The tumbling of the Kenya shilling, reaching a 40 months low of sh106 to the dollar is unlikely to end soon due to heavily infrastructural imports. Kenya’s balance of payments is skewed towards imports and with ongoing infrastructural developments, strengthening of the shilling, below the sh100 mark against the dollar is unlikely to happen soon.
It is a reality that was noted by the Central Bank Governor. Dr. Patrick Ngugi Njoroge who asserted that the government’s appetite for borrowing, without consulting them will ensure that the shilling continues to weaken. The heavy borrowing by government is meant to fund infrastructure projects that were partly in the jubilee’s manifesto but also those that the coalition government had planned to undertake.
The weakening shilling is not new or restricted to the shilling as other African currencies have also been hit by the strengthening dollar.
Analysts from Genghis Capital affirmed that the pair has shed 8.56 percent within the first six months of 2015 (31st Dec 14’ – June 30th 15’), with further shedding extending to a Year to Date (YTD) loss of 9.5 percent breaching the 100 upper limit.
“This occurred despite two interventions by the Central Bank of Kenya (CBK) to mitigate further slides. The dollar has extended a further upward global rally against all major currencies, especially with the ongoing Greek debacle,” read part of its second quarter East African macro-economic outlook report.
The report further asserted that Current Account Deficit pressures may further weaken the pair, with increased importation of goods for the Standard Gauge Railway (SGR) being imported by the Chinese as the largest proportion of allocations is catered under this budget, amounting to sh118 billion. Increased importation of machinery will continue to extend the current account deficit pressures.
In addition, exports of tea and coffee have declined over the past half year, with inflows from our traditional foreign exchange earners not being sufficient, and long term prospects remaining relatively low for the rest of the year. Further pressures and continued drawing of the foreign exchange reserves by the CBK may lead to the drawing from the Emergency Stand-by Facility from the IMF of nearly $700 million to stabilize any significant future shocks, the report explains.
It adds that additional Dollar appreciation increases the risk exposure of Kenya’s balance sheet and funding activities, especially in regards to the Eurobond coupon payments.
Moreover, the shilling weakening is not isolated. The report affirms that
“Prior to the election, the GBPKES (Great Britain Pound to Kenya Shilling) pair saw modest gains. However, following the end of the tightly contested election, the pair has shed 4.68 percent from May 8th to date, with a YTD weakening of 10.49 percent. Despite the turmoil in the Eurozone, the Sterling Pound has managed to make modest gains, with 1Q GDP 2015 growth at 0.4 percent. Growth prospects remain positive as consumer purchasing power is driven due to declined consumer inflation and strengthening earnings growth.”
It concludes that declined growth rates within Europe would not bode well for an already tourism industry that is extremely reliant on European visitors.
The tourism sector has yet to pick up. Tourism experts argue that the hosting of the Global Entrepreneurship Summit in Kenya and the visit of President Obama could see higher tourists flock back from next year.