Deficit widens on the back of lower freight earnings

Cargo at the Mombasa port. China is a major source of imported goods for Kenya. FILE PHOTO | NMG 

By CHARLES MWANIKI
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Summary

• The increase is an indicator that freighters and the port have been feeling the negative effect of disruptions in global trade due to the coronavirus outbreak, whose epicentre is China.
• The Asian economy is a major source of import goods for Kenya and other countries in the region, with the bulk of these goods shipped in through Kenya’s port.

Kenya’s current account deficit as a percentage of GDP rose to 4.9 percent in January from 4.6 percent at the end of last year on the back of lower earnings from transportation services.

The increase is an indicator that freighters and the port have been feeling the negative effect of disruptions in global trade due to the coronavirus outbreak, whose epicentre is China.

The Asian economy is a major source of import goods for Kenya and other countries in the region, with the bulk of these goods shipped in through Kenya’s port.

“Preliminary data shows that the current account deficit was 4.9 percent of GDP in the 12 months to January 2020 compared to 4.6 percent of GDP in 2019. The widening of the current account deficit mainly reflected lower receipts from transport services,” said Central Bank of Kenya (CBK) in its weekly bulletin.

The current account measures the balance of foreign exchange inflows and outflows as a percentage of gross domestic product (GDP), with a deficit indicating more outflows than inflows.

A lower deficit helps among other things the shilling’s exchange rate, due to reduced dollar demand from importers or higher dollar supply from export earnings, depending on which factor is behind the easing of the deficit.

The deficit had narrowed to 4.6 percent by December last year from five percent in December 2018, largely due to lower imports of machinery and transport equipment linked to the standard gauge railway project.

It was also helped by higher inflows from diaspora remittances and transport services, which rose by 3.87 and 2.04 percent respectively to $2.797 billion (Sh288 billion) and $1.999 billion (Sh208.9 billion) in the 12 months to December 2019.

Diaspora remittances have continued to go up this year, rising by 5.9 percent to $259.4 million (Sh26.7 billion) in January compared to the same month last year. Central bank is yet to issue the breakdown of other export earnings for January 2020.

The rise in current account deficit has also come amid deteriorating global conditions, where the coronavirus outbreak has disrupted global trade and raised the prospects of higher cost of goods especially due to Chinese factory shutdowns.

Last week, CBK announced it will buy $400 million (Sh41.2 billion) from banks in the local market to shore up its forex reserves with an eye on the rising uncertainties in the global market over the coronavirus outbreak.