The pain of a weakening shilling

January 12, 2016
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, MONEY-SHILLINGS

How would you feel if, after a normal take-off, you noticed one of the engines on your plane wasn’t working properly? What if you then found out that the other engine was overheating? Now suppose the captain announces that you should buckle-up because the plane is about to fly into an oncoming hurricane? Could this be the current state of the Kenyan economy?

When the Kenya shilling slid against the dollar last year, the drop was perceived as a minor slip up, from which the local currency would recover fast. After all, the last time the shilling had been battered hard was in 2011. The 2011 slip of the shilling was attributed to increased borrowing, high imports and runaway inflation. Could this be the case in 2015 as well?

While the steep decline in the value of the Kenya shilling is the focus of the public debate and public policy responses, the shillings’ fall is happening when the country is experiencing low inflation rates. According to the Kenya National Bureau of Statistics, the rate of inflation dropped to 5.97% in September 2015 compared to 17.3% experienced in September 2011. What could then be weakening the shilling?

The weakening shilling has been attributed to the strengthening of the US dollar against other global currencies and the strong recovery of the US economy.Kenya is also experiencing reduced foreign exchange inflows following a slump in the tourism sector occasioned by security concerns as well as a general decline in the global prices of commodities.

A weakening shilling may also erode the gains the country has been reaping from falling crude oil prices. Locally consumed fuel is imported by oil marketing companies and as such, the country is entirely dependent on imports since the closure of the Kenya Petroleum Refineries Limited in September 2013.

Kenya imports more than it exports and, as a result, more money is channeled out than is brought in, which negatively affects the shilling. For instance, in 2013 exports stood at Kenya Shillings456 billion compared to Kenya shillings 1.4 trillion worth of imports, according to the Kenya National Bureau of Statistics. A weaker shilling is disadvantageous in the sense that one has to pay more due to the increased demand for the dollar or any other convertible currency.

If you import a lot, you need enough dollars to pay for these imports. When exports are not enough, which is the current situation in Kenya, the gap needs to be filled through other financial inflows including remittances, private investment, and support from development partners.

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