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Why Dollar Shortage In Kenya Is A Serious Threat To The Manufacturing Sector

BY Lynnet Okumu · May 31, 2022 04:05 pm

KEY POINTS

According to Central Bank reports, the Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 116.7 shillings from 116.4 shillings

KEY TAKEAWAYS

The real market price (as evidenced in our purchases) is now above 120 shillings and we believe that the differential is contributing to the shortage.

Exporters and other entities holding USD are reluctant to sell the dollar at lower prices as it is clear and visible to them what the market value of the currency is.

The ongoing dollar shortage in the country poses a threat to most the important sectors such as manufacturing, which rely on dollars to import key raw materials and inputs used in processing and capital goods investments.

The Kenya Association of Manufacturers has warned that the situation that is already affecting the relationship between manufacturers and suppliers is likely to disrupt Kenya’s reputation as an open market.

According to Central Bank reports, the Kenyan shilling depreciated by 0.2 percent against the US dollar to close the week at 116.7 shillings from 116.4 shillings recorded the previous week, partly attributable to increased dollar demand from the oil and energy sectors, the lowest it has ever depreciated against the dollar.

However, KAM has raised concerns that currently most of its members are accessing exchange rates at 120 shillings, which is above the quoted exchange rate of 116.7 shillings.

“The real market price (as evidenced in our purchases) is now above 120 shillings and we believe that the differential is contributing to the shortage.

Exporters and other entities holding USD are reluctant to sell the dollar at lower prices as it is clear and visible to them what the market value of the currency is,” KAM Chairperson Mucai Kunyiha stated.

This situation is forcing most manufacturers to buy the dollar in advance, an activity that is now affecting their daily operations.

Moreover, the situation is creating delays in acquiring the requisite USD for imports. This is affecting the long-term-built relationship between the manufacturers and the suppliers.

Some of the suppliers now require more expensive Letters of Credit to transact with them.

“In the most extreme cases, supplies have been cut or delayed as credit limits from the manufacturers ‘suppliers have been breached. This is also feared to affect trade insurance in the future, Stated KAM.

Pressure on the shilling is expected to continue due to the rising global crude oil prices on the back of supply constraints and geopolitical pressures at a time when demand is picking up with the easing of COVID-19 restrictions and as economies reopen.

This means the local currency will continue depreciating as the Dollar shortage also continue to increase.

To caution the manufacturers from the adverse effects of the dollar shortage, KAM has urged the Central Bank of Kenya to institute a policy that will return the market to predictability and, crucially, to supplies of currency as and when needed to restore confidence in the market

The manufacturing sector, which is one of the pillars of the big four agenda, is among the country’s largest and most competitive sectors, which also faces numerous taxation measures.

The sector’s contribution to Kenya’s gross domestic product (GDP) stood at 7.6 percent in 2020 down from 7.9 percent in 2019 which coincided with a plunge in local factory activity during the period as the coronavirus pandemic disrupted local and global supply chains.

During the 2022/23 budget presentation, the manufacturing sector got an allocation of 10.1 billion shillings under various implementing Ministries, Departments, and Agencies to promote local industries.

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