22 July 2011

Kenya: Weak Shilling Cuts Spending on Imports

Delays in placing import orders because of the weak shilling and a declining petroleum bill is improving Kenya's balance of trade.

Latest data from the Central Bank of Kenya shows that the deficit between import bills and export receipts declined to Sh47.6 billion in April, from Sh65.9 billion reported in March, the highest level since 1998.

The value of imports for April was Sh87 billion compared to Sh109 billion in March. Exports declined to Sh39.4 billion in April from Sh43.9 billion in March.

Wild swings in the balance of trade make policy decisions more difficult and cause instability in the shilling exchange rate, affecting business decisions adversely.

"With these changes it is not easy to predict the way forward," said Dr Gerishon Ikiara, a lecturer in international economics at the University of Nairobi.

With the expected importation of maize to meet the current shortfall the balance of trade is expected to take another dip. Dr Ikiara said this could lead to the downward revision of the growth rate.

Kenya's balance of trade has been in the negative with the issue being the gap, which, however, is narrowed by exports and net movement of financial services in favour of the country.

In the month of April machinery and transport equipment imports declined by Sh6.1 billion to Sh22.5 billion as the fuel bill also fell to Sh23.6 billion from Sh30.8 billion in March.

"With a weak shilling prices go up and it is not economical to buy then," said Andrew Franklin of Franklin Management Services.

The number of new vehicle registered reduced to 12,560 in April from 16,497 in March.

The shilling has been on a free fall against international currencies hitting a 17-year low of Sh91.90 while inflation rates have been on an upward trend with the June rate at 14.49 per cent.

Mr Franklin also attributed the decline in importation of machinery to the rise in insurance costs owing to piracy incidents in the high seas.

"The cost of piracy brought up the insurance costs which subsequently pushed up taxes forcing some to cancel their orders," he said.

The shrink in the fuel bill is attributed to quantity rather than prices. Lower tonnage orders in April owing partly to a spill over to March from February saw the arrival of a delayed importation of an order by National Oil Corporation of Kenya.

The consignment of 56,500 tonnes (about 66.7 million litres) of diesel was expected on February 19. However, its delay resulted in an emergency order of 45,000 tonnes (about 53.1 million litres), which was discharged on March 20 by Galana Oil.

Speculation over the rising fuel prices at the time also made importers prefer to buy at the March prices rather than wait for April with the then upward trajectory.

A drop in horticultural produce and tea which declined by Sh2.3 billion and Sh2.2 billion affected export values.

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