Sunday, 23 November 2014

Weak Kenya Shilling: should we mourn or pop the champagne?


THE KENYA SHILLING  has weakened against the US dollar in the recent weeks shaving of nearly five per cent in just about two months. Now the exchange rate stands at 90.25 to the US dollar buying down from KES 86.21 in January this year, a 4.7 per cent decline.

It is a decline that sparked off a debate on whether Kenyans should mourn or cheer the weakening the shilling; is a weak shilling a bad thing or a good thing? It is a bit of both.

 But first let’s understand why we need more shillings to buy the US dollar. And the first question we should ask is; which is changing, the shilling or the dollar? And what are the implications.

 Our thesis the shilling has not weakened; it is US dollar that has strengthened against other major currencies including our dear old shilling. The Dollar has been strengthening against other currencies including the Euro and the British Pound.  It has gained by more or less the same rate against the Euro and the British Pound as the Kenya shilling, that is, 4.7 per cent.This is why the shilling has gained against the the British Pound Sterling and the euro. Therefore there is no reason to panic.

 The  trend of the shilling then means that the effect on the economy could be neutral.  It may not strengthen or weaken our balance of payments position.  Exports may not be higher cheaper where In Euro zone  against whose  currency the shilling has strengthened. 

Let’s look at the import side first. Kenya’s imports are largely Crude oil which constitutes 25 per cent of our annual import bill. Oil is an inflationary import in our basket and the price of crude oil is shrinking. Over the last six months crude oil price has declined 24 per cent from US$ 97.5 a barrel in Mid-June to $74.25 a barrel in Mid-November. This has translated into low pump prices which are expected to continue declining.

 Such declines mean savings for the motorists and manufacturers. We therefore expect a lower price regime next year since the price of electricity is also down 25 per cent since August and is still declining as more geothermal power comes on stream. So inflation, one of the potential results of a weak shilling, will not happen.

 If anything inflation is likely to fall even further. In fact, according to Leading Economic Indicators published by the Statistics office, Inflation declined from 8.36 in August to 6.6 in September declining further to 6.43 in October. Low general prices mean more money for consumers to spend setting the stage for economic growth.

 On the export side, Kenya’s largest export is Tea whose price has shrunk in the recent past. However, a weak shilling will increase the amount of shilling per kilo. Again this will put more money in pockets of our farmers, increasing their capacity.

  Kenya, as a tourist destination will become competitive as a result of the weak shilling. However, tourism benefits will depend on whether the hot heads at the coast cool down or the government manages to neutralize them.  For now tourism is not on the radar as Kenya economic driver.

Don’t pop the champagne yet neither should you sing the dirge for the shilling. However, the Horizon does not look bad. Keep the lid on you may need to pop it in the first quarter next year. For those to whom Christmas means anything, this may not be a miserable Christmas.


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