More pain for consumers as shilling hits Sh100 mark

Central Bank of Kenya Governor Patrick Ngugi

The shilling slumped past Sh100 against the US dollar in levels last seen in mid-2011, as the heavy import bill continued to take its toll on the local currency.

Little is expected in mitigation measures from the monetary policy meeting today, forex traders are predicting, implying that the shilling could come under more pressure in the coming weeks. “We can expect further declines,” Joshua Anene, a senior dealer at CBA said.

A weaker shilling affects consumers through costly imports and pushes up prices of a number of consumers goods.  The current weaker local currency means that more units of the shilling are needed to buy the dollar.

A car that has been selling at $10,000, for instance, now costs Sh1 million at today’s exchange rate compared to Sh870,000 ($8,700) only months ago.

Anene said it was unlikely that the monetary committee meeting would raise the indicative lending rates, coming only a month after the Central Bank Rate was raised to 10 per cent, up from 8.5 per cent.

“The recent hike will buy the bank some time, but we expect that rising inflation and pressure on the shilling will force another hike around the turn of the year,” said John Ashbourne, analyst at Capital Economics.

“Forex stability is secondary in the Central Bank’s mandate; price stability and inflation are its primary focus,” he adds. Traders from other banks forecast that the CBK will continue digging into the IMF credit facility to contain the sharp depreciation of the shilling. In the June meeting, members of the committee said the rate hike was purely aimed at supporting the local currency. Since then, CBK has been actively involved in open market operations in selling dollars in the market.

But that measure has failed to stop the near free fall of the Shilling with forces in the international markets helping strengthen the US dollar.

Oil prices

“The persistent volatility in the global foreign exchange markets coupled with the projected recovery in international oil prices have implications on inflation,” the MPC said in its statement in June.

Kenya’s foreign exchange inflows through remittances have steadily climbed, implying that the shilling could have been even weaker in the absence of the fresh inflows. In May, for instance, total remittance receipts were 7.9 per cent higher than the corresponding month last year.

CBK reported total foreign exchange receipt in May stood at $129.1 million compared to $119.7 million same month the previous year. “The 12-month average flow sustained an upward trend to $122.7 million, up from $111.7 million registered during the same period,” reports CBK.

Low prices of Kenya’s key foreign exchange earners; coffee, tea and tourism have ensured the country’s foreign currency receipts remain depressed.

Newly appointed top executives of the CBK, including Governor Dr Patrick Ngugi and his deputy Sheila M’Mbijiwe, have the first opportunity to stem the forex fluctuations.

During former governor Njuguna Ndung’u’s term, the shilling plunged in October 2011 to its weakest ever level of 106.80 per dollar, leading to run-away inflation and suggesting he was way behind the curve of the interest rate cycle.