Cost of living to go up as foreign debt weighs down EAC currencies

Regional currencies are facing increased pressure against the dollar. PHOTO | FILE | NATION MEDIA GROUP East Africans should brace themselves for an increase in the cost of living as households and businesses pay more for goods and services.

Market data shows that regional currencies are facing increased pressure against the dollar as escalating debt levels and increased servicing obligations threaten to erode foreign exchange reserves.

A weaker local currency increases import bills as importers have to pay more for goods they purchase from abroad effectively leading to an increase in the overall prices of goods and services in the domestic market.

The projected depreciation of regional currencies is largely attributed to the growing debt servicing obligations for foreign currency denominated debts, which requires a drawdown of the country’s foreign reserves to pay off external creditors.

According to analysts at AIB Capital, the Kenya shilling is expected to further depreciate against the dollar as pick-up in consumer demand increases imports. This will lead to an increase in the current account deficit as the country’s exports are likely to remain relatively uncompetitive.

“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), last year 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, the overall balance of payments position weakened in 2019 with the current account deficit dropping by 45.1 per cent to $3.29 billion, largely driven by higher private sector imports.

Uganda’s import bill increased by $850.2 million, surpassing the $352.9 million growth in exports receipt, while its trade deficit rose by 21.7 per cent to $2.78 billion in the same year.

According to the Bank of Uganda (BoU), there could be further depreciation of the local currency, translating to higher inflation.

“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.”Uganda’s provisional total public debt stock as at the end of October 2019 stood at Ush49.05 trillion ($13.23 billion), an increase of 3.8 per cent from 2018.The rise in the stock of total public debt between June 2019 and October 2019 was mainly due […]

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