Revealed: The winners as Shilling continues steep fall against dollar

Labourers pluck tea at Bobaracho, Nyaribari Chache in Kisii County on November 10, 2021. [Sammy Omingo, Standard]

The value of the Kenyan Shilling is expected to surpass 160 against the dollar, leading to further financial distress for consumers.

The shilling reached an unprecedented new low against the dollar on Friday last week due to a surge in demand for the greenback.

According to data from the Central Bank of Kenya (CBK), the shilling reached a historic low for the official banking regulator’s printed rate on Thursday, with an average exchange rate of 150.3618 against the dollar.

This development poses a fresh headache for the Kenya Kwanza administration and the banking regulator.

The current economic crisis in Kenya has been exacerbated by the weakening shilling, which is expected to further burden the already struggling consumers.

The high cost of living has already pushed many into poverty. Additionally, the depreciating shilling is now posing a threat to fuel prices, which has already caused public outrage.

The depreciation of the shilling poses a significant challenge to Kenya due to its reliance on imports.

Consequently, any further devaluation of the domestic currency is anticipated to exacerbate the cost of living, inflicting additional hardship on households already burdened by soaring fuel and food expenses.

This, in turn, will contribute to the country’s mounting electricity expenses and the distress associated with servicing its debts.

But like most drastic changes, the surging value of the dollar and the corresponding weakening of the shilling are creating both winners and losers. While it is a pain for Kenyan consumers, the shilling’s dramatic fall has been a blessing for a select few others.

For starters, players in the export-oriented sectors like tea, horticulture and tourism are smiling to the bank. 

Others in the services export sectors including young Kenyan professionals dealing in online jobs are also smiling to richer pockets.

Landlords charging their rents in USD, or those who have indexed their rents to USD are also big beneficiaries. 

Several commercial banks with regional subsidiaries such as KCB Group and Equity Group are also big beneficiaries. Equity Bank Democratic Republic of Congo for instance has its loan book denominated in dollars providing it with huge dollar inflows. 

Diaspora Remittances are the other big winners. Kenyans working and living abroad have been sending home more money on a stronger dollar. This has seen their families benefit from the strong dollar and the strengthening of other major foreign currencies such as the British Pound and euro.

The rush to take advantage of a strong dollar by Kenyans in the diaspora is therefore stretching and boosting the purchasing power of their local beneficiaries amid the slump in the shilling, in turn triggering a remittance boom.

CBK data shows Kenyans working in the US remain the largest contributors to the remittances, sending more than half of all the contributions.

Remittances are a vital source of household income for Kenya.

According to the World Bank, they alleviate poverty, improve nutritional outcomes, and are associated with increased birth weight and higher school enrollment rates for children in disadvantaged households.

Studies show that remittances help recipient households to build resilience, for example through financing better housing and to cope with the losses in the aftermath of disasters.

“Remittances lift people out of poverty, put food on the table, pay for education, cover health expenses, allow housing investments and many other family goals beyond consumption,” said the president of the International Fund for Agricultural Development (IFAD) Gilbert Houngbo at a past event marking the International Day of Family Remittances.

The weak shilling has shored up earnings for these sectors to the extent that even when tea volumes sold at the Mombasa auction declined, the earnings were up.

“The tea sector has benefitted to some extent from the weak shilling in the recent past since  Mombasa tea auction purchases are done in US dollars,” said Apollo Kiarii chief executive of Kenya Tea Growers Association (KTGA). 

It is the same case for tourism, where players are getting more shillings for the same products and services today compared to what they earned last year. Additionally, the weaker local currency makes Kenya a destination cheaper and in turn attractive for tourists.

“A weaker currency could make Kenya a more affordable destination for foreign tourists. This may attract more tourists, particularly from countries with stronger currencies, as their money will have greater purchasing power in Kenya,” said Susan Ongalo, chief executive of Kenya Tourism Federation (KTF), an umbrella body for industry associations.

“The cost of travel and accommodation may become more competitive, which could lead to an increase in bookings and tourist arrivals.”

The players however say it could be better, noting that while on the one hand they have enjoyed higher earnings on account of the weak shilling, they too, like other industry players, are hurting from the impact of a weak shilling. This is in terms of higher fuel costs, which has affected all sectors and seen the cost of operations go up. The weak shilling has also had the impact of pushing up the cost of inputs such as fertiliser for agricultural sector players.

“The gains (that the tea sector has witnessed) have been negated by declining tea auction prices occasioned by weakening economies and shortage of dollars in key Kenyan tea export destinations such as Pakistan, Egypt, Sudan, Afghanistan, Russia, Ukraine,” said Kiarii.

“The gains have further been diluted by significant increases in the cost of production including power bills, fuel costs, packaging materials, transport costs, taxation costs, labour costs, etc. In addition, erratic weather patterns occasioned by climate change including cold weather, frequent hail damages, and frost damage affect the quality and quantity of green leaf on offer for manufacture which contributes to increased processing costs.”

“Weakening Kenya shilling has increased fertiliser costs leading to high input costs and challenges of timely fertiliser application leading to a negative impact on the quality of made teas which affect the realisation of optimum tea market prices.”

While tourists might find Kenya a cheaper destination on the back of a weak shilling, tourism industry players have seen their cost of operations go up.

“A weaker currency can also lead to higher inflation and increased costs for imported goods and services, which could affect the overall cost of living in Kenya and, consequently, the cost of travel for tourists,” said KTF’s Ongalo.

“The country may face challenges in importing essential goods and services, which can affect the overall quality of tourism services and infrastructure. Especially when the earning is in USD, and expenditure is in Kshs. This could lead to reduced investment in the tourism industry, impacting the sector’s long-term growth.”

“The gains in the tourism sector resulting from a weak shilling may be offset or even diluted by the high cost of petroleum products. A weak shilling can lead to higher import costs, and one of the significant imports for many countries, including Kenya, is petroleum products. This, in turn, may affect the overall cost of living and operating costs for businesses in Kenya.”

The high cost of fuel could have several adverse effects on the tourism sector such as increased operational costs. Businesses within the sector including transportation services, hotels, and restaurants, often rely on petroleum products for operations. 

These could affect the cost of services such as travel for tourists.

The weak shilling and the impact on fuel will hit the local travellers as many Kenyans are likely to put on hold their travel plans. The domestic tourism segment of the industry has always been critical for the sector, with players always counting on Kenyans during such times as the upcoming December holidays but also during the low seasons for international travel.  

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