It's been years since Kenya, with a vibrant and diverse economy, worried so much about its finances. “The shortage of dollars is a very serious problem, the head of the Association of Kenyan Industrialists (KAM), Anthony Mwangi, was alarmed on television in mid-March. We could come to a situation where, when you go to the supermarket, you no longer find locally produced products on the shelves. Kenyan factories are forced to import around 80% of their raw materials, in dollars, and struggle to get the precious greenbacks from the banks.
The main sign of this shortage, which began a year ago, is that Central Bank reserves have melted to a low of about ten years. At 6.4 billion dollars (5.87 billion euros), they now only cover 3.6 months of imports. A "worrying" figure and located below the minimum of 4 months imposed by the regulations, underlines Churchill Ogutu, economist for the company in financial advice 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 effects of Covid-19, the war in Ukraine and a record drought. Thus, in the third quarter of 2022, exports totaled approximately $1.9 billion while the country imported $4.9 billion. On the income side, flagship products such as tea, coffee and flowers have suffered from the pandemic, as has tourism.
On the expenditure side, the dollar, carried by the monetary policy of the Fed, the American Central Bank, is more expensive. A situation that has impacted Kenya like many other developing countries, insists Rufas Kamau, principal analyst of the FXPesa brokerage platform. "We saw the Nigerian naira lose 100% in value against the dollar, we saw the South African rand lose the same amount, it was a global problem," he said. In Kenya, it took 99 Kenyan shillings to buy 1 dollar before the pandemic: this figure has risen to 132 according to the official rate. This depreciation was combined, with the war in Ukraine, with a global surge in prices such as those of foodstuffs, which further increased the need for dollars.
At the same time, the government has started to repay large installments on debt incurred over the past fifteen years to finance the booming infrastructure development, with flagship projects such as the train linking the capital to the port of Mombasa on the Indian Ocean. Borrowings systematically contracted in dollars. Currently, Nairobi is repaying $150 million to $500 million monthly, depending on the month, according to World Bank data.
Finally, as Rufas Kamau points out, this scarcity has encouraged a phenomenon of "hoarding" by banks of their dollars, accentuating the shortage.
Parallel market
As a result, forced to wait patiently for their bank to issue them greenbacks, Kenyan companies face delays that constrain their business. “Instead of executing a transaction in a single day, it now takes a week,” observes Churchill Ogutu. The competition for dollars also pushes them to pay much more than the official rate of 132 shillings: up to 145 shillings for 1 dollar. "It seems that no one uses this official rate anymore," said the analyst, pointing out that even the National Energy Regulation Agency (EPRA), which notably sets fuel prices, refers in its calculations to the unofficial parallel market rate.
At the end of the chain, the mwananchi, the man in the street, does not escape the domino effect. Faced with a situation that has worsened over the past three months, manufacturers will now pass on rising costs to their selling prices, warned Mr. Mwangi of KAM. A sensitive subject while the country is experiencing demonstrations linked in particular to the cost of living, at the call of the opponent Raila Odinga.
According to analysts, however, the situation could improve in the medium term. First, thanks to an easing of monetary policy by the Fed, the shilling could recover in the coming months, predicts Raufas Kamau. In addition, Kenya is awaiting new aid from the World Bank and the International Monetary Fund (IMF) which would make it possible to replenish the reserves of the Central Bank, while the government has concluded agreements with Saudi Arabia and the United Arab Emirates fuel supply, on credit for six months. A solution to freeze the heavy expenses on these products which represent 500 million dollars monthly. At least temporarily.
