Dollar shortage persists as costly imports dry up forex reserves

The United States dollar. [Wilberforce Okwiri, Standard]

Kenya, a net importer, should rethink its importation priorities and whittle down its list of commodities needed from other countries if the dollar shortage, and a yawning negative balance of trade, will be addressed.

The country has sufficient knowledge capital to develop solutions around its major imports, says economist Ken Gichinga.

Without immediate interventions, the country's trade deficit, which was at Sh131 billion in December 2022, according to the Central Bank of Kenya (CBK), will only get worse amid a shilling rapidly weakening against major currencies. The most crucial imports may spin out of reach and the cost of living, as a result, will remain high.

"In the short run, the country needs some level of innovative trade instruments that bypass the need for dollars," says Mr Gichinga, who is the chief economist at Mentoria Economics. "And in the long run, we need an economic blueprint that puts Kenya into production mode and boosts the country's exports."

Historic low

By opening of business on February 16, the CBK had listed its indicative rate of the dollar at Sh129.76. The slide to a historic low has been unstoppable with Trade Cabinet Secretary Moses Kuria recently saying that the dollar has become "very expensive" because of FED's interest rates' shifts, and that it was thus a global problem over which the local government had little control. Just a decade ago, the rate was below Sh90.

Outside the CBK, the exchange rates are even worse, at a staggering average of around Sh140.

After months of burying its head in the sand and claiming commercial banks had enough reserves, the Kenya Bankers Association (KBA) recently admitted that the dollar shortage was a concern, with a black market taking advantage to sell dollars at exorbitant rates to desperate importers as demand skyrockets.

While commercial banks and forex bureaus are selling the dollar at rates above Sh140, manufacturers have been complaining of being forced into wild deals where they have to pay almost Sh160 for the greenback.

The Kenya Association of Manufacturers (KAM) complained that their members had been forced to go for these parallel exchange rates when they were in need of a lot of dollars. In turn, imported products are more expensive and the cost is passed down to consumers, fuelling inflation.

Cathy Muringo, who sells Mitumba bales at Gikomba, reckons that the amount of clothes she used to import at Sh4 million now goes for close to Sh5 million.

"A bale that used to cost (be sold to smaller traders at) Sh25,000 is now selling at Sh35,000," she says, lamenting that this increase is affecting small traders like herself because the products are no longer affordable and therefore sellers have to go for smaller stock.

Muringo, the founder of Experience Mitumba Bales, notes that she has been forced to pass down the cost to her customers.

"Initially we made a profit of up to Sh300,000, but now we make about Sh100,000 thousand. So we pass the cost to clients; we have to share the losses."

While importers continue to feel the pinch of high import costs due to the appreciation of the dollar, exporters on the other hand are enjoying export prices.

However, some sector players have argued that the weakening shilling does not quite translate to higher profits for exporters, because of the high cost of production in many sectors including agriculture, where farm inputs are very costly at the moment.

Processing costs

Kenya does not value-add most of its products, instead preferring to sell without incurring further processing costs. This is yet another reason the country imports some products it should easily make within its borders.

After dropping to 8.98 per cent in January, inflation rose again to 9.23 per cent in February, as the Central Bank Rate remained at a high 8.75 per cent, so maintained to try to arrest inflation.

It could get worse as blue chip companies raid forex markets for additional dollars to pay dividends to their offshore shareholders on the back of reporting higher profits, which provides for higher dividend payouts.

KBA has once before blamed shortages of the dollar on strong demand from companies remitting dividends, alongside manufacturers importing components.

The higher dollar repatriation could, in effect, see CBK use its US dollar reserves to try to cushion the shilling from further slide, which would in turn accelerate the dollar scarcity.

The latest data from the CBK indicates that the country has 3.69 months of import cover, marginally below the regional criteria of 4 months.

"The usable foreign exchange reserves remained adequate at USD 6,605 million as at March 2. This meets the CBK's statutory requirement to endeavor to maintain at least four months of import cover," the CBK said.

The East Africa Community (EAC) forex reserves policy specifies that a member country must have in its coffers at least four months' worth of forex reserves in terms of imports cover at any given time. Kenya's reserves have been below these required levels since the last week of January 2023.

The slide to these lows has been gradual. It is, in part, fuelled by external conditions, including crises that caused the rise of commodity prices and logistical charges globally.

Impact of Covid

The Covid-19 pandemic, which led to closure of crucial industries and hurt the flow of imports and exports, was quickly followed by the Russian attack on Ukraine, which in effect influenced difficulty in ferrying of some key products such as oil, steel, iron and grain.

Kenya's exports were suppressed at the moment as industries and international skies closed, hurting the earning of foreign currency.

Since, the cost of living has been rising as global prices soar courtesy of higher costs of production, logistics and, consequently, importation. The country's determination to honour her external debt obligations, with loans to be paid to bilateral and commercial lenders, has also added pressure to the forex reserves.

But it is importation of some products that could be manufactured locally, and which are not "urgent", that could be among the short to medium-term panacea for the shortage of the dollar.

"Imports ought to be reserved for things that are extremely urgent such as medicine and security equipment," says Mr Gichinga. "We can produce whatever else we need here."

Policy makers

He blames policymakers for the formulation of policies that have led Kenya to be a net importer even for things that can be produced locally.

Economist X N Iraki, an associate professor at The University of Nairobi, says that the rise in USA interest rates, and rise in price of oil, which is bought in dollars, alongside political tensions are some of the reasons responsible for the weakening of the shilling against the dollar.

Meanwhile, those who earn in dollars are in for a huge coup as they are able to access goods for cheaper.

Some large dollar earners have been accused of hoarding it, with a record Sh922 billion in dollars piled up by November 2022 as these people sought to preserve their wealth amid the speedy depreciation of the shilling.

The Capital Markets Authority (CMA) also warned of foreign investors' scepticism of Kenya's capital markets owing to a shortage of adequate foreign exchange to invest in securities at the Nairobi Securities Exchange, and to repatriate accrued dividends and returns due to the forex challenge.

Additional reporting by Esther Dianah