Why stubborn shilling is ruining Ruto's economic recovery dream

President William Ruto. [File, Standard]

Kenya is confronting a currency crisis involving the steep decline in the value of the shilling, which is causing negative ripple effects throughout the economy.

The surging US dollar has seen the shilling weaken, contributing to the skyrocketing prices of most basic commodities.

This is compounding financial distress for many Kenyans at a time when they are already facing food and energy crises tied to Russia’s invasion of Ukraine.

A government-backed deal to import fuel on credit has failed to stop the depreciation of the shilling against the dollar.

When fuel imported on credit landed early this year, it was anticipated that the government-brokered deal would ease pressure on the demand of the dollar from the oil marketers and prop up the shilling.

Kenya signed a deal with the governments of Saudi Arabia and the United Arab Emirates for a deal that would see Kenya get fuel supplies on credit for six months. The first cargo landed in the country on April 14.

Under the deal, the first payment to Saudi Aramco, the Abu Dhabi National Oil Company and the Emirates National Oil Company Group will be made in September.

But oil prices edged higher on Friday after the International Energy Agency forecast record global demand and tightening supplies, propelling prices to the seventh straight week of gains, the longest such streak since 2022.

The local instability in the exchange rates means that with Sh1,000, many families can no longer buy as much as they used to get a few months back.

The shilling has been on a free-fall, hitting an all-time low against the dollar in the recent past, signalling inflation and higher costs of imported goods.

Central Bank of Kenya (CBK) data showed the shilling exchanged at an average of 143.6 against the dollar on Monday. However, some traders were exchanging it at 150 to the dollar.

A weak shilling is harmful to the country given it is an import-driven economy.

Kenya imports numerous goods, including cars, petroleum, machinery, medicine and pharmaceutical products, vegetable oil, wheat, clothing and shoes.

A weaker shilling will keep the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further pushing up inflation, which went down 7.3 per cent as of last month.

Retail dollar buyers are paying up to Sh150 per unit in the banking halls as the demand for the greenback continues to surge.  This is as the margin between the US dollar’s printed rate by CBK and the market rate for customers quoted by banks and foreign exchange bureaus continues to widen.  

The higher effective rate for those buying dollars in the market had been highlighted earlier by importers.

There has been pent-up demand for the dollar from sectors such as manufacturing and other importers, players say.

Access to the greenback had previously also proved difficult for some due to banks being unwilling to sell to each other, which made it hard for smaller players to fulfil their orders from clients.

Persistent shortage

Manufacturers told the Financial Standard last week that a persistent dollar shortage was forcing them to buy the greenback at a premium above CBK’s official average exchange rate.

“There is marginal improvement in daily availability of dollars but it still remains a challenge to the extent that working capital of manufacturers gets tied up in advance purchase to build the required reserves for any commitments,” said Kenya Association of Manufacturers (KAM) chairman Rajan Shah.

“It therefore continues to have a negative impact on the cost of working capital for businesses.”

An illustration of unstable shilling. [File, Standard]

CBK Governor Kamau Thugge recently projected Kenya’s foreign exchange market will be stable this year, mainly due to an improvement in the current account deficit.

However, the shilling is projected to depreciate further against the US dollar and may come under additional pressure from a slowing economy and tighter global economic conditions, several projections show.

“We have been working on improving the interbank foreign exchange market,” said Thugge. “We will be having meetings with the banks to find a way and agree on a way forward.

“But the answer lies in restarting and making them more efficient in the foreign exchange market.”

The continued weakening of the local currency is expected to push up the cost of living, further hurting households already subjected to high fuel and food prices.

Fuel prices hit historical highs in July this year on account of higher taxes and the weak shilling. In Nairobi, a litre of super petrol retailed at Sh195.53 in July and well over Sh200 in far flung towns. Diesel reached Sh179.67 per litre while kerosene retailed Sh173.44.

Crude oil prices

While the price of petroleum products has remained relatively stable this year globally, the shilling has resulted in Kenyans not benefiting from this stability.

Crude oil prices have gone down from a high of $117.53 (Sh16,454) per barrel in August last year to $84.11 (Sh11,775) in June this year, according to data that the Energy and Petroleum Regulatory Authority (EPRA) used in computing local pump prices.

High pump prices affects the cost of transportation and other processes including manufacturing resulting in higher costs of essential products including food.

Also up due to the weak shilling has been the cost of power. The foreign exchange rate fluctuation adjustment has gone up over the last year to Sh1.71 per unit of electricity that consumers are buying this month from Sh0.73 per unit in August last year, having peaked at Sh2.06 per unit in June this year.

Due to this and other factors, a household consuming 200 units of power has seen the cost go up 46 per cent to Sh6,707 in June this year, up from Sh4,373 in July last year.

The forex adjustment is a pass through cost, through which consumers cushion power sector players from the impact of a weak shilling when repaying loans, many of which are issued in foreign currency, or importing equipment critical to the production and supply of electricity.