Strong Shilling Portends Mixed Fortunes

Published on 4th December 2007

The Kenya shilling (Ksh.) has hit a nine years low against the US dollar at an average of US$1.00 = Ksh.63.50. The shilling has been gaining strength over the dollar for over two years now. This has come both as a blessing and curse to many Kenyans depending on which side of the divide they hail. For exporters, the strengthening of the shilling against the dollar has wiped out millions of earnings, making them to suffer losses.

 

On the other hand, oil importers have had a nice time as the stronger shilling cushioned the effects of rising oil prices in the international market. Definitely all importers are in favor of a stronger shilling because of its favorable impact on their competitiveness on the international market.

 

The dollar is not the only currency against which the shilling has gained strength, but it is most affected. Other important currencies include the euro, the Japanese yen and the German deutschmark.

 

The shilling has become stronger because of huge inflow from donors, increased remittance by Kenyans in the Diaspora and the weakening of the US dollar.  Other reasons include the buying of 24.99% stake in Equity Bank by Helios Capital Ltd. at an estimated value of Ksh.11 billion, and the take over by 51% of Telkom Kenya by France Telecom, at an estimated value of Ksh.26 billion. Recently, the International Monetary Fund disbursed four billion shillings to the Kenya government. This has further increased the amount of dollars in circulation.

 

Since 2003, the Kenyan economy has been on a bull run supported by the robust growth in key export sectors like horticulture and tourism. Despite the adverse effects of a stronger shilling on exports earnings, horticulture grew by 2.2 percent while tourism, which accounts for 12% of the countries gross domestic product (GDP), grew by over 30% in 2006.

 

The US seems to have abandoned its strong dollar policy to reduce on its government current account deficit caused by having more imports than exports. Currently, the Kenya current account is in bad shape due to the huge growth in imports volumes as compared to exports that are stagnating in the backdrop of a strengthening shilling.

 

In the past, exporters have managed to arm-twist the central bank governor to intervene. At one time, when the shilling fell past the Ksh.69 mark against the dollar, exporters forced the then resilient governor, Andrew Mullei, to caution commercial banks against manipulating the market for selfish reasons. Now that it’s dropped below the Ksh.63 mark, it will take a very strong governor to keep his hand off the exchange rate since it is directly tied to the country’s export earnings.

 

In case the shilling’s strength remains unchecked by the Central Bank, Kenya will face a much bigger trade deficit, which is not good for the long-term prospects of the economy. As mentioned before, local companies will have to compete with cheaper goods and services from foreign countries. Tourists may find visiting Kenya expensive. Foreign investors in the Kenya securities market will also find investing in Kenya much more expensive.

 

Imports into the country will definitely become cheaper. Goods such as electronics and automobiles, which are purely imports, will become more affordable. Buying stocks or bonds in foreign market will also be cheaper. The increase in oil prices on the international market will not have a great effect locally {although these remains contentious as oil firms have been adjusting their prices upwards in proportion to the international market rise}. Taking that long awaited holiday to Zanzibar will be less costly, in a small way, due to reduced prices of imports the inflation rate in Kenya will reduce.

 

Ideally, the shilling should be valued at a level that is neither too strong nor too weak. Such a level would help sustain long-term economic growth and stability. However, this ideal is difficult to realize since many factors affect the value of a nation's money. Regardless of who benefits more from the strength of the shilling, the market forces should determine its final value. The Central Bank of Kenya should only come in to ensure there is no manipulation from commercial banks and exporters to fulfill their own interests.


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