Oil below $30 is just what the doc ordered for Kenya

By GEORGE BODO

How cheap is oil right now? Ridiculously cheap. In fact a barrel of Brent crude is now cheaper than having a three-course meal at the Radisson Blu.

A couple of days ago Brent crude dipped below $30 a barrel for the first time in more than a decade. There are big winners and losers in this.

As oil prices continue crashing, there is one group of countries that gains unambiguously: the most dependent on agriculture. Kenya is one of these, where agriculture accounts for 25 per cent of the gross domestic product (GDP).

In Kenya, where the bulk of farming is subsistent and small scale, energy is needed to transport farm produce to the markets. It is also needed to transform the raw farm produce into finished products.

Most importantly, oil accounts for about a fifth of the country’s total imports, and with prices declining in the region of 70 per cent, this is already offering some breathing space to the import bill.

When the Kenya National Bureau of Statistics released quarter three GDP numbers, there was some good news – the current account deficit for the first nine months of 2015, as a percentage of the GDP, declined to 8.5 per cent from 14 percent in a similar period of 2014.

It’s been some time since this key macro indicator narrowed by such a wide margin.

The biggest driver was a 35 per cent year-on-year reduction in the energy import bill, a phenomenon directly traceable to the downdraft in oil prices.

In the first nine months of 2015, Brent prices averaged $55 a barrel compared to $106 a barrel in a similar period in 2014.

Even more relevant is the fact that average Murban crude oil prices, a benchmark set by Abu Dhabi National Oil Company, dropped by nearly half.

And with oil prices yet to touch the floor, Kenya’s energy import bill could halve this year. Even if consumers, especially motorists, aren’t currently directly reaping big from the crashing crude oil prices at the pump, they are bound to feel it indirectly.

A second uplift was recovery in the export-import cover, which significantly rose by three percentage points in these two periods under review, although if the view is expanded beyond this scope, export-import cover still remains low.

Nevertheless, this is still some piece of good news. The narrowing current account deficit as well as improving import cover will positively ripple into the economy in two ways.

First, it will guarantee some continued calmness in the exchange rate market – good news for monetary policy makers. Because of this positive structural tilt, we should expect exchange rates to remain stable at the current levels for some time.

Second, because the exchange rate is a critical component in the pricing of basic goods – an economy like Kenya is more exchange rate rather than interest rate-driven – its continued stability will ensure that consumer prices also remain stable.

However, this needs to be interpreted with some caveat – the introduction of additional taxes on certain basic goods could adulterate the full impactNevertheless, for interest rate watchers, stability in both consumer prices and forex markets could tilt monetary policy towards a more accommodative path, especially in the first quarter of the year