•Commodity prices are set to increase as importers, manufacturers, and local traders pass the costs to consumers.
•Key imports include petroleum products, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing and shoes, clinker, electrical and electronics.
Image: FILE
The Kenyan shilling is expected to remain weak against the US dollar in the medium-term, with experts predicting even a further slump, which will hit hard households in the country.
The shilling which has remained vulnerable has continued to fall, hitting a fresh low of 125 to a unit of the dollar this week.
Central Bank of Kenya (CBK) on Friday quoted the local currency at a mean of 125.07 with a selling tag of 125.17.
However, some banks have been selling at above the 130 mark amid sustained pressure from importers to meet their obligations and the broader dollar strengthening.
According to trading solutions provider, AZA Finance, shortages of foreign currency in Kenya have continued to weigh on business growth in the country.
Despite such strains, the current account deficit was lower than forecast last year, coming in at 4.9 per cent of GDP compared to 5.4 per cent in 2021, on the back of increased exports and diaspora remittances towards the end of the year.
The central bank had expected the deficit to hit 5.6 per cent in 2022.
“With dollar demand continuing to outweigh supply, we expect the shilling to remain under pressure in the coming days,” AZA Finance Senior Treasury Associate, Terry Karanja, notes.
Kenya's global broker FXPesa foresees the shilling hitting a record low of Sh130 to a dollar, impacted by Federal Reserve Rate (Fed rate) hikes.
A market outlook by the firm, the first to offer Forex and CFD products for the retail market in East Africa, indicates a review of the Fed rate will fuel the current depreciation of the shilling.
"A strong recovery in the dollar index is likely to push the USDKES to 130 in February as demand for US treasuries continues to rise because of higher interest rates,'' FXPesa's lead market analyst Rufas Kamau notes.
A weaker shilling means households are staring at equally tougher times ahead, as a result expensive imports and high inflation.
The US dollar is predominantly the standard currency unit in which goods are quoted and traded, and with which payments are settled.
It is also the world's reserve currency.
It means importers will spend more to bring in goods into the country with Kenya remaining a key importer, with a trade deficit of about Sh1.407 trillion.
This is on annual imports valued at Sh2.151 trillion against exports value of Sh743.7 billion–Economic Survey 2022.
Manufacturers importing raw material are also affected by higher import bills on the weakening shilling.
This means commodity prices are set to increase as importers, manufacturers and local traders pass the costs to consumers.
Key imports include petroleum products, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing and shoes, clinker, electrical and electronics.
Kenya also imports construction materials for value addition, agricultural raw material imports, textile value addition items, steel among others.
An increase in commodity prices will add pressure to households who have since are grappling with a high cost of living which hit a five-year high of 9.6 per cent in October, before slightly easing to 9.5 per cent and 9.1 per cent in November and December, respectively.
It further slowed down to nine per cent in January, which was however still above the preferred ceiling of 7.5 per cent.
“The rise in inflation was largely due to increase in prices of commodities under transport
(13.1%); food and non-alcoholic beverages (12.8%); and housing, water,
electricity, gas and other fuels (7.3%) between January 2022 and January 2023,” Kenya National Bureau of Statistics director-general Mcdonald Obudho said.
The weak shilling, coupled with the introduction of numerous taxes, is likely to hit the country’s economic growth experts say.
Company executives interviewed in the latest CEO Survey by the CBK opine that the high tax regime could drive away investors or drive up operation costs, hurting return, and expansion plans and leading to job cuts.
“Optimism regarding growth prospects for the Kenyan and global economy remained largely unchanged even though previous concerns such as global inflation, recession fears and the war in Ukraine have moderated,’’ the report says.