Importers celebrate as resilient shilling muscles greenback

By James Anyanzwa

Over the past few weeks, the shilling made gains against the dollar with growing confidence in the economy.

Foreigners scrambling for a share of KenGen’s Sh15 billion bond, with reports of the International Monetary Fund (IMF)’s approval of a $223 million exogenous shock facility, helped peak the local unit at Sh74 against the dollar

Reduced corporate demand and moderate foreign inflows from some economic sectors such as tourism and construction further supported the shilling.

But foreign exchange dealers cautioned that the new trend may be short-lived and unsustainable.

While exporters are hurting, importers are all smiles and particularly Treasury, which is set to import three million bags of maize to feed 10 million starving Kenyans as well as service and payback its maturing foreign debt obligations.

The appreciation of the shilling comes after the local unit fell to a record low of Sh80 against the greenback early in the year, prompting speculations about Central Bank’s intentions to intervene in the forex market.

"From the inflows, it does appear that most sectors of the economy are picking up their stead. In the tourism sector, hotel occupancy is oscillating in the highs of 70 per cent from 30 per cent earlier in the year," said Richard Etemesi, chief executive, Standard Chartered Bank Kenya Ltd.

Etemesi says a number of corporates covered their forex requirements, which has weakened real demand in the spot market.

Imports of raw materials, he says, have slowed down due to the power rationing programme that has left manufacturers running at less than optimum capacity.

"We have also seen the bearish run at the Nairobi Stock Exchange (NSE) ease substantially," Etemesi told The Financial Journal.

"We think offshore investors are creeping back into the economy, especially now that Africa remains a choicy investment frontier."

The worsening food security in the country has, however, necessitating the need for more imports.

Reversing trend

"We may be approaching the floor and we are likely to see the currency pair reversing these gains in the medium term," he warns.

Central Bank of Kenya (CBK) Governor Prof Njuguna Ndung’u, however, contends that the global credit crunch, which had pushed commercial banks not to extend credit to each other, is easing fast.

"The strengthening of the shilling is due to the realignment taking place in the global financial markets as the credit crunch levels off," says Ndung’u.

He says the banks’ unwillingness to extend loans to each other left money locked up with specific banks, which essentially distorted the actual ‘valuation’ of many currencies across the world. He argues that as banks open up their vaults, so will currencies correct themselves. On Friday last week, the shilling gained a massive 6.8 per cent (Sh5.5) to settle at Sh74.50 against the dollar up from Sh80 recorded in January and March this year.

In the last one year, however, the shilling oscillated between Sh62 and Sh72 against the dollar, according to data from the CBK. Raphael Mwanyalo, assistant manager, Foreign Exchange Department, Family Bank, attributes a strong shilling to foreigners’ participation in the KenGen Bond.

He says the shilling is likely to face undue pressure from corporate demand and perhaps stabilise at around Sh75 against the dollar towards the end of the month.

Joshua Kagia, head of Treasury at Consolidated Bank says the IMF approved $223 million helped shore up the shilling. The construction sector has been boosted by forex inflows.

Forex reserve

However, there are concerns the new shilling run may not be sustainable. Etemesi says majority of forward contracts are falling due, causing many firms to enter the forex market for dollars.

It is also feared that if CBK continues to purchase forex for its monetary purposes, it will exert pressure on the local unit and undermine the shilling's strength.

Over the last two months CBK, in its monetary policy operations, purchased $190.25 million from the market to build its foreign exchange reserves and inject liquidity in the market when needed.

While importers smile at the new dollar rates, exporters frown at the loss of competitiveness for their goods in global markets.

Indeed, a strong shilling threatens the survival of local manufacturers and hurts exporters.

The country’s key exports such as flowers, tea and coffee should brace for waning competitiveness in the international market.

A strong shilling eats the exporters’ profit margins and blunts their competitive edge.

While the Government has the instruments to ensure the shilling deepens export-oriented domestic production, CBK balances interests of exporters and importers.

In fact, there have been calls for the Government to intervene and devalue a strong shilling to avoid hurting the economy.

With a strong shilling, Kenya gains as an importer but loses as an exporter.

Speculative practices

Despite this reality, unlike in the past when the CBK Governor could change interest rates or the shilling exchange rate at whim, this is no longer the case. Today, interest rates and the shilling exchange rate are principally determined by the forces of demand and supply.

However, from time to time, bouts of speculative practices tilt the exchange rates, prompting the CBK to intervene.

Interest rates and exchange rate movements affect economic sectors differently turning out winners and losers.

While exporters detest a strong shilling, importers love it, for they spend less in shilling terms.

So far, the country has received support from China of $3 million and expects other partners, including the World Bank and the AfDB, to fund the food kitty.

The National Cereals and Produce Board (NCPB) is expected to import three million bags of maize under a commodity credit guarantee scheme provided by the United States Department of Agriculture.

Intervention intended to drive interest rates or the shilling exchange rate in a particular direction can end up causing distortions if not in line with the underlying developments in the economy.

In the first quarter of 2009, the economy grew at 3.9 percent compared to a 0.6 per cent decline recorded in the first quarter of 2008.

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