Increase in US rates will also upsurge the refinancing risks of the external debt components of the country’s debt/FILE
NAIROBI, Kenya, Aug 2- The strengthening of the US dollar is expected to have a negative effect on the Kenyan economy, a new report says.
According to Amana Capital’s Half Year Economic Review and Outlook, the rise in rates by one of the world’s stable economy will affect the Kenyan shilling.
“Increase in US rates will have a shock on local rates and the Kenya Shilling and also increase the refinancing risks of the external debt components of the country’s debt,” reads the report.
Last week, the Kenya’s shilling dropped to 104.05/20 per dollar, which was the lowest level in almost two years. Analysts attributed the drop to in part the firing of Treasury Cabinet Secretary Henry Rotich due to financial misconduct and increased liquidity in the money markets.
The report further revealed that a decrease in export earnings will also worsen the current account position and put pressure on the shilling and debt service capability.
Kenya National Bureau of Statistics had last month highlighted that the value of Kenya’s main exports declined by 3.1 per cent to Sh137.5 billion in the first quarter of 2019 compared to Sh141.9 billion registered in a similar period in 2018.
“The decline was mainly on account of decreased foreign earnings from tea and titanium ores and concentrates,” stated KNBS.
Revenue generation under performance has also been pointed out as a major hindrance to Kenyan’s economy.
“This will widen the fiscal deficit and lead to more borrowing at higher rates,” said the report.
The report resolved that looking to present investment opportunities will save the economy, in the short and long term.
Some of these include the proposal of the repeal of the interest rate cap that is expected to take center stage again.
It remains as a tough sell to the Parliamentarians but the recent launch of Stawi and proposed launch of the SME Credit Guarantee Scheme may see a scenario where MPs amend/increase the margin of the cap from 400 basis points.
According to the report, there is also a high likelihood that the Central Bank will finalize negotiations with the IMF for a foreign exchange standby facility which will be used to mitigate pressure on the shilling following a cut in interest rates.
