12 April 2011

Kenya: Spiralling Import Bill Widens Trade Deficit

Kenya's current account deficit has widened by Sh45.8 billion as import bills exceeded export earnings by Sh184.5 billion, a government report has shown.

The widening deficit means Kenya is finding it hard to finance the importation of vital commodities such as oil, machinery and raw materials; a position that weakens the Shilling's exchange rate to major world currencies and puts pressure on the government to borrow foreign currency to boost forex reserves.

The latest Central Bank of Kenya (CBK) monthly economic review report shows a spiralling import bill narrowed the balance of payment (BOP) surplus by 90.4 per cent to Sh7 billion ($83 million) as at November last year from $868 million in November 2009.

"This could explain why the Shilling has been declining," said Mr Chris Muiga, a senior forex trader at KCB.

The BOP is measure of all flows of money into and out of a country and a surplus - more funds coming into the country than going out - is favourable since it acts as a confidence pointer in the economy.

A deficit means money is going out and it results in the home currency losing against other currencies, which is happening to the Shilling.

Increase in oil prices, capital transfers in the form of profit and dividend repatriations and a decrease in funding are helping to widen this deficit.

The importation bill for oil had increased by 20 per cent to Sh232 billion ($2,673 billion) in November last year from $2,066 billion in November 2009.

Capital inflows are also slowing due to investors cashing in some of their gains.

Mr Muiga said investors are opting to buy securities in other African markets such as Ghana and Uganda which are offering more attractive returns.

"The rates on government securities are low when compared to other countries in the region," said Mr Muiga.

A 10-year Kenya government bond has a 9.3 per cent coupon rate while a Uganda government bond of similar maturity has a 11.62 per cent coupon rate.

Money which would have come in the form of transfer such as the Sh67 billion toll road projects is still pending, added Alex Muiruri, a research analyst at Dyer and Blair Investment Bank.

Last year also saw an influx of foreign investor participation towards the second half of the year due to political events boosting investor confidence.

"In September we ha.jgachiri@ke.nationmedia.comd a stable political environment after the passing of the new Constitution," said Mr Muiruri.

The shilling was at Sh75.13 against the dollar at the beginning of November 2009 and a year later it had depreciated by seven per cent to an average Sh80.45 and is currently pegged at about Sh84 to the greenback.

The depreciation means that Kenyans will need more shillings to buy a unit dollar and this strains the country's reserves which act as the country's buffer.

Forex reserves now stand at $5.1 billion or 3.9 months import cover against against the statutory minimum requirement of six months reserve.

Gerishon Ikiara, an internal economics lecturer at the University of Nairobi, said that figure while not the preferred six-month level is not alarming.

"There is no need to panic," said Dr Ikiara.

The shrinking surplus could also show that there is an increase in purchase of capital equipment and raw materials which can be taken as a sign that economic activity is on the rise, said Dr Ikiara.

Mr Muiga also said the current import cover level is not alarming since the November 2009 level was quite high relative to other months.

In June 2010 the forex reserves where at $5 billion with a 3.9 month import cover compared to November which had $91 million more in reserves and a similar import cover margin.

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