Kenya: Cost of Imports to Increase as Shilling Hits New Low

21 September 2021

The Kenyan shilling continued weakening on Monday against major currencies, hitting its lowest point this year yesterday in the latest nightmare for the economy.

Official data from the Central Bank of Kenya (CBK) shows that the local currency exchanged at a mean of Sh110.16 for each US dollar, in what promises to make imports more expensive in coming days.

Kenya is a net importer and a depreciation of the shilling has a net effect of increasing the prices of goods, including electricity and fuel.

The shilling has been weakening steadily in the last few weeks, sliding from Sh107.9 in July, to Sh109.7 at the end of August. In September, the home currency has further lost ground to cross the new Sh110 psychological point and it appeared to be dropping further as importers increased demand for the greenback.

Apart from imports costs shooting up, a weaker shilling has a direct impact on Kenya's foreign-denominated loans given that the country pays a huge chunk of its loans in dollars.

"For every shilling that weakens against the dollar, Kenya's external debt grows by Sh40 billion going by our latest external debt numbers which is Sh4 trillion," Mr Tony Watima, an economist, said.

But on the flipside, exporters will be smiling all the way to the bank given that a weakening shilling makes exported goods cheaper, and therefore more competitive in the global market.

Mr Watima noted that inflation is likely to increase because of intermediate raw materials that Kenya imports for manufacturing.

"The other impact is that a weak Kenya shilling means our debt position shifts," Mr Watima said.

Kenya's risk of debt distress has grown from moderate to high as the country continued its borrowing spree to fund expensive infrastructure projects and deal with a ballooning budget deficit.

The overall debt hit Sh7.71 trillion in June, and is set to spiral to Sh8.75 trillion by the close of the fiscal year, just Sh250 billion shy of hitting the statutory Sh9 trillion debt ceiling that will trigger a fresh move by the National Treasury to seek Parliament's approval to raise the debt ceiling.

The weakening of the Kenyan shilling has been partly attributed to increasing dollar demand from importers alongside the stay of excess liquidity within the financial markets.

The Central Bank of Kenya has been aggressively defending the home currency in the past several weeks by deploying what is known as open market operations (OMOs) to ease any volatility in the exchange rate by the sale of re-purchasing agreements (repos).

At the same time, the reserve bank has sold dollars from its pool of reserves to even out unmatched dollar demand in the financial markets.

The CBK says in its weekly bulletin that it has adequate dollars to meet imports at $9,619 million or 5.88 months of import cover as at September 16.

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