SIMON MAINA / AFP
It’s been years since Kenya, with its dynamic and diversified economy, has had so many worries about its finances. “The shortage of dollars is a very serious problem,” warned the head of the Association of Kenyan Industrialists (KAM), Anthony Mwangi, on television in mid-March. We could end up not finding any locally produced products on the shelves when going to the supermarket. Forced to import around 80% of their raw materials in dollars, Kenyan factories are struggling to get the precious greenbacks from the banks.
The main sign of this tightness, which began a year ago, is that central bank reserves have dwindled to a low of around ten years. With 6.4 billion dollars (5.87 billion euros), they only cover 3.6 months of imports. A “worrying” figure that’s below the 4-month minimum required by regulations, says Churchill Ogutu, economist at financial consultancy IC Group.
structural imbalance
Several factors have led to this situation. First, the structural imbalance between exports and imports characteristic of many African countries has worsened under the combined impact of Covid-19, the war in Ukraine and a record drought. For example, exports in the third quarter of 2022 totaled around US$1.9 billion, while the country imported US$4.9 billion. On the income side, flagship products like tea, coffee and flowers have suffered from the pandemic, as has tourism.
On the spending side, the dollar is more expensive, buoyed by the monetary policy of the Fed, the US central bank. A situation that has hit Kenya like many other developing countries, emphasizes Rufas Kamau, principal analyst at brokerage platform FXPesa. “We saw the Nigerian naira depreciate 100% against the dollar, we saw the South African rand depreciate by the same amount, it was a global problem,” he explains. In Kenya before the pandemic, it took 99 Kenyan shillings to buy $1: that figure has risen to 132, according to the official rate. This devaluation, together with the war in Ukraine, was combined with a global increase in prices, such as food, which further increased the need for dollars.
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At the same time, the government has begun repaying large installments on the debt it has incurred over the past fifteen years to fund burgeoning infrastructure development, with flagship projects such as the train linking the capital with the Indian Ocean port of Mombasa connects . Loans were systematically taken out in dollars. Currently, according to World Bank data, Nairobi is repaying between $150 million and $500 million a month, depending on the month.
Finally, as Rufas Kamau points out, this shortage has fueled a phenomenon of banks “hoarding” their dollars, which aggravates the shortage.
parallel market
As a result, Kenyan companies are having to wait patiently for their bank to issue greenbacks and are facing delays that are restricting their business. “Instead of completing a transaction in a single day, it now takes a week,” observes Churchill Ogutu. The competition for dollars also forces them to pay much more than the official rate of 132 shillings: up to 145 shillings for 1 dollar. “It seems nobody is using this official rate anymore,” the analyst said, pointing out that even the National Energy Regulation Agency (EPRA), which sets fuel prices in particular, is referring to the unofficial parallel market rate in its calculations.
At the end of the chain, the mwananchi, the man in the street, does not escape the domino effect. With a situation that has deteriorated over the past three months, manufacturers will now pass the rise in costs on to their selling prices, warned KAM’s Mr Mwangi. A sensitive issue, while the country is experiencing demonstrations at the call of opponent Raila Odinga, particularly related to the cost of living.
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According to analysts, however, the situation could improve in the medium term. First, the shilling could recover in the coming months thanks to an easing of monetary policy by the Fed, Raufas Kamau predicts. In addition, Kenya is awaiting fresh aid from the World Bank and the International Monetary Fund (IMF), which would allow the central bank’s reserves to be replenished, while the government has fuel supply agreements with Saudi Arabia and the United Arab Emirates, on credit for six months. A solution to freeze the high spending on these products, which accounts for $500 million a month. At least temporarily.