Help, East Africa's shillings are in free fall!

Maxence Melo

JF Founder
Feb 10, 2006

A Kenyan currency dealer. Photo | FILE

By MWAURA KIMANI and EMMANUEL | Africa Review | 02 Oct, 2011

Growth in East Africa's economies is showing signs of faltering in the face of spiralling inflation and currency pressures as the Eurozone and US economic crises come knocking on the region's doors.

The latest economic data from Uganda, Tanzania, Rwanda, Kenya and Burundi shows that growth in key sectors such as manufacturing, construction and financial services is under threat from surging financing costs, higher input costs and lower international and local demand. As the situation worsens, politicians are jumping into the fray, the latest being Kenya's Prime Minister Raila Odinga, who last week announced the formation of a team to craft strategies to halt the free fall of the local currency, after the Central Bank of Kenya had seemingly run out of options.

Rising economic uncertainties arising from external shocks are undermining prospects for exports, remittances, official aid, and private capital flows for most East African Community member states, experts said. This outlook has also left business executives in a fix as they sit down to draw up new strategies for 2012.

Data from the Kenya National Bureau of Statistics released last week showed the economy grew at 4.1 per cent in the second quarter of 2011, a slight drop from the 4.6 per cent recorded for the same period last year. However, the growth was an improvement from quarter one, 2011. In Tanzania, growth slowed to 6.7 per cent in the second quarter of 2011 compared with 7.2 per cent in 2010, as output in mining slumped.

The African Development Bank last week cut Tanzania's GDP growth forecast to 6.9 per cent this year from earlier projections of 7.3 per cent, citing lack of reliable power and inflationary pressures "Tanzania's economic growth faces great risks counting increasing fiscal deficit, and inflationary pressure from fuel and food prices," said Prof Mthuli Ncube, chief economist at AfDB.

In Uganda, the latest round of economic uncertainty in the Eurozone has cast a shadow on export earnings for this year, with major items like flowers coming under pressure as the shilling continues to tumble partly because of declining export returns.

These economic shocks are coming as pressure builds on world leaders to find a quick solution to the debt crisis in the Eurozone, a major trading partner of most EAC countries. "A further deterioration of the global economic environment could have substantial spillovers into the sub-Saharan region," says the International Monetary Fund in their latest economic outlook report, released last week. "A faltering US or European recovery could undermine prospects for exporters, remittances, official aid and private capital flows."

Uncertainty has gripped the region as it becomes apparent Greece could default on its debt and exit from the Euro, sending the Eurozone into a deeper economic crisis.

Already, regional currencies such as the Kenya shilling have shown extreme volatility, hitting record lows against the dollar.

The Kenya shilling hit a record low of Ksh104 to the dollar last week before the Central Bank of Kenya defended the shilling by offering to sell dollars to key sectors of the economy.

The Uganda shilling has also lost ground to the dollar, trading at Ush2,855 to the greenback last week, meaning it has lost about 20 per cent since the beginning of the year.

"The region is basically a net importer, so weakening of the local currency has compounded other factors such as drought," said Wycliffe Masinde a research analyst at Kestrel Capital.

The IMF has cut Uganda's GDP growth prospect for 2011 to 5.5 per cent from an earlier projection of 6.5 per cent, the largest revision in projections of the EAC economies.

Kenya's growth prospects have been cut to 5.3 per cent, down from 5.7 per cent in an earlier projection at the beginning of the year.

Tanzania's growth has also been cut to 6.1 per cent, down from 6.7 per cent.

No promise
In Kenya, agriculture and construction were up 5.2 and 5.8 per cent respectively in the second quarter, helping to lift growth that was weighed down by a decline in manufacturing and financial services, which were down 3 and 5.6 per cent respectively. The drastic drop in the performance of financial services can be attributed to banks slashing their lending to avoid the possibility of increased default on their loans. Commercial banks have responded by rising interest rates as their cost of funds has gone up.


Sep 26, 2011
[h=2]I think if our Shilling is in free-fall the Central Banks runs out of options [/h]Strong dollar demand trigger the shilling fall against the greenback, as importers moved to cushion themselves against a weak unit.

"If there is (dollar) demand pressure, truly we will not be happy with the level, we need to be persistent and consistent."

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