Weak Shilling Spells Good Times for Exporters

Business Daily (Nairobi)

Rawlings Otini

10 June 2011

Kenyan exporters into the European market are recording increased earnings on the back of a weakening Shilling that has fallen by 24 units to the euro since the beginning of the year – even as importers suffer increased bills.

The Shilling has been on a losing streak against the euro in the past five months due to the rising euro-denominated public debt that has increased Central Bank’s demand for foreign currencies even as banks and importers increased their holdings of foreign currencies to hedge against losses.

Officials at Fresh Produce Exporters (FPEAK) said the soaring dollar is eroding the windfall gained from the rising euro. “The gains are high because the buyers in Europe don’t feel any difference, but inputs costs like fertilisers are also soaring,” said Stephen Mbithi the CEO of FPEAK. Kenyan exports to the European Union last year rose from Sh100 billion to Sh109 billion while imports increased from Sh171 billion to Sh203 billion. Key exports to Europe include horticulture, fish, tea and coffee.

Fish exports last year rose from 125,000 tonnes to 135,000 tonnes with earnings rising from Sh6 billion in 2009 to Sh7 billion in 2010 with earnings from horticulture hitting Sh78 billion last year.

“A number of countries in the Europe pay our fish exports in euros which means higher returns for our people,” said Beth Wagude director Kenya Fish Processors and Exporters Association. Dealers said rising sentiment that the European Central Bank could increase interest rates has made the euro to appreciate. The shilling has weakened from 107 units to the euro to trade at 128 by the close of trading Thursday.

“The euro has been rallying against the dollar while the dollar has been rising against the Shilling, these two put together have worsened the situation,” said Jeremiah Kendagol, a senior dealer at the Kenya Commercial Bank. The euro has appreciated from 1.9 to the dollar in the past five months to trade at 1.48 against the dollar due to the pumping of cheap money into the US economy otherwise called quantitative easing.

Dealers at the Commercial Bank of Africa said the government’s large budget deficit now at Sh236 billion may also lead to increased borrowing from abroad in a move that is likely increase demand for foreign exchange, weighing down Shilling. “This has also been aggravated by the sustained purchases of euros by the regulator in the past few weeks further complicating the issue,” said Raja Shah, a partner with PKF Certified Public Accountants.

Transport

Wilfred Kamami, the director of Wilmar Agro Ltd, a flower exporter said that even though the returns are higher, the high cost of transport is working against them as transport costs which account for about 10 per cent of the total costs have significantly increased.

“The cost of production is also high as farmers are also paying more for their inputs cost most of which are imported and account for about 15 per cent of all the costs,” said Kamami.

The Sh24 gain in the euro against the Shilling however covers them from the increase in costs arising from the appreciation of the dollar by Sh7.

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