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The cost of inflation
The current inflation rate being experienced in the country is expected to surge even higher as a sustained weakening of the shilling feeds into prices of basic consumer goods such as food and fuel.
The shilling has continued to depreciate drastically to shocking low levels as dealers reported increased demand from maize importers and electricity generators buying diesel to run thermal power stations.
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| A shopper at supermarket compares flour prices as a result of high inflation |
The shilling has lately sank lower to trade at a new record of 92.90 to the dollar down from 91.30 the previous day. A weak shilling adds inflationary pressure by increasing the prices of imported goods.
The local currency has therefore lost 15 per cent against the dollar which has kept inflation high to 15.53 per cent this month from 14.49 per cent in July
The agricultural sector primarily in horticulture which is a major foreign exchange earner reported last week that their earnings are expected to drop due to suppressed demand in Europe.
High inflation and increased instability of the local currency also affects the ability of investors to make decisions concerning future foreign currencies transactions and economic performance.
Foreign investors at the stock market have also sold shares as drought and high inflation persists
"Majority of our investors have sold their shares out of fear of the unexpected outcome of the shilling performance. The increased sale in shares is likely to negatively impact the market in the coming days," said Tsavo Securities director Fred Mweni.
The Kenya Association of Manufacturers (KAM) has said that the weakening of the local currency has since pushed up the cost of production by more than seven per cent since the beginning of this year.
The association chairman Jaswinder Bendi said that the situation has been compounded by the increase in fuel prices and power rationing in major industrial sectors. Fuel prices have recently shot up with the current Energy Regulatory Commission adjustments increasing by kshs2 to hit at kshs118 for a litre of petrol and kshs107 for a litre of diesel
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| The weakening Kenyan shilling |
“Kenyans will be affected by the double impact of an increase in oil price and the weakening of the shilling and manufacturers will have to cushion themselves by passing some of the costs to consumers through increases in commodity prices.” He said.
The high rate of inflation and a weakening shilling is happening when the Arab crisis is causing an upward movement in fuel prices, also providing side shocks on cost of living index
High fuel prices pushed up by the political problems in the Arab world is causing the shilling to lose stable ground against the dollar.
It is expected that local manufacturers of food items such as flour and cooking oil will continue to adjust prices upwards as they seek for more shillings to import raw materials.
Kenya is a major importer of finished goods and raw materials. The latest Central Bank of Kenya (CBK) data shows that imports in April totaled Sh87 billion, while exports were Sh39.4 billion resulting to an unfavorable balance of trade of Sh47.6 billion.
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| The Central Bank of Kenya |
Some Kenyan manufacturers may relocate to other countries because of pressure from high energy costs, a weakening shilling, rising inflation, and political uncertainty.
"A lot of multinationals are consolidating their production in cheap markets. Many have considered relocating production to Egypt," Betty Maina, chief executive officer of the Kenya Association of Manufacturers.
She said South Africa and Egypt were the country’s most likely to be considered as new locations because of low energy costs and strong currencies.
Kenya heavily depends on hydropower which has been affected by the dry spell and having embarked on constant power rationing program, it therefore has to rely on costly diesel-fired electricity thus rising raising energy costs.
Maina said battery manufacturer Eveready East Africa is seriously considering pulling out its business in Kenya though it would still remain commercially active in Kenya.
Inflation and a weak shilling is cutting across in both edges for manufacturers. It's definitely better for net exporters but they are also hurt by increase in labour costs and costs of production.
Export-oriented counters such as tea, coffee expect the dwindling shilling to increase their earnings in local currency but this benefit may be short-lived while some manufacturers and the telecommunication industry bears the harsh crunch.
“We are now getting more shillings per dollar,” said Sasini managing director Caesar Mwangi. Sasini sells up to 95 per cent of its produce in dollars but Mr. Mwangi feared that rising input costs would reverse the gains.
Petroleum products, packaging materials, Fertilizers, machinery and are some of the inputs whose local prices have increased as the shilling weakens. However, if and when the shilling gains ground, Mr. Mwangi fears that farm inputs ere not likely to go down correspondingly thus eroding their profit margins in the long term.
Analysts however say that the increase in inputs would be compensated by the gains from the weakening shilling.
“Even if the shilling strengthens, you still have the rise in commodity prices going in favour of tea exporters,” said Eric Musau, a research analyst at African Alliance Investment Bank.
Kenya Airways and TPS Serena would be among the beneficiaries from the weak shilling because they also bill in dollars.
According to Renaldo D’souza, a research analyst at Genghis Capital, despite the threat of inputs eroding gains for Kenya Airways, their hedging strategy on fuel costs is still good and thus will enable them remain profitable.
Similarly manufactures who purchase their raw materials agriculturally (produced locally) will not be affected because they are water fed unless they are produced by irrigation means which requires power.
A research by Renaissance Capital shows that Safaricom and Access Kenya will be directly affected by the shilling’s instability because part of their capital expenditure is in foreign currencies and the rest in local currency.
The weakening of the shilling coupled by the increasing demand for public spending as a result of the current drought and increasing inflation has further propelled Kenya’s total National debt to stand at Kshs.1.5 trillion. The national debt shot up by kshs.93.8 billion to 1.5 trillion in the first half of the financial year
The total foreign debt is has accrued to Kshs599.2 billion while the domestic debt is at Kshs720.3 billion. The figure means that each Kenyan currently owes donors and external money lenders an amount more than Kshs.22, 000.
The International Monetary Fund (IMF) has expressed concern for the Kenyan government to reduce the debt to manageable levels.
“We are already working with the government on several measures that need to be undertaken to help reduce the debt and stabilize the situation” Said IMF representative to Kenya Regna Gudmundsson.
The public debt is more than 45 per cent of the country’s Gross Domestic Product (GDP) and is expected to be reduced to levels less than 35 per cent.
