•Yesterday, the Central Bank of Kenya (CBK) quoted the shilling at a mean exchange rate of 122.50 to the dollar.
•Banks are however selling the dollar way above quoted official rates, with rates of up to 130.
Image: FREDRICK OMONDI
The weakening Kenyan shilling has continued to pile pressure on households who are grappling with a high cost of living, albeit a slight drop in inflation last month.
Consumers have remained exposed to high commodity prices as manufacturers pass on high import and production costs, despite inflation easing in November to 9.5 per cent from 9.6 per cent in October.
So far this year, the Kenyan shilling has shed about eight per cent of its value against the US dollar.
Yesterday, the Central Bank of Kenya (CBK) quoted the shilling at a mean exchange rate of 122.50 to the dollar.
Banks are however selling the dollar way above quoted official rates, with rates of up to 130.
This has put traders in a tight position, limiting their import power amid shrinking forex reserves.
A weaker shilling means importers spend more on goods such as petroleum products and raw materials for factories into the country, with the costs finally being passed to consumers.
Some of key bulk imported raw materials include clinker that is used as the binder in cement manufacturing.
Kenya also imports construction materials for value addition, machinery, agricultural raw material imports, textile value addition items, steel among others.
Apart from raw material, the overall cost of imports has been increasing on the weaker shilling with Kenya remaining a net importer mainly from China.
"The weakening has resulted in higher import costs of raw materials for manufacturers, as well as higher food, transport and household commodity prices more broadly,” trading solutions provider, AZA Finance notes.
According to the Kenya Association of Manufacturers, local players have no option but to factor in the costs, which are finally passed in the final pricing.
The country's inflation remains high considering that the last time the country witnessed such rates was in June 2017, when it hit 9.21 per cent.
Exporters of horticulture, tea, and coffee who are largely paid in dollars however stand to benefit.
CBK has been putting a number of measures to stabilise the local currency, among them the recent back-to-back increases on its base lending rate from 7.5 per cent to to 8.25 per cent, and last week’s increase to 8.75 per cent.
While it makes access to credit more expensive, reducing borrowing, it is also aimed at taming inflation as few people with purchasing power chase available goods and investments.
According to trading solutions provider, AZA Finance, demand from the manufacturing and energy sectors shows little sign of abating, signaling demand for the dollar will remain high as the year ends.
“Rising inflation led by higher food and fuel prices is denting economic activity, especially for small businesses which are forced to absorb the high input costs at the same time as declining consumer spending,” said Terry Karanja, senior treasury associate at AZA Finance.
With another fed rate hike expected this month, the local currency is projected to remain vulnerable even as the CBK puts in place measures to cushion the local currency from weakening further.
CBK is however positive incoming IMF funds expected this month will boost the country’s forex reserves and support the shilling.
The government is expected to receive $433 million (Sh 52.8 billion) from the IMF as part of the $2.34 billion (Sh285.6 billion) loan facility agreed last year.
The funds will help to cover external financing needs, which have been strained by drought and challenging global financing conditions.
Even so, CBK governor Patrick Njoroge said Kenya still has enough forex reserves.
“We are not stressed. We have adequate reserves to smooth out any volatility that may come,” Njoroge told journalists during the post-Monetary Policy Committee briefing.
Apart from the IMF, about $400 million (Sh48.9 billion) is expected from the World Bank early next year.
“There are programmed inflows that are giving us confidence,”Njoroge said.
There is also an expected strong diaspora remittances as the year ends.
Inflows remained strong at $332.6 million (Sh40.6 billion) in October, compared to $318.0 million (Sh 38.9 billion) in September, an increase of 4.6 percent.
The cumulative inflows for the 12 months to October totaled $3.9 billion (Sh477.1 billion) compared to $3.6 billion (Sh440.4 billion) in October 2021, an increase of 10.9 percent.