Product shortages loom as dollar crisis deepens

Manufacturers confirmed the access to foreign exchange strain, saying the unavailability of forex in the country is already having a huge impact on their operations.

Foreign suppliers

A majority of manufacturers are struggling to pay their foreign suppliers and creditors, risking their ability to meet their manufacturing needs, Financial Standard has learnt.

"Yes, most of the manufacturers are encountering the struggle of getting their forex requirements," said Kenya Association of Manufacturers Chairman Rajan Shah.

Manufacturers now want the foreign exchange crunch addressed immediately by the banking regulator - the Central Bank of Kenya - before it snowballs into a full-blown crisis that could hit the economy hard.

CBK Governor Dr Patrick Njoroge, however, recently maintained the market has adequate foreign exchange to meet demand from importers and corporates for payments like dividends.

The regulator has also in the past insisted that it is committed to a flexible exchange rate.

Exchange market

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

"The usable foreign exchange reserves remained adequate at $6.860 billion or Sh869.8 billion (3.84 months of import cover) as of February 23. This meets the CBK's statutory requirement to endeavour to maintain at least four months of import cover," said CBK on Friday in its weekly bulletin.

Financial Standard could not immediately get a comment from CBK for this report. "We have had several engagements with CBK yet no solution is available," said Mr Shah in the interview.

"It is necessary to have free interbank trading without restrictions on rate to be traded to have a better flow of foreign exchange."

A similar biting dollar shortage last year saw many manufacturers operate below their capacity.

At the time, leading manufacturers, including edible oil producers Kapa Oil Refineries and Pwani Oil, revealed how the dollar shortage amid raw material rationing had disrupted their operations.

Several large banks are now selling the dollar at between Sh133 and Sh136 per unit, while buying the same at between Sh123 and Sh125, with bankers and forex bureaus saying the higher prices are driven by demand and the cost of accessing the hard currency on their part.

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

Experts recently warned Kenya risks turning into a partially dollarised economy as more traders and corporates shun the troubled shilling in favour of the greenback for day-to-day transactions.

The trend referred to as dollarisation, where the use of dollars as a means of exchange informally gains currency for ordinary transactions like rent payments and other utilities, experts said, poses many risks to the economy.

If dollarisation - the preference for dollars - is not reined in, experts warned, the phenomenon could largely stifle growth as the country may not be able to effectively utilise its monetary instruments.

Lose competitiveness

It could also influence economic activity, and Kenya may gradually even lose competitiveness compared to its major trading partners.

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

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.

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

The country imports various goods, including cars, petroleum products, machinery, medicine and pharmaceutical products, vegetable oil, wheat, clothing and shoes.

A weaker shilling will also keep the price of imports such as fuel elevated, inevitably pushing up the cost of goods and services and further raising inflation, which has remained stubbornly high at 9.1 per cent as of last month.

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

Foreign deposits in local banks stood at the equivalent of Sh922 billion as of last November, according to CBK data.