“We regret to inform you that due to the volatile exchange rate to the dollar, we are experiencing disrupted supplies of PPR raw material. We are trying everything in our capability to restore production and fulfil the demand of our customers,” reads a notice by pipe manufacturers -Agro Irrigation and Pump Services Limited.
The company's director Mahesh Halai paints a picture of the current volatile foreign exchange market, which has disrupted operations of many manufacturers.
This is in the wake of an increasing likelihood that the US Fed will keep hiking interest rates to between 5.5 per cent and six per cent this year, which is expected to strengthen the dollar further, analysts at Kenya’s global broker, FXPesa, project.
“In a forex market where the US dollar is strengthening against the Kenya shilling for the last two years, a commercial bank is incentivised to position itself on the bullish side of the dollar and the bearish side of the Kenya shilling,” Rufas Kamau, Market Analyst at FXPesa explained.
To optimise forex gains, the commercial banks want to hold onto more dollars so they can sell at higher rates under the speculation that the Kenya shilling continues losing, he said yesterday.
Manufacturers and importers have been hard hit, with a weak shilling to the dollar pushing up the cost of imports–both raw material and finished goods, which has seen commodity prices in the local market continue to rise.
The shilling has lost more than two per cent of its value to the dollar so far this year maintaining a free fall from mid-last year.
It hit a new low of 127 yesterday rallying towards the 130 mark, with the Central Bank of Kenya seen to be holding to the dwindling forex reserves.
The apex bank has however maintained a brave face on the local currency and forex reserves.
“The Kenya shilling remained stable against major international and regional currencies during the week ending February 23,” it says in its weekly bulletin.
According to trading solutions provider, AZA Finance, there has been increased demand for the dollar from the oil and energy sector, as banks offer a dollar at above 135 units on the Kenyan shilling.
This means imports are spending more than the Central Bank of Kenya average rate to access the dollar, a cost that they are passing to consumers.
Key imports affected include petroleum products, machinery, medicine and pharmaceuticals products, vegetable oil, wheat, clothing and shoes, clinker, electrical supplies and electronics.
Construction materials for value addition, agricultural raw material imports, textile value addition items and steel have also been affected.
“The main problem facing importers today is that demand for dollars is exceeding supply, due to tight global financial conditions, which have affected access to commercial foreign debt and made portfolio inflows difficult to come by,” Financial Risk Analyst, Mihr Thakar, noted.
According to Thakar, the Central Bank of Kenya (CBK) has let the currency act as a shock absorber, rather than depleting reserves for short-term currency strength.
This, he says, has kept Kenya's economy resilient, at the expense of higher import prices in the medium-term.
Last week, usable foreign exchange reserves fell to a record $6.8 billion (Sh864.2 billion), from $6.9 billion (Sh876.9 billion) the previous week, CBK data shows, which puts the import cover at 3.8 moths.
This is below the statutory requirement of at least 4 months import cover, a move that is linked to CBK’s decision to hold on to the reserves.
The government has indicated an intention to change the main source of dollar reserves from sovereign debt to Foreign Direct Investments.
“ This is expected to boost Kenya's current account and Central Bank ability to intervene in currency volatility,” Mihr told the Star on telephone yesterday.
AZA Finance senior treasury associate Terry Karanja also notes Kenya secured a $27 million (Sh3.4 billion) funding deal with the European Union to boost exports to the 27-nation bloc and strengthen the overall business environment.
The government is also anticipating $3.4 billion (Sh432.1 billion) in tourism-related earnings this year as it expects tourist numbers to exceed pre-pandemic levels.
“In the immediate term, however, we expect the shilling to remain under pressure as importers clamour for dollars to meet month-end obligations,” Karanja said.
CBK can also close the gap on reserves by incentivising FDIs, FXPesa’s Kamau said.
This would include supporting local businesses and lowering the cost of doing business.
“The CBK could also consider increasing interest rates but that would hurt the economy and lead us into a tough recession. Instead, supporting expansion in manufacturing and value addition would create a boom in surplus production for export which would increase dollar reserves,” Kamau told the Star on telephone,” yesterday.
