East Africans should brace themselves for an increase in the cost of living as households and businesses pay more for goods and services.
Regional currencies are facing increased pressure against the dollar as increasing debt levels and increased servicing obligations threaten to wear down foreign exchange reserves, market data shows.
The projected drop of regional currencies is mainly attributed to the growing debt servicing obligations for foreign currency-denominated debts. To pay off external creditors, it requires a drawdown of the country’s foreign reserves.
According to analysts at AIB Capital, as a pick-up in consumer demand increases imports, the Kenya shilling is expected to further depreciate against the dollar. The country’s exports are likely to remain relatively uncompetitive therefore, this will lead to an increase in the current account deficit.
“We expect the shilling to gradually depreciate against the dollar but remain relatively unchanged against the euro and pound,” said AIB.
According to the Bank of Tanzania (BoT), in 2019, the country’s import bill was $10.98 billion, up from $10.19 billion in 2018, on account of an increase in the value of goods imported.
In Uganda, in 2019 the overall balance of payments position weakened with the current account deficit dropping by 45.1 per cent to $3.29 billion, largely driven by higher private sector imports.
Last year, Uganda’s import bill increased by $850.2 million, exceeding the $352.9 million growth in exports receipt, while its trade deficit rose by 21.7 per cent to $2.78 billion.
There could be further depreciation of the local currency, translating to higher inflation, according to the Bank of Uganda (BoU).
“Worsening weather conditions, higher fiscal deficit, instability in the global financial markets and uncertainty during the election period constitute elevated upside risks to the inflation outlook,” the BoU says in its Monetary Policy report for 2019. “A rise in fiscal deficit could also lead to inflationary pressures going forward.”
“In the medium term, the exchange rate may weaken on account of the weakening current account balance. This could be heightened by volatility in the global financial markets and policy uncertainty, including Brexit, which could lead to capital reversals on account of flight to safety,” BoU says.