The shilling likely to lose ground again as demand for imports rise and export sector remain sluggish

By Today Financial News Team

The Central Bank of Kenya (CBK) Monetary Policy Committee meets Wednesday to review its policy on the economy that has slowed down due to high interest rates that have discouraged borrowing.CBK Governor Prof Njuguna Ndung'u to chair monetary committee

And the committee chaired by Governor Prof Njuguna Ndung’u might have no alternative but  to raise the Central bank lending rate (CBR) higher in an effort to save the depreciating shilling that was selling at 88 to the dollar Wednesday.

CBK increased its CBR rate to 18 per cent last year in a bid to stem a weak shilling and contain headline inflation that peaked 19.72 per cent, its highest point last year, before easing to 18.93 per cent in December.

The governor who has come under heavy criticisms for what is viewed as delayed intervention by CBK to save the shilling mid last year may not take chances this time round but analysts fear that the move might not yield the much desired results.

“The banks wonder why Kenyans are surprised that the shilling is falling. Demand for dollars is higher than supply and it is obvious the shilling will continue to lose ground,” says a former chief executive with an oil firm who declined to be named.

According to the former official now a consultant in the oil industry, no amount of effort by CBK would save the shilling unless the structural problems facing the economy are adequately addressed.

The World Bank has already raised alarm that the economy is imbalanced with imports far in excess of exports that bring in most of the foreign exchange that is used to meet the import bill.

Investigations by Today Financial News Team revealed that in May last year, export revenue from top exports, tea, horticulture and manufacturing was not enough to pay for oil imports alone.

“But the exchange rate and inflation woes are just the tip of the iceberg: underneath the surface is a deep structural problem,” says Mr Wolfgang Fengler, Lead Economist at the World Bank, Kenya office.

“Kenya’s economy is increasingly imbalanced, with a growing gap between exports and imports. This makes the economy particularly vulnerable to external shocks.”

Statistics show that the export sub-sector has been doing badly due to stiff competition from cheaper imports as well as high cost of doing business in the country.

In the agricultural sector, high costs of inputs, poor weather conditions as well as mismanagement in the coffee industry had taken a toll on one of the top foreign exchange earner.

Insufficient energy and inefficient Mombasa Port has made the country too expensive for international investors, especially in manufacturing.

According to the bank, there is no simple formula to fix the economy though the government has stressed on tightening monetary policy without giving special attention to the underlying structural issues.

The forthcoming general election also creates uncertainty in the light of the 2007 election that sparked off violence that disrupted economic activity.