Home Uncategorized Kenyans brace for higher cost of living over Russia-Ukraine conflict

Kenyans brace for higher cost of living over Russia-Ukraine conflict

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A grocery stall at a market in Kenya.

Kenya is looking at higher debt repayment and cost of living as the shilling remains vulnerable to the US Dollar, which is gaining from the Russia-Ukraine war.

The local currency neared a low of 114 on Friday morning (at 113.91) and is expected to weaken further as the US prepares to hike interest rates this month. 

According to the latest analysis of the Kenyan shilling by ForecasEconomics, accelerating inflation in the U.S. over the past few months and the Fed’s increasingly hawkish tone have raised expectations of a sooner-than-anticipated rate hike.

”The depreciating trend will continue in 2022, amplified by election-related uncertainty, which typically saps confidence, taking the shilling to Sh116.7 per by year-end,” ForecasEconomics says. 

Fed chair Jerome Powell this week said he is in favour of a 0.25 point increase, aimed at tackling the surging cost of living.

The bank is under pressure to rein in inflation as prices in the US rise at the fastest rate in 40 years.

Currency trading solutions provider, AZA Finance, notes the Russia’s war in Ukraine has increased demand for haven assets, strengthening the US currency.

Oil prices remained volatile on Friday on disruption of supplies from Russia due to sanctions over the conflict.

“Brent crude futures for May rose to as much as $114.23 a barrel and were at $113.72, up $3.26,” Reuters reported.

J.P. Morgan projects prices could hit $185 if Russian supply remains disrupted.

High global oil prices mean Kenyans will have to deal with a high cost of living as oil affects almost every sector of the economy.

Major impact comes in on transport costs, manufacturing, agriculture and lighting of poor households.

A weak shilling will also see the cost of servicing the country’s debt, which is mainly dollar-denominated with lower amounts in Euro and British pound.

Debt repayment was allocated Sh1.17 trillion in the current financial year, which more than half the country’s annual tax revenues, with a weaker shilling adding repayment costs by more than Sh1 billion.

According to a report on the summary of exchequer issues on January 28, the National Treasury has spent Sh570.15 billion towards debt repayment since the beginning of the financial year.

About $1.03 billion (Sh117.7 billion) is for servicing debt owed to China, of which about $217 million (Sh24.8 billion) is in interest.

Public debt currently stands at Sh8.2 trillion where external debt is Sh4.2 trillion while domestic debt is Sh4.04 trillion.

The country is expected to return to the Eurobond market in the first half of 2022 to raise more funds to bridge the budget deficit.

The Parliamentary Budget Office recently advised the National Treasury to reschedule payments of domestic debts to ease the burden on taxpayers.

Meanwhile, the Russia-Ukraine conflict continues to impact on the country’s exports, putting pressure on the forest reserves, which are nevertheless cushioned by strong remittances.

According to Financial Risk Analyst Mihr ThakarKenya’s current account, which provisional figures show came in at 5.4 percent of GDP in 2021, compared to 4.6 percent of GDP in 2020, will fall under further pressure from a higher import bill stemming from supply concerns and geopolitical tensions.

“A significant portion of Kenya’s outward hard currency flows will be affected by rallying oil prices. Rising iron and coal prices will negatively affect manufacturers and thus taper business demand,” Thakar told the Star.

Moreover, rising fertiliser, food and fuel prices combined, threaten to spiral inflation out of CBK’s preferred roof of 7.5 per cent, he said.

A major world war could affect Kenya’s remittances and exports, at a highly leveraged time.

Mihr notes that Kenya’s external debt service to exports is up from approximately five per cent in 2012 to about 30 per cent in 2020.

The country is thus quite sensitive to a decrease in exports, currently dominated by remittances, flowers, fruits and vegetables, tea and coffee.

Treasury has been keen on balancing the foreign currency denominations of the debt to reflect export earnings as part of navigating through the exchange rate fluctuations.