East Africa currencies menaced by inflation and high oil prices

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East African currencies are forecast to weaken against the dollar in coming months, due to an increase in fuel prices and consequent inflation.

The cost of living will rise, resulting in decreased purchasing power.

Economists cite errant weather conditions and uncertainty over global oil production ahead of a key decision by the Organisation of the Petroleum Exporting Countries on whether to extend production cuts in June.

Analysts at the Africa-focused financial advisory firm StratLink say that adverse weather conditions experienced in the region could lead to a rise in inflation.

“Rainfall patterns between October last year and now indicate moderate to severely dry conditions over much of the Horn of Africa,” the StratLink’s market report for April states.

“In April, there is a high likelihood of drier than average conditions over much of Uganda. The prevailing weather is likely to lead to a higher food prices and upward pressures on inflation.”

Inflationary pressure

According to the report, Kenya faces inflationary pressures due to the dry spell that continued into April, pushing up food prices.

The average overall inflation for Kenya, Tanzania, Uganda and Rwanda during the three months to March was 2.9 per cent, down from 2.93 per cent in the same period last year.

In Rwanda, the franc has been volatile since the beginning of the year but gained some ground against the dollar to appreciate marginally by 20 basis points to 902.3 units to the greenback in March.

The Tanzanian shilling has in recent months faced pressure from declining hard currency inflows from the country’s major export earners such as the tourism and agriculture sectors.

It was the worst performing in the region, depreciating from Tsh2,294 to the dollar at the end of January to Tsh2,313 last week.

The annual inflation rate in Kenya rose to 4.35 per cent in March, from 4.14 per cent the previous month, above the market expectations of 4.2 per cent.

In Uganda, inflation edged down to 2.0 per cent in March from 2.1 per cent the previous month, while in Tanzania it rose slightly to 3.1 per cent from 3.0 per cent during the same period.

Price of crude

The World Bank predicts that the price of crude this year largely depends on policy outcomes such as the impact of the removal of waivers to the US sanctions on Iran and whether the Opec cartel will extend its oil production cuts for the second time.
Other risks to oil prices, according to the World Bank, include the effect of the International Maritime Organisation’s sulphur emissions regulation that takes effect on January 1, 2020, the conflict in Libya, and a weaker-than-expected growth in major oil consumers, especially China and the US.
“The outlook for commodity prices, especially oil, is vulnerable to policy-related risks. The US decision on April 22 to terminate waivers to its sanctions on Iran could put upward pressure on oil prices,” the Bank said.
According to the Bank’s latest Commodity Markets Outlook report released in April, oil prices have been on an upward trend since the beginning of this year after Opec and its allies cut production and Venezuela and Iran experienced declines.
In October last year, the oil price reached a four-year high of $86 a barrel, before dropping to about $60 in December. Since then, oil prices have recouped most of the losses on the back of production cuts by Opec and its partners.
Crude oil prices rose to $68.60 in mid-March, from $66.35 in mid-February, before jumping to $70 a barrel on April 5.
The World Bank forecasts oil prices to hit an average of $74 a barrel, up from a projected average of $72 a barrel in 2018.
The waiver is anticipated to expire on May 2, which is expected to cut global supply of crude by up to 1.3 million barrels per day, and push prices to $80 per barrel in the immediate future and possibly a high of $100 by next year.
Opec and its allies are meeting in June to agree on whether to extend the oil production cuts.
Opec started cutting oil production in January 2017 and, in December last year, at a meeting in Austria, agreed to extend the cuts by six more months.

Oil production
Opec and its partners, who account for more than half of the world’s oil output, reached a deal to cut oil production and boost the market.

The alliance agreed to cut output by 1.2 million barrels per day for the first six months of 2019.

The 15-member group agreed to decrease its output by 800,000 barrels per day, while Russia and the allied producers would decrease it by 400,000 barrels per day.

Across the region, the prospects of reduced global supplies and the resultant impact are raising concerns that a surge in crude prices could rock the stability witnessed in recent months.

“The rise in international oil prices may exert moderate upward pressure on prices of fuel,” said the Central Bank of Kenya’s Monetary Policy Committee at the end of March.

In its latest review mid-April, Kenya’s Energy Regulatory Commission increased the prices of petrol and diesel by an average of $0.05 after the prices of crude at the international market rose to $68.60.

With prices now hovering at $74 per barrel, a further increase in fuel prices is expected in the mid May review.

In Tanzania, the price of diesel increased from $0.9 in early March to $. 0.948 in mid-April, while that of petrol rose from $0.908 to $0.929 during the same period.

In Uganda, the prices increased from $1.024 to $1.053 for diesel, and $1.104 to $1.133 for petrol over the same period.

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