The depreciation of the shilling to the dollar, the highest in years, poses a major pain point for many Kenyan companies. At the end of last year, the shilling closed at 121 to the dollar. This half year to June, it has closed at 140, a delta of 19 shillings in just six short months. Most impacted are companies that have huge dollar loan stock. For instance, a company that took a dollar denominated loan of 100 million last year now has to contend with a book loss of Kenya Shillings 1.9 billion.
Currency depreciation is not restricted to Kenya alone. Many countries in Africa have registered the same trend. Information from the IMF blog says, “depreciations across the continent are mostly driven by lower risk appetite in global markets and interest rate hikes in the United States pushing investors away from the continent towards safer and higher paying US treasury bonds.” Economist Ndiritu Muriithi confirms as much in a newspaper article saying, “investors are selling off their holdings of Kenyan stocks and moving their monies to US dollar assets because interest rates are comparatively high.”
A weaker Kenya Shilling has widespread ramifications that affect everyday existence. Most obvious is the cost of imported essential items like food. Kenya is an importer of palm oil used for cooking in most households. Sugar, maize, wheat, and rice are other items whose national shortfall is supplemented by imports. Despite the government’s interventionist efforts, the prices of these items are yet to come down to their pre-pandemic levels on account of a weakened shilling.
Others affected by the depreciation of the shilling are foreign investors expatriating dividends and profits. A report by the Business Daily mentions that, “an analysis of dividend repatriation across 13 listed firms shows that foreign investors have taken a Sh13 billion haircut on currency depreciation alone.
For the longest, the IMF has entertained the view that the shilling is “managed” rather than operating on the forces of demand and supply. It has insisted that Kenya’s currency is overvalued. To that end, it is likely that the chips will now be allowed to fall where they may with market forces eventually determining the true value of the shilling. It is also likely that the Central Bank of Kenya will only intervene to forestall inflation by raising interest rates.
Meanwhile, Kenyans should be forewarned to tighten their belts for the foreseeable future. A weaker shilling against the dollar pushes up the cost of servicing the country’s external debt. A way must be found to wean the country of reliance on expensive loans like Eurobond taken under the previous administration. The burden of servicing these debts has contributed greatly to the weakening of the shilling.
It will also be interesting to see how Kenyan companies are holding up when they report their half-year results in the next few weeks. Of particular interest are the likes of Kenya Power that has power purchase agreements with several independent power producers. These are dollar denominated yet the power utility company’s receipts are in Kenya shillings. Kenya Airways also has a huge dollar loan stock. But because its receipts are mainly in US dollars, they may serve as a natural hedge against forex fluctuations.
Mr Khafafa is a public policy analyst