Engel’s Co-efficient on the Rise Again.

Recently we have experienced the depreciation of the shilling against major world currencies. According to major researchers, the shilling is among the worst performing currencies in the world. This has had negative effects for both consumers and businesses.

On the consumer front, Engel’s co-efficient, the proportion of food costs in household spending, is on the rise. Our research indicates that the coefficient has hit a new high in a period of 3 years amid a sharp increase in commodity prices.

Kenyan families are now devoting a larger portion of their income to food, a clear indication of the depreciation of the shilling against major world currencies. As expected, retailers have moved fast to adjust the prices of commodities (e.g. flour, sugar, rice, milk and bread) so as to cushion themselves against increased cost of buying.

The implications of a weakening shilling on SMEs

There are certain things SMEs can expect as the Kenya shilling hits new lows. First, manufacturers will suffer through high input costs since Kenya is heavily reliant on fuel and imported goods.

This will force SMEs to carry a huge burden in relation to increased operational costs. As a result, many SMEs will scale down some of the projects they have planned because increased operational costs will require a response on the revenue side of the business.

Indebtedness will be on the rise as manufacturers seek more credit to cover the shortfalls in operational costs and as individuals borrow money for consumption purposes. Inevitably, SMEs with a dollar debt will lose more as they will not have a way of maintaining growth.

The banking sector will see an increase in bad debt if this situation persists. Banks have effectively wrapped their tentacles on individuals and businesses and this could exacerbate the bad debts situation. Given that most individuals and businesses have multiple accounts or loans; it is likely that hard times could trigger a domino effect that could see other commitments within the banking sector suffer.

There will be a rise in the cost of credit as individual banks match their lending rates to their cost of credit. Banks will certainly exercise more caution when lending to SMEs and this will hurt SMEs by discouraging borrowing in the short-term.