Weak shilling infects public debt, imports
By John Otini, February 14, 2023The Kenya shilling has further depreciated to Sh125 per US dollar, hitting importers and the national public debt portfolio hard.
This marks a significant drop from the previous rate of Sh124 last week and Sh120 last year in a move that favours exporters but has significantly affected the cost of imports, says Central Bank of Kenya (CBK) data.
“The shilling has lost about 26.7 per cent in value since 2020. Importers are paying 26.7 per cent more to buy imports increasing the prices of consumer goods. There is a shortage of dollars in the country because of higher demand for dollars,” notes financial advisors at Abojani Investments.
However, the unofficial exchange rate is estimated at Sh134 against the dollar in a continent where a variance between market rates and official rates. Nigeria and Ethiopia have variances of 46 per cent and 39 per cent respectively.
Cost of fuel
One of the key areas where this depreciation will have an impact is the cost of oil. Kenya imports Sh268 billion worth of oil every year, and the depreciated shilling will make this increasingly expensive if it continues to hold.
This, in turn, is likely to drive up the cost of transportation, as well as the cost of goods and services that rely on oil, such as fertilizers and other manufactured products.
The depreciation of the shilling will also impact the cost of importing machinery and other essential capital goods. This could lead to reduced investment in key industries and limit the country’s ability to grow the economy.
However, Central Bank of Kenya (CBK) governor Patrick Njuguna has allayed fears saying there should be no cause for alarm since the country expects support from the International Monetary Fund (IMF).
“The usable foreign exchange reserves remained adequate at $6,939 million which is 3.88 months of import cover as of February 9,” CBK said.
The decline in the value of the shilling also has major implications for Kenya’s external debt which stands at Sh4.6 trillion, and a depreciated shilling will make it more expensive to service this debt.
This could potentially lead to further economic instability, as the government is forced to divert resources away from other important areas, such as infrastructure and social services, to pay off its debt.