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| Zahid Mustafa, head of consumer banking, Barclays Bank of Kenya (left) unveils the plaque to officially launch the Barclays Mombasa Road branch at Parkside Tower. He is flanked by a customer Emmanuel Mangoa Onuonga (right) and the bank’s Chief Operation Officer Abdi Mohamed (second left). |
By James Anyanzwa
The shilling, which has enjoyed relative stability against major world currencies, is now under threat. It now faces the exchange risk from volatile oil prices and increased importation of goods.
According to the Parliamentary Budget Office (PBO), this could increase the price of crude oil imports and a knock on effect on the cost of living. The likely loss in value of the local currency could spell doom to importers, households and businesses through an increase in commodity prices. According to PBO, the risks to the exchange rate in 2014 include unpredictability of oil prices as well as increased importation of goods.
Kenya’s import bill has remained high, driven by fuel importation as well as high import demands for capital goods. “This is likely to worsen the current account deficit and exert pressure on the Kenya shilling,” said PBO.
Import bill
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The country’s widening current account deficit has been blamed on soaring international crude oil prices, which increased the country’s import bill while putting pressure on the local unit.
According to PBO, fuel driven inflation also remains a concern, especially due to political instability in oil producing countries. “Fuel is the second biggest contributor to overall inflation in Kenya and oil price volatility could easily push inflation to double digits,” says PBO.
The local unit has remained stable against major world currencies throughout last year.
It fluctuated between Sh84 and Sh87 to the dollar. This can be attributed to loan disbursements under the IMF’s extended credit facility, which boosted foreign reserves as well as an increase in diaspora remittances.
The foreign exchange reserve position has been maintained above the statutory four months of import cover, albeit marginally thereby cushioning the Kenya shilling exchange rate.
Foreign investors
Some analysts also pointed out that the shilling exchange rate is likely to come under pressure as foreign investors, whose economies appear to be gathering momentum liquidate part of their investments in emerging economies.
“The effect of drought is going to be widespread and the cost of power is expected to go up. That is a problem,” said John Kirimi, executive director, Sterling Capital Ltd.
“The proportion of hydropower often declines during the drought season resulting in the increased use of diesel generated thermal power. That combined is likely to push up the cost of living.”
“There seems also to be pressure on the shilling. Foreign investors appear to be selling because their economies are improving while the Government deficit is growing bigger and bigger. These two are capable of putting pressure on the shilling.”
