How weakening shilling spells trouble for taxpayers

If time is money, a majority of Kenyans are running out of it. Others, however, are making it.

The Kenyan shilling has been unstable for the most part of the year, slumping even further to its lowest record yet against the dollar last week.

If you had a dollar in January, you would have exchanged it for about Sh100 and having bought airtime, you would talk for some 50 minutes at the average calling rate of Sh2 a minute. That same greenback today would let you talk for 54 minutes at the same rate, giving you four minutes more.

For Kenyans who put their faith in the American currency, that carries the emblem ‘In God we trust’, and were holding $6.1 billion in dollar accounts at the end of January, the value has grown from about Sh611.2 billion to Sh661 billion, representing eight percent increase or about Sh50 billion.

Borrowed

For the majority of those who hold no dollar account, the realities are different. They are living on borrowed time.

In January, Kenya owed $30.6 billion or Sh3 trillion when the shilling was trading at 100 against the dollar. Today if we are to repay, without the accruing interest, we would have to fork out Sh3.3 trillion after the shilling tumbled to its lowest ever of 108.50 per dollar on August 19. (On Thursday, August 27, the shilling was trading at 108.15).

This means Kenyans have to work even harder to repay the Chinese, Americans, Europeans, Japanese, and Arabs who we owe in dollars.

So, why is the shilling crumbling like a currency note in a clenched fist of a mighty dollar?

To begin with, the shilling is exposed by Kenya’s insatiable appetite for dollar-denominated loans –  the Eurobonds and syndicated loans, that the country heavily relies on, more so under the current administration.

Dollar loans stand at $33.1 trillion or Sh3.5 trillion after adjustment for currency and new loans picked up to fight the coronavirus pandemic from the World Bank, International Monetary Fund (IMF), Africa Development Fund, and other bilateral lenders.

Limited inflows

To repay them Kenya needs dollars. But the country relies only on diaspora remittances, a small pool of exports and new loans for dollar inflows.

However, the Covid-19 pandemic has already hit these sources, limiting inflows from Kenyans in the diaspora who are living under constant threat of job losses, restrictive travel, cancellation of flower auctions, and closure of the international financial market.

FocusEconomics – a Barcelona-based economic analysis firm which tracks growth projection from 11 global leading banks, consultancies and think-tanks – notes that concerns over the potential economic fallout from the spread of the coronavirus have weighed heavily on the market sentiment, increasing demand for safe-haven assets and leading to a sharp weakening of the shilling.

Shocks

The shilling started its descent in March as the first case of the virus was reported in the country ushering in major economic disruption, and by April the shilling had declined to 107 against the greenback, the psychological mark of the furthest retreat seen in the country.

To put it in context, when the shilling hit a low of 107 in November 2011, followed by 19.72 percent inflation, Parliament launched a probe on the then Central Bank of Kenya governor Prof Njuguna Ndung’u for hesitating to act and propelling the slide.

In 2015, the current CBK governor Patrick Njoroge had Kenyans holding their breath once more when the shilling almost touched the 107 level.

This time around, even Dr Njoroge could not hold the tide back, the walls have been breached, and confidence is low. In March this year, he had announced he would buy dollars to protect the shilling from future shocks, but has now been forced to sell the greenback he had, hoping the World Bank and IMF can continue supplying dollar loans to boost the reserves.

“The Kenya shilling depreciated against the US dollar attributable to demand from merchandise importers who had entered contracts before the coronavirus-related disruptions, buying hard currency to offset them in the current thin market with very little dollar inflows, prompting the CBK to sell dollars, despite their earlier plan to purchase dollars from the market to improve forex reserves,” Cytonn said in a report.

Dr Njoroge, however, said in a post-Monetary Policy Committee meeting that when the performance of the shilling and other currencies is weighed against the dollar, “we are closer to the middle,” the worst being the Zambian Kwacha that had depreciated by 22.3 percent by April against the dollar.

But that was before all hell broke loose.

No respite

The lockdown had helped manage dollar demand, besides the loans, as activity from importers had slowed down. Oil prices had also plummeted to record levels, airlines were grounded, and transport in and out of major towns and counties had also been shut.

The shilling fall had, however, become pronounced by July that President Uhuru Kenyatta opened up Nairobi, Mombasa, and Mandera counties and announced the resumption of local air transport.

These efforts have fallen short though.

Other factors like dividend payments by corporates have also contributed to the demand for dollars especially Safaricom, Kenya’s largest telecom, seeking the US currency ahead of Sh56.09 billion dividends payout, which has been cited for the latest rout.

“There has been an increase in dollar demand in recent weeks - import demand is picking up as the economy opens up – which we believe is the main reason for the weakening of the shilling lately. Another factor pressuring the shilling is the seasonal dollar demand from corporates which are due to pay dividends in the coming weeks. Meanwhile, dollar inflows have been muted after heavy inflows of Covid funds from the IMF and World Bank,” Nairobi-based analyst Vinita Kotedia of EFG Hermes said.

CBK has used most of the tools in its box including mopping up billions of shilling liquidity at an average of Sh20 billion a day to reduce the amount of shillings chasing dollars even at the risk of losing its firepower if the situation gets worse.

“CBK has been in the market to mop up Sh495 billion in July alone which should have supported the shilling but this is not the case. It has continued to fade, at some point, CBK will lack firepower,” Genghis Capital Churchill Ogutu observed.

CBK maintains that its forex reserves of $9.24 billion or 5.61 months import cover, is an adequate arsenal to deal with volatilities but even this is being spent at a high rate having dropped from $9.717 billion (Sh1.047 trillion) as at July 2, which covered 5.84 months’ worth of imports.

“CBK is using some of its reserves to help ease some of that pressure which we think is partially seasonal. Low interest rates on the shilling on the margin is likely also driving some of this weakness, in our view,” Ms Kotedia said.

Rescue

In almost three decades, Kenya had not taken a standby loan from the IMF since 1988 but in 2015 after issuing its first Eurobond, Kenya went to the IMF to get the facility as insurance in case the shilling collapsed and the debt became difficult to pay.

In 2016, Kenya requested for standby loan again but when it failed to agree with the Bretton Woods institution the facility lapsed in September 2018 without a replacement.

While Kenya is currently in talks for another insurance loan, the external shocks which the funds could help cover have not abated.

However, IMF in a rescue effort has given Kenya access to $739 million under its Rapid Credit Facility to maintain an adequate level of international reserves and help provide the budget financing needed to respond to the pandemic.

But, the lending is pegged on Kenya allowing the shilling to depreciate, a painful pill whose consequences will haunt taxpayers for years to come.

“The CBK should also continue to allow the exchange rate to act as a shock absorber,” said Tao Zhang, IMF deputy managing director.

Mr Ogutu said this would only help if exports pick up and Kenyans selling tea, horticulture and flowers can earn more from their dollars.  However, he added, Kenya may be in for a 5.5 per cent decline in exports meaning the country would have to bear the pain of expensive imports and have very little or no respite from earning it in exports.