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Dollar shortage, high rates hits manufacturers

Several importers are now behind their order schedule for a lack of the US currency.

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by SHARON MAOMBO

Business31 May 2022 - 02:00
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In Summary


  • •KAM said some supplies have already been cut or delayed as a lot of manufacturers have breached suppliers credit limits, a situation that might affect trade insurance in the future.
  • •Several importers are now behind their order schedule for a lack of the US currency.
A cashier at a Nairobi forex bureau counts dollars and shillings/

Businesses are struggling to raise enough dollars at a higher cost to facilitate essential foreign trade transactions such as raw material importation and IT services. 

Yesterday, Kenya Association of Manufacturers (KAM) chairperson Mucai Kunyiha said the real Kenya shilling exchange rate against the dollar is above Sh120 even though it is formally quoted at around Sh116.

"Although the formally quoted exchange rate for the US dollar in the market is hovering around Sh115-Sh116 none of our members can access currency at that price in the market, “he said.

Already, several importers are behind their order schedule for a lack of the US currency, a move likely to cause a shortage of commodities in the market.

KAM said some supplies have already been cut or delayed as a lot of manufacturers have breached suppliers credit limits, a situation that might affect trade insurance in the future.

Ben Otido, a media house chief accountant told the Star the shortage is already straining relationships with external suppliers. 

"Just two weeks ago, Equity had a wire limit of $20,000, however, on Sunday, not even $10,000 was available. We have suppliers to pay. One even came to Kenya abruptly because of delayed payments," Otido said.

He explained that businesses are now forced to accumulate dollars for a number of days in order to meet payments

Equity Bank is currently selling US dollar at Sh121.3, an average of most banks.

Even so, the buying rate quoted on platforms is an average of Sh116.7; something financial expert Mihr Thakar says indicates 'predatory behaviour'. 

"The bigger the spread between the two, the more likely an indication of hoarding," Thakar told the Star.

High commodity prices in the international market have increased the US dollars required to purchase the same quantities of product.

For instance, before Covid-19 pandemic, Crude Palm Oil (CPO) prices averaged at $700 per metric ton but rose to $1,980 in March 2022. Oil, metals and other commodities and inputs have mostly gone the same way.

Additional demand for US dollars has also left manufacturers struggling to obtain sufficient dollars to meet their dollar obligations in a timely manner from commercial banks.

Due to this, manufacturers say they have been forced to plan for foreign currency payments by purchasing foreign currency in advance resulting in an increase in working capital.

From the foregoing, it would appear that the market is losing confidence in the transparency and effectiveness of our foreign exchange market.

Manufacturers have asked the Central Bank to propose and implement policy actions that will return the market to predictability and supplies of currency when needed in order to restore confidence in the market.

Experts are warning of a further drop as foreign investors continue to exit the country's capital markets due to unpredictable general elections scheduled for August. 

According to the latest analysis of the Kenyan shilling by Forecast Economics, the on-going Russia - Ukraine crisis, the upcoming general election and the Fed’s increasingly hawkish tone are likely to further pin down the shilling which was weighed down by the Covid-19 pandemic.

"The depreciating trend will be higher than anticipated, amplified by election-related uncertainty, which typically saps confidence, taking the shilling to close to 120 by year-end,'' ForecastEconomics said.

This is expected to pile more pressure on the cost of living in the country, which saw inflation rise to 5.6 per cent in March from 5.1 in February mostly due to high fuel prices.  

In the meantime, the dollar crisis is also making it extremely difficult for businesses to repatriate profits from one country to another.

Last week, Kenya Airways announced that it was suspending air-ticketing activities in Malawi due to the worsening forex crisis in the country. 

 


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