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EA economies grapple with dollar shortage as forex reserves dip

This week, Tanzania President Samia Suluhu broached a subject that has been uncomfortable for East African state economists and government officials – shortage of dollars.

In her bid to calm jitters in Tanzania that the economy was suffering hard hits from drought, inflation, rising debt and a potential weakening of the local currency, President Samia on Wednesday said: “Don’t be cheated, the Tanzanian economy is better than our neighbours. We have foreign currency reserves to last four months (of import cover) but if you go to our neighbours, they don’t even have reserves to last a week. We are getting requests to guarantee their fuel imports.”

This was deemed to be referring to Kenya, where a dollar shortage continues to bite and the shilling continues to fall. But Kenya’s central bank says it has an import cover of 3.7 months.

A week ago, the Business Daily quoted Kenyan executives saying they had started sourcing dollars from neighbouring countries, especially Tanzania.

Declined overtures

President Samia has declined such overtures as she shores up her own reserves which, at four months, still fall short of the standard 4.5 months of import cover.

Demand for forex has shot through the roof in recent months as importers seek more dollars to finance imports, owing to higher global prices of fuel, food, cooking oil, steel among other imports.

The Central Bank of Kenya has been blamed for the dollar crisis, having introduced tough rules on the foreign exchange interbank market. But Governor Patrick Njoroge has always downplayed the crisis.

Oil importers have been hit hard as they need dollars to bring in supplies. A shortage of fuel hit Nairobi this week and there are fears it could get worse, although the Petroleum Outlets Association of Kenya has said there is no shortage of oil in the country.

“There is sufficient fuel at the depots but the major oil companies are not evacuating it because they do not have sufficient dollars,” said the association’s chair Martin Chomba.

Shortage of fuel

Major oil marketing companies – Vivo, TotalEnergies, Rubis and Ola Energy – buy fuel in bulk and supply it to smaller independent retail outlets, meaning a shortage at these top suppliers cascades to the smaller players.

The Energy and Petroleum Regulatory Authority (Epra) has also failed to fully withdraw a subsidy on diesel, which has compounded the cash-flow woes of the oil marketers.

Epra last month partially reinstated a margin of Ksh2.54 ($0.02) per litre of diesel but, amid continued delays by the National Treasury in releasing subsidy funds, the firms have been pushing for termination of the scheme to ease their cash crunch.

The marketers have been borrowing to fulfil their cash needs for fuel imports, but muted fuel sales owing to tough economic conditions have seen them register lower volumes.

State-to-state deal

President William Ruto’s government has resorted to government-to-government procurement of fuel, which will see state-owned Gulf companies supply fuel to a Kenyan marketing company of their choice, which will in turn distribute to other local players.

The government has already floated a tender of nine months under the new arrangement, a temporary measure away from the open tender system, where more than 100 companies compete to procure fuel.

The state says the new system will help reduce pressure on forex reserves, considering that payment for the cargo will be made after six months compared to the current system where firms have to pay for the cargo every week.

Cost of electricity

Meanwhile, the cost of electricity in Kenya has risen 10 percent on the back of higher fuel prices and a weakening shilling. Epra raised the fuel cost charge to Ksh8.3 ($0.064) per kilowatt-hour (kWh), from Ksh6.59 ($0.051) last month.

This is the highest rate of the fuel energy component since June 2012, when it hit a record Ksh9.03 ($0.070)/kWh.

Epra also raised the foreign exchange rate fluctuation adjustment to Ksh2.16 ($0.017) per unit, from Ksh1.85 ($0.014), blamed on the weakening shilling.

This has raised the unit cost of power for lifeline consumers to Ksh22 ($0.17) per unit, from Ksh20 ($0.15).

Epra is expected to put in place new tariffs from April 1 to run for the next three years.

Inflation climbed to 9.2 percent in February.

Regional woes

The Kenya National Bureau of Statistics’ Consumer Price Index showed that in that month, food commodities contributed greatly to the high inflation, with businesses seeing shrinking demand for goods and services.

While Tanzania is also witnessing economic challenges, Kenya’s seem severe.

As the Kenyan shilling weakened, the Tanzanian currency appreciated 0.4 percent against the dollar to Tsh2,310.23 on March 9 from Tsh2,320.64 in January, according to data from the Bank of Tanzania. But official foreign reserves declined to $4.8 billion (equivalent to 4.3 months of imports) in January, from $5.17 billion.

In Uganda, foreign reserves stand at $3.6 billion (3.6 months of import cover), a slight improvement from January and February 2023 when the reserves were $3.5 billion, according to the Bank of Uganda.

External debt repayments

BoU Deputy Governor Michael Atingi-Ego said the reserves had been eroded by external debt repayments.

The reserves stood at $4.5 billion (4.5 months of import cover) in June 2022, before taking a downward trend to February 2022, due to external debt repayments and reversals in portfolio flows.

In Rwanda, the franc depreciated against the dollar by 6.05 percent year-on-year end of 2022, with official reserves pegged at 4.2 months of import cover.

In Kenya, the region’s biggest economy, the dollar shortage has severely impacted commercial transactions, leading to the proliferation of forex bureaus and a black market as commercial banks raised their rate to as high as Ksh140 per unit.

Last week, commercial banks acknowledged they were facing a shortage of the dollar, with people opting to negotiate with forex bureaus for better returns.

Impact on debt

The unfolding volatility in the forex market has seen forex bureaus trade a unit of the greenback at a Ksh138, compared with the Central Bank’s official rate of Ksh128.59.

This has impacted the cost of external debt, which is dominated in dollars. By last week, this debt had risen to Ksh3.2 trillion ($24.89 billion) from Ksh3.02 trillion ($23.41 billion) in October 2022.

The dollar also spells trouble for households as the cost of imported medication has risen and for thousands of Kenyan students studying abroad, a surge in fees and levies in local currency.

Habil Olaka, chief executive of Kenya Bankers Association told The EastAfrican that commercial banks indeed have dollars but they are owned by depositors, not the banks.

 “The banks can only sell dollars that they own, not the customers’ deposits,” he said.

“If everybody is holding on to their dollars the banks will have no dollars to sell. Because banks have less in terms of what they are able to sell they have to ration the little they have and therefore you start looking at who is most in need and how to ensure that everybody is given a fair share,” he added.

No cause for alarm

Ken Gichinga, chief economist at Mentoria Economics, says there is no cause for alarm yet.

“I think the most critical element will be to determine if the situation is short-term aberration that will self-correct or it will remain persistent into the future. If it’s the latter, then companies will adjust their foreign exchange strategy, which will have ramifications,” he said.

Dealers at AZA Finance, a pan-African foreign exchange firm, in their daily market report, have blamed the weakening of the shilling on the persistent forex demand from importers as well as the impact of inflation.

“External debt repayment obligations are also contributing to broader forex scarcity, which has led to fuel shortages as importers are unable to get hold of enough dollars to replenish their stocks,” AZA said. “With the lack of rain likely to impact harvests and push inflation higher, we expect the shilling to continue depreciating in the near term.”

Global credit insurance

Already, steel manufacturers are booking forex exchange losses and are on the verge of losing their global credit insurance facilities to due failure to honour obligations to suppliers.

Bobby Johnson, the chairman-in-charge of the Metal Sector at the Kenya Association of Manufacturers and director of steel manufacturing firm Steelmakers, said the sector is incurring huge losses as a result of exchange rate volatility and the unavailability of dollars.

“Due to fluctuation in the exchange rate we are booking huge losses in terms of exchange rate loss,” said Johnson.

“We also have challenges with our suppliers now because we normally have global terms backed by global credit insurance companies. When you don’t honour your commitment on time then you stand the risk of losing that credit facility which is now forcing us to turn to local banks for funding where the cost of finance is much higher,” he added.

The International Monetary Fund has held that the Kenyan currency is overvalued. In 2018, the IMF said the shilling was overvalued by 17.5 percent and reclassified it from a floating to a managed exchange rate regime.

Source : The East African

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