Download How strong dollar adversely affects Kenyan economy

The People ­ Monday
Date: 27.04.2015
Page 11
Article size: 124 cm2
ColumnCM: 27.55
AVE: 34775.11
How strong dollar adversely
affects Kenyan economy
The dollar has relentlessly
continued to strengthen against
other currencies and the
Kenyan shilling has not been an
exception. And now questions
abound on the effects of a strong
US dollar on the economy.
There are always two sides
of a coin, but ultimately, there is
always a winner and a loser in any
game. A strong dollar has both
positive and negative effects, thus
Kenya's economy has to brace
itself for both. First, the dollar is
strengthening on the backdrop
of weakening shilling because of
low demand for shilling­backed
investments—this has a domino
effect. As the dollar rises, Kenyan
debt becomes more expensive
to service in local currency. And
as the Fed starts to tighten, the
interest rates charged on dollar
debts—whether in bond markets
or via banks—will rise in tandem.
inflationary pressure on the
economy—which may counter
the deflationary power of low oil
prices.
On the positive side, a rising
dollar is cutting import prices in
general, which should help hold
inflation in check. In addition,
as is often the case, oil prices
seem to be reacting more than
would seem logical to the dollar
movement. This has to do more
with the politics being played
especially between the US and
Russia.
Secondly, as much as
borrowers in emerging markets
may come under pressure to
service their debts, market
exporters will benefit from a
falling currency. Unfortunately,
things are not so neat. Although
most emerging­market firms that
borrow in foreign currency do so
in dollars, exporters may trade
As a result, borrowers are at
not with America, but with other
risk of a dual disadvantage: a
strengthening dollar and a rising
cost of borrowing and refinancing.
That does not necessarily mean a
wave of bankruptcies, but it does
mean another drag on growth
countries whose currencies are
at a time when economies like
Kenya are already struggling.
Additionally, some imports will
become more expensive for
Kenya, which is largely an import
economy, thereby placing upward
also depreciating against the
dollar.
Thus the strengthening dollar
can add to emerging economies'
debt burden without helping
their exports. At the close of the
day, a strong US dollar has much
negative effect to the economy of
the country.
The writer is a tax
consultant—aNKuria
Ipsos Kenya ­ Acorn House,97 James Gichuru Road ­ Lavington ­ Nairobi ­ Kenya