Sunday, August 02, 2015

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WHY A WEAK SHILLING WILL DESTROY KENYA

Sunday, August 02, 2015

The shilling has been plummeting is old news, but how bad it is for the economy does not get to be elaborated. It is encouraging to see folks who usually would not be concerned in economic issues like exchange rates try to understand why exactly a weak shilling is bad for Kenya, in particular for the ordinary person who does not deal in dollars. This article attempts to make it clear. 
First, Kenya will be paying more money for goods bought in other countries (imports). Since the incumbent government came to power, the amount of goods Kenya sells to other countries (exports) have been stagnant. On average, Kenya exports little goods and services worth 43billion shillings per month. On the other hand, Kenya imports large quantity of goods worth 126billions per month. Basically, assuming Kenya was a business, for every 100bob earned from exports, 293bob is paid for imported goods. Yes, you guessed it; Kenya is always operating at a loss relative to trading competitors like China, and even African countries like Rwanda. Below is a pie chart showing the percentages for the last 2.5years.  
Therefore, a weak shilling means more losses for Kenya since imports are bought using dollars, which are now more expensive.  The trade deficit of about -82billion per month will increase.
Another thing is commercial banks will soon raise the lending rates. Early July 2015, the central bank raised the base interest from 10% to 11.5%. The added 150 basis points will be reflected in consumer loans offered by banks. The CBK raised rates to slow down the falling shilling and if the shilling does not stop, nothing will stop them from raising it more higher. That has a direct bad impact on the ordinary guy with a bank loan to pay. In addition, high interest rates will slowdown economic activity since credit (loans) becomes expensive. The situation might worsen that money literally stop changing hands! Like in 2011 when the shilling touched 107.  From the graph, you can observe that Kenya has been experiencing declining interest rates which have led to growth by borrowing cheaply to build houses, buy cars, expand firms and the like. The lending rates by banks have touched low levels of 15.26% as at May-2015. The favorable declining trend is expected to stop.
Repaying expensive interest payments on foreign currency public debt, in my view will be the most painful for Kenyans. Although a ballooning public debt is another issue to be dealt with on its own, a weak currency will increase interest rate payments for external debt. For example, the Euro bond will be more costly to repay when the shilling keep on loosing value.  Below is a graph showing how the government has been stocking up loans.
 To sum it up, Kenyans, especially the policy makers, should be wary of a weak shilling and the big public debt and act by working hard to compete with the likes of Rwanda and Ethiopia by increasing exports. 

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