Thanks to weak shilling, exporters are laughing all the way to the bank
The Sunday Nation
Nairobi,
09 October 2011
As mentioned last week, I recently read about an exporter who was complaining that her company was also hurting because the prices of imported inputs had shot upwards. This made me wonder whether that complaint is valid. Let us investigate…
Suppose you are exporting a product for which you charge US$10 per piece. In January of this year, the dollar was exchanging at about Sh80.80 and so you would have got Sh808 per item. This month, however, the exchange rate peaked at Sh102 so you would get Sh1,020.
If your costs amount to, say, Sh500 you would have made a profit of Sh308 in January and Sh502 in September. So you are better off. But what if the product you are exporting requires some imported raw materials to manufacture.
Suppose the imported input costs US$2 per item: How does this change your profits? Well, in January, your cost would have been as follows: Sh161.60 imported input and Sh338.40 local content.
Let us first assume that the cost of the local content doesn’t change; that is it remains at Sh338.40 in September. Due to the weakening of the shilling, the cost of the imported input will rise from Sh161.60 to Sh204. Therefore the total production cost increases to Sh542.40. Clearly, this is higher than the January figure of Sh500; but is that a reason to worry?
Remember that in January you were making a profit of Sh308. What about now? Well, you still sell the product at US$10 which is equivalent to Sh1,020; therefore, your profit is Sh1,020 – Sh542.60 = Sh477.60. So you are still better off in September than you were in January.
But one might argue that the cost of the local input has also increased due to the general inflation that has been induced by the weak shilling… after all, the inflation rate is now 17.3 per cent.
True; but in January inflation was only 5.2 per cent. So how do we estimate the average increment in the local input cost from January to September? We have to compare the average Consumer Price Index (CPI) for the two months.
According to the National Bureau of Statistics, the CPI in January was 110.57 points and 125.23 in September. This is an increase of about 13.25 per cent. In other words, the prices of goods in the country have increased by this rate over the nine month period.
Thus it would be fair to assume that your local input has also increased by the same margin; that is from Sh338.40 to about Sh383.30. Therefore you production cost has gone from Sh500 in January to Sh587.30 (Sh383.30 + Sh204) in September. As a result, you profit is now Sh432.70 (Sh1,020 – Sh587.30).
Comparing this with the Sh308 you were making in January, it is clear that you are still better off now – you are making almost Sh125 more! So, any which way you look at it exporters are laughing all the way the bank, thanks to the weaker shilling.
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