Dollar shortage hinders Kenyan firms’ expansion capacity
Saturday February 04 2023
Kenyan firms have cited dollar shortage among a string of domestic challenges that have obstructed their expansion capacity and impacted revenues.
This comes as the country’s foreign reserves hover below the statutory four months import cover, with the shilling plummeting to a record low of Ksh124 against the US dollar.
The latest Central Bank of Kenya (CBK) survey shows that financing, lingering supply chain issues and foreign exchange challenges on importation are constraining firms’ expansion plans.
Other key factors impacting operations of businesses in Kenya include high freight costs, inflation, energy prices, and low demand for certain products as buyers become cautious of spending on “luxuries”.
Domestic and external factors
The survey that was carried out in November sought to establish domestic and external factors that drive business expansion and that could constrain growth over the next one year as well as mitigating factors.
According to the findings, most firms are operating below capacity and could increase production if there was an increase in orders.
Expansion into new markets, talent management and technological innovations will the key drivers of growth over the next year, the survey noted.
Businesses are banking on a stable economy, stability of the local currency and global economic recovery.
The Kenya shilling has fallen to a record low of Ksh124 to the US dollar as foreign exchange reserves fell to $ 7 billion (3.92 months of import cover) as at January 26. However, CBK noted that the reserves continue to provide adequate cover and a buffer against any short-term shocks in the market.
According to the International Monetary Fund’s World Economic Outlook update report for January, most economies have prioritised achieving sustained disinflation.
“With tighter monetary conditions and lower growth potentially affecting financial and debt stability, it is necessary to deploy macro prudential tools and strengthen debt restructuring frameworks,” the IMF said.
CBK data shows that Kenya’s public debt increased to Ksh8.89 trillion ($71.69 billion) in November from Ksh8.7 trillion ($70.16 billion) in September as the William Ruto administration borrowed Ksh137.36 billion ($1.1 billion) in the first three months of assuming office.
Last week, Central Bank’s Monetary Policy Committee (MPC) maintained its policy rate at 8.75 percent to rein in inflation, noting that the impact of the tightening of its monetary policy in November 2022 was still transmitting in the economy.
The MPC noted that recently announced measures by the government to allow limited duty-free imports on specific food items are expected to moderate prices and further ease domestic inflationary pressures.
According to the IMF, fiscal support should be better targeted at those most affected by elevated food and energy prices, and broad-based fiscal relief measures should be withdrawn.
“Stronger multilateral cooperation is essential to preserve the gains from the rules-based multilateral system and to mitigate climate change by limiting emissions and raising green investment,” the IMF said.