In recent weeks, regional currencies have come under increased pressure against the dollar as the impact of the Covid-19 pandemic threatens to dismantle efforts by central banks to maintain stability and arrest negative impact on their economies.
Depreciating currencies result in increased cost of living as prices of basic goods rise; and servicing of hard currency-dominated loans becomes expensive for institutional borrowers.
“There is not much forex coming into the region and economic activities are far from picking up because the number of Covid-19 cases has not peaked. Naturally, the currencies will come under more pressure,” Dr Joy Kiiru, lecturer at the School of Economics, University of Nairobi, told The EastAfrican.
Since March, the Kenya shilling has depreciated by 5.8 per cent hitting a new low of 108.40 against the dollar on Wednesday from an average of 101.20 last year, driven by demand for the greenback by importers taking advantage of easing of restrictions to resume normal operations.
The Uganda shilling witnessed heightened depreciation pressures in March largely driven by panic that led to exit of offshore investors, speculative tendencies but has managed to remain relatively stable in consecutive months exchanging at 3,696.61 against the dollar on Wednesday.
The Tanzania shilling has been steady, trading at an average of 2,303.03 in May and 2,302.16 in April against the dollar and depreciating by only 0.16 on an annual basis while the Rwandese franc depreciated by 0.9 per cent in the first quarter of the year.
The weakening of local currencies brings inflationary pressures in a region where current account deficits are projected to worsen owing to the huge discrepancies in earnings mainly from agricultural produce and inflows receipts particularly from tourism, remittances and foreign direct investments.
In June and July countries witnessed an increase in petroleum imports coming at a time when prices at the international market are on an upward trend, something that has not only increased the import bills and local retail prices but is also threatening to instigate fuel imposed inflation.
While all the regional currencies are under pressure, the Kenyan currency is worst hit with depreciation occurring in two-phases.
The first phase occurred in the mid-March to end-April period when the local currency declined 4.6 per cent mainly due to sudden stop of global financial liquidity flowing into the country.
Debt burden
The financial flows from multilateral lenders in May to combat the pandemic coupled by increase in receipts from tea and horticulture exports by 15.2 per cent and 22.7 per cent respectively and recovery in remittances to $258.2 million from $208.2 million in April was pivotal in boosting reserves to $9.2 billion representing a 5.53 import cover.
Though the fall of the shilling has started to cause panic particularly among importers, there are fears the worst is just unfolding due to widening current account deficits and the burden the government will experience in meeting debt obligations.
For Kenya whose foreign debt stands at $32.9 billion, the shilling’s depreciation has increased the debt obligation by $2.7 billion. In Uganda, provisional total public debt stock as at end April stood at $14.4 billion, an increase of about 13.7 per cent in July 2019 while in Tanzania external debt stood at $22.5 billion at the end of May, an increase of $867.1 million from the same period last year.
Credit: Source link