East Africans face hard times ahead with the cost of living set to rise as a consequence of local currencies’ poor performance against the dollar.

The Kenyan and Ugandan shillings have been worst hit, shedding nearly double what the other two East African currencies — the Tanzanian shilling and Rwandan franc — have lost against the dollar in the first quarter of the year.

The Kenya shilling depreciated by 5.4 per cent between December 31, 2014 and May 7, 2015. In Uganda and Tanzania, the currency depreciated by 6.94 per cent and 3.64 per cent respectively in the same period. The Rwandan franc has lost 1.95 per cent against the dollar.

READ: EA currencies slide against strong dollar

The region, which is heavily dependent on imports, ranging from wheat, fertiliser, maize, petroleum products, medicines, processed foods and clothing to raw materials and machinery, is staring at a rising import bill, that will be passed on to consumers.

Ravinder Sikand, the financial advisory director at Deloitte East Africa, said the losing trend is expected to continue in the medium-term, with the regional currencies facing downward pressure on account of the bullish dollar.

Consequently, the region is likely to see an increase in overall inflation as imports become more expensive.

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“In addition, we may see further reduction in the foreign exchange reserves as central banks try to shore up local currencies to avert a sharp drop. As at the end of April, Kenya’s foreign exchange reserves were at their lowest level since December 2014, at $6.73 billion or 4.4 months of import cover,” he said.

Last week, the Kenyan shilling weakened to hit the 95.00 peak, blamed on the high appetite for corporate demand on dollars by companies paying out dividends in foreign currencies to their investors, the tourism slump and a drop in exports.

READ: Regional currencies to face added pressure as demand for dollar rises

The Central Bank of Kenya reacted by pledging to suspend voice brokers from the currency market and mopping up liquidity that makes it costlier to hold dollars. By the end of last week, commercial banks posted the shilling at 95.40 to the dollar, its lowest point since November 2011.

Last week, CBK planned to mop up $115.55 million in excess liquidity from the money market using repurchase agreements and term auction deposits in an effort to strengthen the shilling.

In their April economic review of Kenya, analysts at Stratlink Africa said that they expected the shilling to remain fragile, driven principally by the state of the current account and notably a hangover of deterioration of the balance of payments.

“Noting that 2014 was a particularly challenging year for the economy, with the main export commodities such as tea (21 per cent of export earnings) weathering subdued prices and tourism beset by terror risks, investors should expect the shilling will remain weak in the near term,” Stratlink said.

Analysts predict the shilling to hit the 97.00 mark in June, even as the central bank takes a cautious approach to supporting it. Since the beginning of the year, CBK has mopped up $563.65 million from the market to stamp out volatility, as it seeks to pursue a tightening bias to contain inflation through money-market operations. 

CBK has also asked commercial banks to stop dealing with voice brokers — over-the-counter interdealer brokers — in the foreign exchange market.

Mid last week, CBK announced that it had retained the Central Bank Rate at 8.5 per cent. The announcement came amid rising inflation rates across the region.

Kenya saw its inflation rise to 7.08 per cent in April from 6.31 per cent in March. Uganda’s rose from 1.4 per cent in February to 1.9 per cent in March, while Tanzania’s rose from 4.3 per cent in March to 4.5 per cent in April.

“The Tanzanian shilling has depreciated against the dollar due to strong demand from importers. The economy is experiencing a robust growth in the construction industry, and as a result, the need for machinery imports has led to increased demand for dollars,” Mr Sikand said.

The regional economies are cushioning themselves with Kenya expecting the increased dollar inflows from remittances, averaging $121.38 million per month between January and March 2015, to provide more cover.

Similarly, the Bank of Tanzania (BoT) also stepped up efforts to stabilise the Tanzanian shilling through foreign currency sales.

Foreign exchange inflows into Tanzania are expected to pick up in the second half of 2015 when exports of agricultural products and tourist arrivals increase. In the medium term, lower oil prices in the international market will also continue to provide a measure of relief on current account deficit.

Experts opinion

Experts add that the Tanzania and Uganda shillings may remain weak against the dollar ahead of the elections slated for this year and next year respectively. 

The Uganda currency hit an all-time low in March to trade at Ush3,121 against the dollar. The shilling traded at an average of Ush2,999 last week. It has shed 6.94 per cent against the dollar.

Although the Tanzania shilling strengthened last week to trade at Tsh1,865.70 against the dollar, it has already crossed the Tsh2,000 mark this year, the lowest in history despite efforts by the BoT to tame it. In the first quarter of 2015, it shed 3.64 per cent to the dollar.

BoT has sold $339 million in the market from January to April to support the shillings but more interventions are needed, analysts said, if an impact is to be felt.

In Rwanda, the franc is expected to further weaken in 2015 because of its large current account deficit coupled with a stronger dollar. The franc depreciated by 3.5 per cent in 2014 despite regular interventions the National Bank of Rwanda (BNR).

In the first quarter of this year, the BNR quarterly forex report showed that the franc had declined by 1.95 per cent against the dollar.

At the end of April, the Franc was trading at 700.9/715.6 against the dollar as compared with 687.1/701.8 at the start of the year. The franc is expected to trade at 698 against the dollar in 2015 and 722 against the dollar in 2016, representing a 2.4 per cent depreciation in 2015.

Analysts expect the demand for imports across the region to grow faster than that for the region’s exports, driven in part by the low oil prices that will propel increased liquidity across Kenya, Uganda, Rwanda and Tanzania.

“This will keep lending ability high as banks replicate the CBR in the interest rates; there is a need to raise the CBR, it has been almost one year on the same rate,” said Eric Musau, an analyst with the Standard Investment Bank.

The Kenya shilling was mainly supported by sustained foreign inflows through diaspora remittances averaging $121.38 million per month in the first quarter of this year and a lower petroleum import bill. Usable foreign exchange reserves stood at $6.86 billion at the end of April 2015 versus $7.2 billion in February 2015.

Dr Haron Sirima, CBK deputy governor said that the usable foreign reserves together with the $688.3 million precautionary facility with IMF will cushion the country from temporary shocks.

“We are closely monitoring developments in the foreign exchange market and will continue to use appropriate monetary policy instruments to minimise volatility of the Kenya shilling. We have adequate foreign exchange reserves in excess of 4.5 months of imports to cushion the exchange rate against these short-term shocks and volatility,” Dr Sirima said.

Despite this assurance, the CBK’s foreign exchange reserves have contracted by more than $500 million in the past four months while the main forex earning sectors including tourism, tea and coffee have been slowed down in the past two years — implying the demand for the dollar will remain high in the country.