Cost of imports to soar as shilling weakens further

Cost of imported commodities is to increase further with a weakening shilling, whose value is expected to fall to Sh133 to the dollar by the end of the year.

With the declining shilling, currently trading at Sh126.60, imports of petroleum products and raw materials for factories will surge on rising input costs, with consumers expected to bear the extra costs.

On the flip side, exporters of commodities like horticulture, tea and coffee are expected to rip big from the depreciating shilling since their sales will be pegged on the greenbacks. Mohamed Abou Bashra, head of macroeconomic analysis at EFG Hermes, a leading investment bank, said yesterday that the shilling is projected to hit lows of between Sh130 and Sh133 by December as it continues to come under pressure, especially, from a declining foreign exchange reserve.

The shilling which was trading at Sh113.40 in January 2022 has since shed Sh14 to date and may since further, according to analysts at EFG Hermes.

Banking sector

“We will be looking for the shilling to be ending the year around the Sh130 to Sh133 level in light of those pressures,” Bashra said during the release of a state of economy and banking sector report for Kenya. Speaking to the Business Hub, yesterday, Ronny Chokaa, a research analyst at Genghis Capital agreed with Bashra, saying Kenya’s foreign exchange (Forex) market is under mounting pressure with usable Forex reserves standing at $6.8 billion (Sh862 billion) as of February 23rd barely enough to cover the statutory 4 months of import cover.

By then, the USD-KES average exchange rate had declined to an unprecedented low of Sh126.27.

“In effect, the Central Bank is becoming increasingly limited in its capacity to implement either a managed exchange rate regime, or to carry out quantitative easing necessary to alleviate the pressure on the shilling,” Chokaa said.

In January Genghis, in their analysis of expected volatility of the shilling had also projected that the exchange rate would fall to Sh136.65 levels by December 2023, and in the worst case scenario Sh150 against the greenback by year-end.

Kenya, like most countries globally, compares its currency to the US dollar and fixes the exchange rate to this currency, in order to maintain stability for investors. Financial advisors, Abojani investments, the Kenyan currency has lost about 26.7 per cent in value since 2020, with importers paying 26.7 per cent more for goods, a situation that has created a shortage of dollars owing to the high demand for the greenbacks.

The continuing loss in value of the shilling is expected to make the price of oil more expensive, with a knock-on effect on the transport sector and the cost of goods and services is also set to rise in the course of the year.

Capital goods

The cost of machinery and other capital goods will also be impacted, leading to reduced investment in key industries and limiting the country’s ability to grow its economy. The Central bank governor Patrick Njuguna is on record saying there should be no cause for alarm since the country expects support from the International Monetary Fund (IMF), and the fact that usable forex reserves remain adequate at $6,939 million (Sh880 billion) which is 3.88 months of import cover as at February 9 2023.