Fall in current account deficit signals machine imports drop

Money Markets

A KQ plane at the Jomo Kenyatta International Airport (JKIA) in Nairobi: PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• While a narrow current account deficit is preferred for its support to the local currency, the rapid shrinkage has economists concerned as it signals economic slowdown where buying of machinery and plant (and thus foreign direct investment) is falling.
• A drop in global fuel prices has lowered the country’s import bill while the sale and leasing of Kenya Airways planes has grown Kenya’s export value, contributing to shrinking of the account deficit.
• As per CBK’s data Kenya’s overall balance of payments position improved by $1.3 billion (Sh130 billion) to a surplus of $853 million (Sh85.3 billion) during the fourth quarter of 2015 from a deficit of $500 million (Sh50 billion) during the third quarter of 2015.

The Central Bank of Kenya (CBK) has raised concern that the sharp decline of the country’s current account deficit signals lower import of machinery.

The difference between Kenya’s import bill and value of goods exported has declined to 5.8 per cent of the country’s GDP from 9.8 per cent in 2014 and is expected to fall further this year to 5.5 per cent.

While a narrow current account deficit is preferred for its support to the local currency, the rapid shrinkage has economists concerned as it signals economic slowdown where buying of machinery and plant (and thus foreign direct investment) is falling.

“The current account is financed by capital and in the case of Kenya it is foreign direct investments —so what it means is that our financing has come down by that margin really fast,” said CBK governor Patrick Njoroge.

A narrow current account deficit signals a drop in importation of machinery and transport equipment which are crucial for economic growth.

Kenya has been undertaking huge infrastructural projects requiring importation of machinery which pushed up the country’s import bill in the previous year.

Dr Njoroge’s assessment ironically comes after recent report that the country recorded the fastest rise in foreign direct investments (FDI) in Africa and the Middle East, at 47 per cent released by the FDI Intelligence website.

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A drop in global fuel prices has lowered the country’s import bill while the sale and leasing of Kenya Airways planes has grown Kenya’s export value, contributing to shrinking of the account deficit.

Earlier this year, KQ sold two Boeing 777-200 planes to US-based carrier Omni Air International. It has also delivered one of two Boeing 787 aircraft it is leasing to Oman Air with plans to hire out two more to the European airline.

The aircraft transactions by KQ are however one-offs and their absence next year is expected to see the deficit rise marginally to 5.8 per cent.

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Improvement of tourism sector and stronger exports on horticulture and tea have also contributed to a higher export bill narrowing the deficit.

The tourism sector has rebounded following improved security in the country and international marketing of Kenya as a prime destination.

Kenya’s foreign currency reserves are currently five times the monthly import bill attributable owing to the drop in cost of goods brought into the country.