Trade deficit at 10-year low

Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | NMG 

By CHARLES MWANIKI
More by this Author

Summary

• The Central Bank of Kenya (CBK) Tuesday said the deficit is expected to change only slightly to 4.7 percent in 2020.
• A narrowing of the deficit in the current account, which is a balance of the country’s forex inflows and expenditure, helps the shilling due to the reduced pressure on the country’s foreign exchange reserves that finance external payments.

Kenya’s current account deficit narrowed to a 10-year low of 4.6 percent in the 12 months to December 2019 from five percent a year earlier.

It was helped by lower machinery imports, higher Diaspora remittances and improved earnings from tourism and transport services.

The Central Bank of Kenya (CBK) Tuesday said the deficit is expected to change only slightly to 4.7 percent in 2020.

The regulator had projected the deficit as a percentage of GDP to come in lower by the end of the year in earlier Monetary Policy Committee (MPC) meetings — estimating 4.3 percent in the November meeting — but lower earnings from commodities export weighed against the expectations.

A narrowing of the deficit in the current account, which is a balance of the country’s forex inflows and expenditure, helps the shilling due to the reduced pressure on the country’s foreign exchange reserves that finance external payments.

“The current account deficit narrowed in 2019, mainly due to lower imports of SGR-related equipment. Remittance inflows have remained strong supported by reduced costs as banks leverage on technology,” said CBK in a post-MPC briefing note.

In the 12-month period, imports of machinery and transport equipment fell 0.5 percent to Sh456 billion, while petroleum imports were down 2.2 percent to Sh334 billion.

Similarly, imports of chemicals and manufactured goods also fell, by 5.8 percent and 3.8 percent respectively to Sh240.5 billion and Sh292 billion.

On the inflow side, diaspora remittances rose 3.7 percent to hit a record Sh282 billion.

Earnings from tea and horticulture exports, however, fell reflecting lower prices in the global market and unpredictable weather patterns.

Tea exports dipped 18.6 percent to Sh112.4 billion in 2019, while horticulture earned Sh100.6 billion, a drop of seven percent on the previous year.

A narrow deficit, if the projection by the regulator holds true, will continue to offer support to the shilling, which has traded in a narrow band in the past year.

Analysts expect that the currency will continue to trade below the 101.50 level to the dollar in the near term, especially considering that the CBK has Sh857 billion ($8.5 billion) worth of forex reserves which can be deployed to stave off volatility.