Business Daily (Nairobi)
James Makau
28 January 2008
The shilling reversed gains made on Friday last week after renewed violence over the weekend sent a wave of jitters to the country's forex market.
By early morning trading, commercial banks quoted the shilling at Sh73.50/70 to the dollar marking a Sh4 loss from Friday's closing price of Sh69.55/65 against the greenback.
"The shilling lost heavily on the back of increased inter-bank activity with the weekend's activities denting the market's confidence," said Duncan Kinuthia, a currency dealer at Bank of Africa.
Analysts had earlier said that despite the strengthening of the shilling on Friday, prevailing fundamentals - low tea production and the weak tourism industry - still favour a weak shilling at least in the short term.
"The shilling is trading within wide ranges. As long as the current unrest persists, the back and forth wild swings will also persist," says Mr Kinuthia.
More unsettling is that the ensuing violence in the country could lead to lower productivity and competitiveness of Kenyan exports and the tourism sector, a factor that currency dealers say could lead to further depreciation of the shilling.
Transport routes along the country's western corridor have been blocked, making it almost impossible to move goods to Uganda and the Great Lakes region, Kenya's largest export destinations.
Shortages of key commodities in Uganda, Rwanda and the Great Lakes region have been reported in previous weeks as trucks and oil tankers were stranded in Kenyan towns hit hard by the post election violence.
Analysts say lack of access to basic components of the production and supply chain ( inputs, transport, people) have to be restored for the benefit of the weaker shilling to filter into exporters pockets.
Although tourism is putting up a brave face in the ensuing chaos, the disruption of tourist arrivals and the cutting short of holidays - hence low demand for the local currency- are realities that are too costly.
The coffee and tea auctions, which are a source of dollar inflows into the country, have also been disrupted due to the political unrest.
Huge demand for the US dollar from oil companies, who brought in $50 million during the week, was a key driver behind the weakening of the shilling. The oil companies scrambled for the few dollars in the market as they ditched the local currency to meet their requirements.
Last year, the most significant factor that led to further strengthening of the shilling was the resumption of capital inflows into the country.
Following the steady growth of the economy in the last five years, foreign investors' interest in local investments has been on the rise.
But with the charged political climate, investment flows into the economy are at risk as international investors and donors monitor the situation closely.
"Investors are taking a wait and see approach since they are now factoring in the political risk in the country," says Solomon Alubala, a senior dealer at Middle-East Bank.
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