are not very wide in the industry.

“The sector is one of low-margins, high-volume sales leaving little room except to react with an increase in prices,” he said.

Kenya also imported 459,165 tonnes of rice worth Sh15.3 billion, 458,940 tonnes of maize seeds worth Sh9.3 billion, 228,834 tonnes of sugar molasses and honey worth Sh12 billion, and 622,343 tonnes of animal and vegetable fats and oils worth Sh50 billion.

Buyers of luxury goods such as motor vehicles will also have to dig deeper into their pockets to satisfy their desires as importers raise prices in line with the prevailing exchange rates.

READ: Rotich downplays shilling fall as currency hits new low

Car sellers expect not only to factor in the increased dollar cost on new imports but also to price older stock more expensively to meet the higher cost of replacing it.

“We can definitely see the prices going up. For instance, a $10,000 (Sh980,000) car could attract a basic price increase of at least Sh80,000 on account of the shilling’s depreciation this year alone,” said Kenya Autobazaar Association chairman Charles Munyori