The Kenya Shilling has continued to depreciate against all the major currencies in recent months except some marginal gains against the South Africa Rand, the Japanese Yen and all the East Africa currencies. The economic conditions responsible for this decline still prevail and one can only speculate when and where the exchange rates will eventually stabilise.
The forces at the world level, the strengthening of the US dollar, the crisis in the Euro zone due to financial troubles in Greece will be with us for a bit longer. At the local level the country has to service its international debts, continue with large scales imports due to the on-going infrastructure projects, the tourist numbers are yet to tick and we continue to convert our fertile agriculture soil from areas of cash crops (tea and coffee) to concrete jungles.
A slump in domestic currency has the following effects which will adversely affect the profitability of any business and even affect individuals:
- It will increase costs for importers
- It will increase the cost of servicing foreign currency denominated debts
- It will increase the cost of capital investment where it involves importation of equipment
- Exporters benefit when converting foreign earnings to local currency
- Domestically produced goods could become more competitive against imported products
The risk that the financial performance of the business may be affected by exchange rate fluctuations is normally referred to as foreign exchange risk. If not well countered, foreign exchange risk has a super potential to adversely affect businesses and push investors off their investment paths.
In our next post Wahome Ngari takes you through some simple strategies that your business can adopt to manage foreign exchange risk as the way to navigate the volatility of the shilling.
If you need more help, ask us about the WealthCreation Masterclass where these concepts are taught.
Wahome Ngari – Principal Consultant/ CEO, Citadel Consulting Ltd -firstname.lastname@example.org
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