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Pain and joy of a weaker shilling as unit hits Sh108.8

BUSINESS
By Dominic Omondi | November 2nd 2020
Central Bank of Kenya Governor Patrick Njoroge during an interview. [David Gichuru/Standard]

The weakening of the shilling is turning into a double-edged sword for Kenyans, with some smiling to the bank as others stare at a gloomy festive season.

At the close of business on Friday, the local currency was trading at Sh108.8 against the dollar, a substantial loss of ground against the greenback.

Before Kenya announced its first case of Covid-19 on March 13, a dollar fetched Sh102.4 to the shilling.

The weakening of the shilling, occasioned by deterioration in the country’s external position resulted in more dollars leaving the country than they came in. This has been a source of both pain and joy for businesses and consumers.

Central Bank of Kenya (CBK) Governor Patrick Njoroge, in an interview with KTN on Thursday, said he was not worried by the shilling losing ground as long as there was a well-organised market.

“When you have a well-organised market, you have a rate that is appropriate for both buyers and suppliers,” said Njoroge, acknowledging that a significant change in the exchange rate might have an impact on the cost of living.

Kenya is a net importer, which makes it vulnerable in case of a weaker local currency.

Moreover, with a lot of the country’s external debt being denominated in dollars, servicing the same debt, particularly interest payments, will take up more taxes that would have been used for to finance other critical public services.

Ken Gichinga, the chief economist at Mentoria Economics, noted that with a big chunk of the country’s import bill being denominated in dollars, a weak shilling was likely to result in imported inflation. “As the cost of fuel goes up, the cost of other products such as food goes up,” said Gichinga.

Other than transport, other consumer products that are likely to go up include electricity. Mid-October, the Energy and Petroleum Regulatory Authority (Epra) signalled consumers would dig deeper into their pockets as the cost of power goes up again on account of a weak shilling.

“Notice is given that all prices for electrical energy… will be liable to a foreign exchange fluctuation adjustment of plus 107.31 cents per unit (kWh) for all metre readings taken in October 2020,” said Epra.

At Sh1.07 per unit, the forex adjustment cost is at its highest in about two years. The foreign exchange adjustment component of the power bill nearly doubled in just one month, rising to Sh1.07 per unit of power consumed in October from Sh0.57 per kWh in September.

Motorists would have had it easier after the prices of a barrel of Murban crude oil dropped - but weaker unit thwarted the benefits. Experts note that Kenyans will feel a pinch when repaying their foreign debts, which are denominated in foreign currency.

However, a weak shilling will see exports, mainly tea, coffee and horticulture, fetch better prices. Exporters and recipients of diaspora inflows will also smile to the bank. Those in tourism will earn more shillings for every dollar received.

Gichinga said the country’s exchange rate is finally going to its equilibrium, a situation that will boost exports.

A weak shilling has also benefited speculators, said Tony Watima, an economist.

“Speculators also tend to have a field day which works both ways. Some will speculate a gain and others a loss, and that effect always balances,” said Watima.

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