Wot no local currency? Kenya Shilling is the worst performing currency in the World.

The Kenya Shilling crash

It’s been a glaring issue for a while now, accelerated over the past couple of months, but what has happened to the Kenya shilling? For years the shilling traded at around 80-81 to the US dollar, yet last week it hit a record low of 104.20, losing 24% of its value in this year alone. Speculators say that the exchange rate could still plunge further to 110/even 120 shillings to the dollar. Disaster. Inflation is high (now 17.3% - the original Government target was 5%), some commercial banks have already raised interest rates and economic growth forecasts for this quarter have been scaled down due to the slide of the local currency.

Who is suffering?

Everyone, but most of the burden is being carried by the common man who must absorb increased food and transport prices uncomplainingly. The local chemist, a lovely man at the bottom of our road who works a 12 hour day, 7 days a week, was saying that his small business has been hit hard.

“Pharmaceutical products are costing 30% more these days. It’s okay for the exporters but real Kenyans are suffering badly.”

I think that a lot of people/the powers that be, have stuck their head in the sand for a while hoping that the shilling would rally – but now serious questions are being asked all over the place, MPs have asked for Parliament to look into the issue, Raila Odinga has taken action by creating a task force to help stabilise the shilling. Even President Kibaki felt he had to address the issue. He made a public statement at the ASK show last week, to say that the Central Bank and government agencies will institute measures towards stabilising the exchange rate of the shilling and overall level of domestic prices. Watch this space.

Why?

So why has the value of the shilling spiralled downwards in this alarming way? It’s a pressing question for me personally since we are K shilling earners and property owners in Kenya. Frankly, it’s worrying. After copious reading of local newspapers, it seems that there are various contributing factors in this sudden devaluing of the local currency, though it cannot be put down to a single cause. I am confused.

1. 2012 Elections

The first rumour I heard (back in July) was that the shilling depreciation, was that this is a common phenomena before each Kenya election. The theory is that value of the shilling is artificially pushed down so that foreign dollars being brought in from overseas will buy more local currency to fund election campaigns. In that case it’ll pass, I thought to myself. It hasn’t.

2. Insecurity due to US and Eurozone economic crises

The Eurozone is a major trading partner of East African countries. Rising economic uncertainties elsewhere in the world are undermining prospects for exports, official aid and private capital flows (incl money coming in from the Diaspora). Local markets are nervous. Overseas demand for Kenyan export goods such as flowers, tea, coffee and vegetables are expected to fall if they hasn’t already.

3. Lower rainfall/Drought

A poor season also led to lower domestic production of food. Another consequence of low rainfall is a higher price of electricity. As I understand it, Kenya still relies heavily on hydro-electric power. When dams are low, the government buys in diesel generated fuel from private firms as a short term measure. A higher cost of power is particularly a burden for manufacturing. Check out the ‘fuel cost charge and forex adjustment’ charges on your electricity bill.

4. Higher cost of Imports

While many larger companies have been absorbing the higher cost of imported goods for some time now, hoping that the local currency crisis was a temporary glitch, they will now start passing on higher costs to their customers. For instance, Safaricom last week announced higher tariffs and call rates for their customers because they can no longer carry higher costs their end on customers’ behalf.

5. Currency speculation – rows between Central Bank and Commercial Banks

The Central Bank has accused commercial banks of hoarding US dollars with a view to making more money as the shilling value falls. Commercial banks have accused CBK of sending out mixed signals (i.e. pumping dollars into the economy then talking about raising interest rates to attract forex/dollar investors to the country) and a general failure to address the crisis properly.

Self perpetuating problem: Foreign investors have been exiting the economy since August as a result of the weakening shilling. Leading Kenya economist Aly Khan Satchu estimates that the Kenya economy has lost $1.1 billion in forex for this reason.

There’s a general crisis of confidence that the Central Bank is not able to properly defend the currency and whatever it does next will be too little too late.

“The shilling is falling because of a behind the curve monetary policy strategy.” Aly Khan Satchu said.


What next?

My fingers are tightly crossed that the situation will improve. After all, how much worse can it get? While Kenya’s problems may pale slightly against the debt crisis being played out in the rest of the world, they feel real enough here.

Let’s hope that Kenya strikes oil in the Turkana district/Lamu basin by the end of the year, as is widely speculated they will. Geological surveys are complete, all the signs of oil are there and drilling rigs are being manoeuvred into position as we speak. What will the discovery of oil do for Kenya? Does the Kenyan Government have the wherewithal to manage the country’s resources to the benefit of Kenyans on the ground or will it sell out? Needless to say, the Chinese are already poised to be first in line for raw materials.