WHAT HAPPENS IF THE EXCHANGE RATE OF A DOLLAR TO KSHS SWINGS FROM 80 TO 87? We have two types of exchange rate regimes; floating/flexible exchange rate (exchange rate determined by supply and demand of dollars and other hard currencies such as Euro, Yen e.t.c) and fixed exchange rate (can be fixed by the Central Bank).In Kenya, we use floating/flexible exchange rate. WHO BENEFITS IF THE RATE SWINGS FROM 80 TO 87? It benefits businesses or individuals who get paid in dollars. Example-1,If you pay me 1000 dollars when the exchange rate is 80 bob to the dollar. It translates to 80,000 Kenya shillings. However, if you pay me the same 1000 dollars at a time when exchange rate is 87 bob, it amounts to 87,000 Kenya shillings. Example-2,If our Eurobond was paid in dollars at a time the rate was 80 bob to dollar, we would have received (80 times 2 billion dollars=Kshs 160 billions). However, at present, the rate is 87, that’s why we got Kshs 174 billion (87*2). A difference of 14 billion shillings. In a nutshell, exporters (if they get paid in dollars), individuals working for international organizations (if they get paid in dollars) and tourism sector (if tourists pay in dollars) or investors moving into the country (with dollars) gains/benefits if a shilling moves from 80 to 87. WHO LOSES IF THE RATE SWINGS FROM 80 TO 87? Importers- Why? (they pay for goods or services in dollars).For example-If the price of a washing machine in Dubai is 2,000 dollars and you want to bring it into the country, You would pay Kshs 160,000 shillings(Custom duty not included) if the exchange rate is 80 bob. However, if the rate is 87 bob, the same machine would cost you Khs.174, 000. Now you know. QUESTION-As a country,are we better off when the rate is 87 or 80? Check the answer on Monday. Blessed Day.
Posted on: Fri, 27 Jun 2014 05:38:34 +0000
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