Why strong dollar is not good news for Kenya

If time is money, Kenyans are running out of it at the expense of those who make it.

If you had one dollar in January and converted it to shillings, you could talk for 50 minutes at an average calling rate of Sh2 each.

The same dollar converted today will let you call for 54 minutes meaning the American currency, which carries the emblem In God we trust courtesy of president Dwight Eisenhower, will have created four more minutes.

Kenyans who put their faith in the dollar created 47,564 years of Safaricom or Airtel talk time by holding on to $6.1 billion in dollar accounts at the end of January and whose value has grown from Sh611.2 billion to Sh661 billion.

For the majority who hold no dollar accounts, this event is different, living on borrowed time.

In January, Kenya had $30.6 billion in debt. It was Sh3 trillion at Sh100 against the dollar but is now Sh3.3 trillion at 108. 35.

Chinese, Americans, Europeans, Japanese and Arabs who we owe debt in dollars will have Kenyans work for an additional 289,193 years worth of calling time to pay back the amount.

During the National Assembly retreat on Wednesday last week, Finance Cabinet Secretary Ukur Yatani said things could be much worse without new dollar loans.

“We had expected that by now the shilling would be at Sh120 against the dollar as a result of this pandemic, but we have managed the situation with additional forex reserves from IMF, AfDB and the World Bank,” CS Yatani said.

Shilling crumbling

But why is the shilling crumbling like the quality of the new currency notes in the clenched fist of the mighty dollar.

First is that the local unit was exposed by Kenya’s fashionable dollar loans- the Eurobonds and syndicated loans that the country had heavily turned to under the current regime.

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

To pay for them, Kenya needs dollars. But the country has been heavily relying on diaspora remittances, small pool of exports and new loans.

Coronavirus scourge threatened all these dollar sources from fear of job losses in the millions in the US grounding of flights and cancelling of flower auctions, and closure of international financial markets from risks.

Focus Economics says that concerns over the potential economic fallout from the spread of the coronavirus weighed heavily on market sentiment, increasing demand for safe-haven assets and leading to a sharp weakening of the shilling.

The shilling started its descent in March as the first case of the virus was reported and in April the shilling declined to 107, the psychological mark of the furthest retreat ever 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 then CBK governor Prof Njuguna Ndung’u for hesitating to act and propelling the slide.

Kenya shilling depreciated

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

This time round, even Dr Njoroge could not hold the tide back and the walls were breached, confidence was low. In March this year, he had announced he will buy dollars to protect the shilling from future shocks, now he was being forced to sell the dollars he had and hope the World Bank and IMF would continue to supply dollar loans to boost his 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 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.

The lockdown had helped manage dollar demand since besides loans, Kenyans were not importing much which meant that dollar demand was low. Oil prices had also plummeted to record levels and airlines were grounded, transport in and out of towns and counties had been outlawed.

When President Uhuru Kenyatta opened up Nairobi, Mombasa and Mandera counties and announced resumption of local air transport in July 6, the fall of the shilling resumed and it seemed like it would not end.

Other factors such as dividend payments by corporates also contributed to the demand for dollars especially Safaricom demand for the US currency ahead of Sh56.09 billion dividends payout 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 weakness in the shilling lately. Another factor pressuring the shilling is seasonal dollar demand from corporates which are due to pay dividends in coming weeks. Meanwhile dollar inflows have been muted after heavy inflows of Covid funds from the IMF/World Banks,” Nairobi based analyst Vinita Kotedia of EFG Hermes said.

CBK has used all the tools in the box including mopping up billions of shilling in liquidity at an average of Sh20 billion a day to reduce the amount of shillings chasing dollars even at the risk of losing 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 said.

CBK maintains that its forex reserves of $9.24 billion or 5.61 months import cover, is 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.

Low interest rates

“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,” Kotedia said.

In almost three decades Kenya had not taken a standby loan from the IMF the last being in 1988 but in 2015 after taking the first Eurobond the country went to the IMF to get the loan as insurance in case the shilling collapsed and loans became difficult to pay.

In 2016 Kenya took the 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 shock which the funds could help cover is unfolding without the facility.

But IMF still came to the rescue giving Kenya access to $739 million under the Rapid Credit Facility to maintain an adequate level of international reserves and help provide the budget financing needed to respond to the pandemic.

However they have asked Kenya to allow the shilling to depreciate, a painful pill whose consequences will haunt Kenya for years to come.

“The CBK should also continue to allow the exchange rate to act as a shock absorber,” Mr Tao Zhang, deputy managing director and acting chairman of the fund.

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

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