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Weakening shilling will make it harder to put ugali on the table

By Dominic Omondi | Published Sun, January 8th 2017 at 00:00, Updated January 7th 2017 at 19:24 GMT +3
A rise in global crude oil prices has a ripple effect on fuel prices locally which, if it continues unabated, will also drive up the price of kerosene thus affecting household's purchasing power. "Every time a price rises by one shilling it reduces your purchasing power by that one shilling," says Odhiambo.PHOTO: COURTESY

Every time the shilling loses ground against the US dollar, the harder it gets for mwananchi to put food on the table. For the past one month, the shilling has ceded ground considerably against the greenback, increasing possibility of a more miserable life for millions of Kenyans.

Dr Scolastica Odhiambo, an economics lecturer at Maseno University, reckons that should the shilling continue its nose-dive, the cost of living is going to sky-rocket adding more pain to consumers. A weak shilling has "a paramount" effect on the price of imported goods, says Dr Odhiambo, particularly the price of oil which comprises a bigger fraction of the country's import bill.

A rise in global crude oil prices has a ripple effect on fuel prices locally which, if it continues unabated, will also drive up the price of kerosene thus affecting household's purchasing power. "Every time a price rises by one shilling it reduces your purchasing power by that one shilling," says Odhiambo.

Increased prices of imports, says Odhiambo, will eat into people's discretionary income, leaving them with little money. "The income you remain with is quite low, meaning you cannot consume as you were consuming before," said Odhiambo.

Also to be affected by a dip in the value of the Shilling is the importation of such durable goods as cars. If one dollar was trading at Sh100 in December and then sinks to, for example, at Sh105 in February, that five shillings depreciation is going to have an impact in your pocket.

"If you could buy a Toyota Corrola say at one million in December, you are likely to buy it at Sh1.2 million in February. You are allocating more money to consume that good, while the money could have benefited you somewhere else," notes Odhiambo.

And in as much as there might be a silver lining in the form of competitive prices for the country's exports such as tea, coffee and flowers as a result of a stronger dollar, University of Nairobi lecturer, Dr XN Iraki, is convinced that the demerits of a battered Shilling outweigh the merits.

"However inflation could go up and affect our purchasing power and the number of sufurias of ugali," explained Iraki. By close of business on Friday, the shilling had weakened further against the greenback, touching a 15-month low of Sh103.60/80 to the dollar.

The shilling has suffered sustained loss against the greenback throughout the festive period starting from a relative high of 101.9 against the dollar on December 2, 2016 to finish the year at 102.4 before dipping further down to 103.

Another economist, Robert Shaw, notes that a weak Shilling combined with the other factors such as upcoming elections which have seen investors adopt a wait-and-see approach and shortfall of the rains which might depress harvests thus pushing up the prices of food might add to the cost of living.

"So, I think, when you see the combination together, then you are looking at an upward pressure on the cost of living," says Shaw.

Basically, Kenya imports more than it exports, making it a net importer. Some of the goods the country imports include refined petroleum, delivery trucks; pharmaceuticals, used clothing, wheat, rice, computer, electronics, gas, palm oil, rubber oil, toilet paper...the list goes on and on.

To purchase these goods, the importers need foreign currency, mostly the US dollar which is the widely used international currency. The country gets foreign currency through its exports earnings which include tea, coffee, cut flowers, legumes and vegetables. The other foreign currency earner is tourism, through which the country gets a lot of foreign currency from tourist arrivals.

However, because the country pays more for its imports than it earns from its exports, it is normally left with a deficit in its current account. This deficit, current account deficit, is plugged through short-term financial inflows other than export earnings including diaspora remittances, private investment, and support from development partners.

Unfortunately, "it often just takes a single event – even if it is completely unrelated to Kenya – to prompt these short-term flows to leave the country as quickly as they came in," according to Dr Wolfgang Fengler, the World Bank's Lead Economist in Trade and Competitiveness for the Western Balkans.

"This is Kenya's overheating engine," said Wolfgang in 2011 when the shilling hit an all-time low of 107 against the US dollar. 
A number of factors might have interfered with the short-term flows.

Iraki says the depreciation of the shilling was expected after the United States Federal reserve recently raised the interest rate. "That makes the dollar appreciate against other world currencies. Imports will become expensive and those whose business involves lots of imports such as used cars will feel the pinch including travellers who buy tickets in USD," said Iraki.

Moreover, after an extended period in which the country enjoyed low prices of oil, prices of the commodity have started going up. This is after oil producing countries agreed to cut production of the black gold to address the oil glut that had wiped away their revenues.

By Thursday, crude oil prices crossed the Sh6, 000 ($58) mark a barrel to shatter an 18-month record, with further increases expected. This has put pressure on the Shilling as importers are forced to acquire more US dollars to buy crude oil from the global market.

But Odhiambo also thinks that the political climate has also played a role in this depreciation. "Now, what is affecting the dollar, by the way you should know, is the political climate. By sending away International Foundation for Electoral Systems (IFES) which declared around $20 million which was supposed to come into the economy, the Government might have put the Shilling under pressure. $20 million would have shocked the economy. It would have buoyed up the Shilling," says Odhiambo.

USAID is also said to have reduced some of its support, according to Dr Odhiambo. We could not independently verify whether actually USAID had frozen part of their support. It is said that the Central Bank has sold more US dollars to the cagy importers. Shaw does not think the Central Bank will intervene with gusto by, for example, tightening liquidity (reducing the amount of money in circulation) as it did in 2011.

There are reports that CBK has dipped into its currency reserves (the CBK normally has a reserve of foreign currency in case of such emergencies), selling more dollars to importers to stave off fall of the local unit.

According to news agency Reuters, the Central Bank's hard currency reserves have declined by $337 million since the first week of December to $6.97 billion, or the equivalent of 4.56 months' worth of import cover.

But the Government has, as its last resort, a stand-by loan of Sh153 billion from the International Monetary Fund (IMF). However, the Government cannot go for this precautionary loan until that time it has a serious problem with its balance of payment.