Shilling slides to 15 month-low in turbulent start to 2017 trading (Kenya)

By Charles Mwaniki | Business Daily, Kenya January 5, 2017

The Kenyan shilling has started the year on a turbulent note, slipping to a 15-month low against the US dollar and setting local consumers up for higher cost of imported goods as well as a steep rise in electricity bills.

Commercial banks yesterday exchanged the shilling at 103.10/20 to the dollar compared to 102.80/103.00 on Tuesday — a decline that currency traders attributed to increased demand for the US dollar.

“The shilling opened the year under pressure from importers, losing ground [to the dollar]. This trend is expected to remain throughout the week and we may see the regulator stepping in to manage volatility,” fixed income analysts at Genghis Capital said in a brief yesterday.

The importers are looking to fill their dollar requirements after the holidays, when most had stayed off the market.

Reports indicated that the Central Bank of Kenya (CBK) had moved into the market to sell an undisclosed amount of dollars in a bid to stave off extreme exchange rate volatility.

The CBK had the shilling at an indicative rate of 102.81 yesterday, the lowest since October 16, 2015 when it quoted the local currency at 103.04 to the dollar. Banks at the time quoted the shilling at 103.45/55.

The central bank rarely discloses the amount of dollars it has sold in the market, but has always maintained that its actions are never meant to determine the direction or level of the exchange rate but to prevent volatility.

Foreign exchange reserves held by the CBK have over the past one month fallen by $318 million (Sh33 billion) to $6.97 billion — equivalent to 4.56 months of import cover.

Given that Kenya is a net importer of goods, including vital commodities such as fuel, medicine and capital goods, a depreciating shilling increases inflation (cost of living), with the effect trickling down to all facets of the economy.

Energy sector operators are bracing for tougher times as they will need more dollars to import petroleum as the price of crude continues to recover from last year’s historic lows.

A barrel of oil is now priced at $60 following last month’s decision by major oil producers to cut production.

Fuel imports account for a large percentage of Kenya’s total import bill — standing at between 17 and 25 per cent.

A higher exchange rate coupled with rising oil prices will make imported petroleum more expensive, raising the cost of transport, which in turn trickles down to the cost of goods — including fresh produce.

The higher cost of fuel and a weaker shilling will also impact the household energy budgets, potentially raising the fuel levy and forex adjustment components in the power bill.

Fuel levy rose in December to Sh2.85 per kilowatt hour (kWh) from Sh2.34 in November, and is expected to rise further this month as water levels in hydro dams fall, forcing the country to rely more on expensive thermal power

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