Kenya's balance of payment deficit hits 10% of GDP

Faster acceleration of imports in relation to exports has widened Kenya's balance of payment deficit to about 10 percent of the GDP, according to Central Bank. The East African nation's imports have risen sharply in about a decade, broadening the deficit from less than 1 percent of GDP in 2004 to the current figure. "Kenya's current account balance has generally been in deficit since 2004 when it stood at 0.82 percent of GDP. The deficit widened to stand at about 10 percent largely reflecting a faster growth in imports of goods into the country relative to exports," says Central Bank of Kenya (CBK) in a brief on Wednesday. The balance of payment statement, which is a summary of a country's transactions with the rest of the world through trade in goods, services, and finance, usually has two accounts; current and capital. The current account captures transactions of exports and imports of goods and services while the capital account records purchases and sales of financial assets. "Current account deficit implies that a country's value of imports of goods and services and payments of incomes and current transfers to foreigners exceeds its sales of goods and services, income receipts and transfers from foreigners," explains CBK. The bulk of Kenya's imports are largely machinery and transport equipment, manufactured goods and oil products for industrial purposes. China and India are Kenya's leading sources of imports. Kenya National Bureau of Statistics (KNBS) indicates that in June, industrial supplies made the bulk of imports with a share of 32 percent. While the values of fuel and lubricants, machinery and other capital equipment and transport equipment registered shares of 19 percent, 19.3 percent and 13 percent respectively, notes KNBS in its latest economic indicators report. On the other hand, food and beverages was the main exports category, with a share of 46 percent, while the value of non-food industrial supplies and consumer goods registered 27 percent and 23 percent of shares respectively. Volume of trade during the month declined by 14 percent to stand at 1.6 billion U.S. dollars. In particular, total value of exports declined by 11.4 percent while imports fell by 14.6 percent. "Growth in exports has been sluggish with little diversification away from the traditional exports of coffee, tea and horticulture," notes CBK. "International trade in services, which forms part of the current account balance, has been in a surplus over the years, mainly due to improved earnings in export of transportation, tourism and communication services. Net current transfers also increased, supported largely by rising emigrant remittances," adds the regulator. However, the steady growth in services and net current transfers has not been sufficient to offset East African nation's deficit in the merchandise or goods account. "The huge import bill in the current account increases demand for foreign currency, while slowdown in exports of goods reduces the inflow of foreign currency. The combined effect exerts pressure on the exchange rate to depreciate," explained CBK. But that is not bad thing for Kenya, according to the bank, since depreciation of a currency makes exports cheaper relative to imports. "When exports become cheaper, foreigners can afford more of a country's exports, leading to a rise in the quantity of exports. If demand for exports responds positively to changes in the price, then a depreciation will lead to an increase in the quantity exported and, hence, the value of exports," notes CBK. Depreciation of a currency also makes imports more expensive leading to reduction in demand for the foreign goods and services, which in turn reduces balance of payments deficit. "So a weakening currency would not be that bad after all for Kenya or any other developing country. Weakening in exchange rate may have the desired effect of improving the current account balance," says CBK. Rise in East African nation's imports of heavy machinery in the last decade reflects increased investment in infrastructure. Kenya has intensified building and refurbishment of roads, airports, geothermal drilling and other public investments. Kenya's balance of payment deficit resulting mainly from heavy machinery imports, according to CBK analysts, is desirable."If a deficit arises from financing productive domestic investments such as infrastructural projects and human capital development that generate revenues and employment in the future, such a deficit is desirable." "With heightened investment promotion to actualize Vision 2030 development plan, there will be increased capital inflows especially for investment which in turn could strengthen the exchange rate."