Kenya Shilling Takes a Dive in the Dollar Dance: Implications for Local and International Businesses

In just under 29 months, the Kenyan shilling has witnessed a sharp decline against the US dollar, leaving consumers grappling with high prices of imported commodities.

On Tuesday, a quick spot check by KenDesk found the dollar exchange rate at Equity and I&M bank as 154.43 shillings, a 19% drop this year.

The government, however, has been quick to downplay the significance of this unsettling trend. Appearing before the National Assembly on September 27, treasury Cabinet Secretary Njuguna Ndung’u attributed the current situation to a necessary correction following years of shilling misalignment with the real economy.

Despite these reassurances, the implications of the weakening shilling extend far beyond the surface.

Local Businesses Face Headwinds

Local enterprises, especially those heavily reliant on imported raw materials or finished products, are facing the brunt of this currency devaluation. The increased cost of imported goods directly translates into higher production expenses.

As a result, businesses find themselves at a crossroads — whether to absorb the rising costs and compromise on profit margins or pass them on to the consumers. The dilemma is particularly acute for small and medium-sized enterprises (SMEs) that may lack the financial cushion to absorb such fluctuations.

Alex Ngure, a car dealer selling imported used vehicles from Japan, told KenDesk that the industry was taking a hit from the escalating exchange rates.

“The cost of importing cars has surged significantly in recent months, putting immense pressure on our bottom line. We’re torn between maintaining competitive prices for our customers and covering our increasing expenses,” Ngure shared.

For instance, importing a luxury V8 car last year stood at Ksh 7.35 million at an exchange rate of 105 shillings. Today, with the current rate of 154.43 shillings per dollar, the cost has skyrocketed to Ksh 10.29 million.

“Such exorbitant prices are sure to scare away potential buyers,” warns Charles Munyori, the Secretary-General of the Kenya Auto Bazaar Association. “If you don’t have the financial muscle to absorb these shocks, it’s a perilous situation.”

The impact isn’t limited to the automotive sector alone; retailers, manufacturers, and service providers are grappling with the fallout.

Alice Kalekye, the owner of a small clothing boutique in Nairobi, lamented, “It’s becoming increasingly challenging to sustain our business. The rising costs of importing fabrics and finished garments are eating into our profit margins. In fact, some of my close business friends have had to shutter their shops due to the tough economic environment.”

The emergence of a stronger dollar has been cited as the key driver behind Kenya’s currency woes. Last year, the US central bank, confronted with a 9% inflation rate, promptly raised interest rates in a concerted effort to curb rising prices. This has inadvertently led to a surge in the value of the US dollar, impacting emerging economies like Kenya.

In March of this year, President William Ruto revealed the government-to-government fuel deal that would see the shilling recover to trade at Ksh 120. Seven months later, the situation has only worsened. Shockingly, the cost per litre of petrol has risen from Ksh 162 to a staggering Ksh 217.

In a recent press briefing, Azimio leader Raila Odinga made a startling revelation. He asserted that the purported Kenya oil import agreement was not with the governments of Saudi Arabia and the United Arab Emirates. According to Odinga, the deal was brokered between international oil companies (IOCs) and the Ministry of Energy.

“What initially seemed like a straightforward deal has morphed into a mechanism that disproportionately favours a few individuals within the government,” declared the opposition leader. Interestingly, all of this unfolds against the backdrop of the controversial Sh17 billion oil import scandal involving businesswoman Ann Njeri Njoroge.

International Businesses Reevaluate Operations

The ripple effect of Kenya’s currency struggles is not confined to the local shores. International businesses with operations in Kenya are also feeling the pinch.

According to Prof XN Iraki, an economist at the University of Nairobi, “Currency volatility injects unpredictability into financial planning, rendering investments risky. As a result, investors stand to lose when repatriating their profits in such uncertain environments.

For example, Vodacom Group and Vodafone, with a combined 40 per cent stake in Safaricom, have notably suffered significant dividend losses.

In 2022, the duo accrued a total of Sh22.2 billion in dividends (equivalent to Sh1.39 per share) from their holdings. At that time, pegged at an exchange rate of 119.10 units per dollar, this translated to an impressive $186.7 million.

Fast forward to 2023, and the dynamics have shifted. Their dividend of Sh19.2 billion (Sh1.20 per share) has dropped to $134 million at the current dollar rate. This represents a $52.7 million (Sh7.6 billion) decline despite only a Sh3 billion decrease in shilling terms from the previous year.

Multinationals such as Vivo Energy Group Plc that report earnings in dollars for Kenya shilling have also not been immune from exchange rate fluctuations.

The parent company of Vivo Energy Kenya revealed a 20% gross profit decrease for the first half of the fiscal year. This has seen figures dwindle from $362 million during the same period last year to the current $288 million.

Now, coupled with high taxation by President Ruto’s administration, Kenya is likely to lose investors to neighbouring nations with a more stable currency and favourable business conditions.

Looking Ahead

In June of this year, the National Treasury forecasted a possible devaluation of the local unit to 150.76 by 2024 when settling its Eurobond. Surprisingly, this has manifested faster than anticipated, with the current exchange rate at 154.43 shillings per dollar.

For the average Kenyan, the impact is immediate and tangible. The surge in the cost of imported goods and services amplifies the strain on household budgets, leading to a diminished quality of life.

Local and international businesses also find themselves navigating choppy waters, compelled to reevaluate strategies to stay afloat.

Prof Iraki says that the Kenya government must take decisive measures to stabilize the currency with predictable laws and restore investor confidence.

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