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Why a strong Kenyan Shilling is important for SMEs

Exchange rates kenyaA couple of days back a very popular newspaper increased its price quoting sustained increase in input costs & the accelerated fall of the Kenyan shilling. “And just like other sectors of our economy, the cost-push impact has neither spared the production nor distribution of the newspaper, especially with the global increase in the cost of oil”, it said on its front page.

One would expect that a newspaper would be able to absorb such (hopefully) short-term fluctuations & be able to provide reading pleasure to its subscribers at the same price. if the fall of the Kenyan Shilling has affected a big newspaper, one can imagine the plight of the SMEs.

Newspaper headlines over the past few weeks haven’t brought much cheer either. Consider these
  • The cost of milk & bread go up
  • Power prices hiked
  • Transport prices go up by 20 percent
  • Sugar & other essential commodities prices go up
  • Oil prices hiked
  • Banks increase lending rates
  • Value Added Tax (VAT) hiked to 16 percent

While inflation has badly hit the consumers, the case of SMEs is worse. So how does a weak Shilling hit the SMEs?

Input costs

The uncertainty that inflation brings along with it causes consumers to tighten their purse strings thereby shrinking market size. Higher input costs means a rise in output costs. However, while big businesses may be in a position to absorb the losses to an extent, SMEs are left with no other option than to hike their prices. This leads to unhealthy financial statements, layoffs & in the worse case scenario even close down.

Exchange Rate and International Markets

The weak Kenya shillings endanger an SME’s position not just in the local market but also in the international market. This is because inflation leads to currency depreciation. This in turn affects cash flows–the receipts & payments. It’s worse when the output price is more than the depreciation.

Negotiation

SMEs lack the clout that larger business corporations have with respect to their suppliers & consumers. On the one hand they cannot bargain with their suppliers & on the other neither can they pass on the rising costs to their customers. Indeed a ‘caught between the devil & the deep sea scenario.

Credit costs

With banks announcing an increase in the credit costs coupled with tightening of norms, SMEs will find it extremely difficult to raise loans. Banks all over the world tend to increase lending rates to control inflation. Not good signals for SMEs.

As a senior functionary of a corporate house put it: Everybody realises that SMEs are the fulcrum of Kenya’s economy. They provide employment to over 70 percent of the population & contribute to the GDP in their own significant way. But very few do something in their favour.

It’s time the government spared a thought for SMEs to create an enabling environment by relaxing its monetary policy & take them out of this volatile situation that’s making it hard for them to plan, invest & grow.

Image courtesy: FreeDigitalPhotos.net

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