Rising imports put stability of shilling at risk

The widening trade deficit puts the shilling’s exchange rate to major international currencies at risk. FILE 

By GEOFFREY IRUNGU

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The gap between Kenya’s earnings from exports and the national imports bill more than doubled between September and October last year on account of rising purchases of mainly machinery and equipment, new economic data shows.

The gap – expressed as the current account deficit – stood at Sh41 billion ($475 million) in October, from Sh18 billion ($214 million) in the previous month.

Data from the Central Bank of Kenya (CBK) shows that the rising imports basket pushed the overall trade balance to a deficit of Sh1.9 billion ($22 million) in the month of October for the first since last June.

“Payments for merchandise imports increased by 0.6 per cent, or $99 million to $16.6 billion in the year to October 2013, largely reflecting increases in imports of chemicals, manufactured goods,
 machinery and transport equipment,” said the CBK in its newly released October 2013 report.

The widening trade deficit puts the shilling’s exchange rate to major international currencies at risk. The shilling has strengthened to an average exchange rate of 85 units to the dollar as at Friday from near 87 units earlier this year.

READ: Shilling now hits 85 on increased tea export dollars

During this period, the share of machinery and transport equipment to total imports increased from 27 per cent to 29 per cent.

The increase in imports of machinery and transport equipment comprised largely increases in power generating machines, industrial and office machines, and electrical machinery.

In her report on economic forecasts for Kenya this year, StanChart head of research on Africa Razia Khan said the current account deficit is likely to be in the range of 11.8pc on average, a slight increase from 2013’s 11.4pc, due to the rising imports of machinery, some of which is related to oil and gas exploration.

Ms Khan said her forecast was based on the old series of calculation, which however the CBK has recently indicated to have changed although it offered no details on its rationale for change.

“Our current account forecasts are based on the old series, and we expect improvements to be gradual and contingent on oil developments. Kenya has substantially underperformed regional peers in terms of export growth,” Ms Khan said.

The current account would be one of the areas that foreign investors in Kenya’s upcoming sovereign bond would scrutinise closely, Ms Khan said.

“A current account deficit in double digits as a percentage of GDP is problematic, even though import pressure stems largely from infrastructure investment and higher capital-goods imports,” said Ms Khan.

In annual terms, the CBK report said receipts from merchandise exports declined by $246 million or 4.0 per cent to $5.9 billion in the year to October 2013.

“The decline is attributed to reduced earnings from coffee, oil products, manufactured goods, raw materials, chemicals and related products and other non categorised exports,” said the CBK.