Current account deficit set to hit a 12-year low

Kenya’s current account deficit is on track to end the year at its lowest level in 12 years, following a period of falling imports versus rising inflows from diaspora remittances and tourism.

Central Bank of Kenya (CBK) projects the deficit, which is the balance of foreign exchange inflows and outflows as a percentage of gross domestic product (GDP), will stand at 4.3 percent for the year, the lowest since 2007’s 3.23 percent.

A major reason for the fall in import costs has been the completion of the Phase 2A of the standard gauge railway (SGR) from Nairobi to Naivasha, which marks the first time since 2014 that the country is not incurring railway building import costs.

In the 12 months to October, the deficit stood at 4.1 percent, having remained largely steady at this level since June.

“This reflects slower growth of imports of food, machinery and transport equipment, resilient diaspora remittances and strong receipts from service exports, which remained strong largely supported by receipts from transport and tourism services,” said the CBK in a market bulletin.

The Central Bank has been revising downwards the projected current account deficit, having opened the year with an expectation of 5.1 percent, cutting this to 4.8 percent in June, 4.5 percent in September and now the 4.3 percent carried in the most recent projection last month. Diaspora remittances remain the biggest contributor of foreign exchange inflows, with Kenyans living abroad sending home an average of Sh23.3 billion ($231.48 million) every month this year.

In the 11 months to November 2019, they remitted a cumulative total of $2.546 billion (Sh256.4 billion), up 3.8 percent from the $2.453 billion (Sh247 billion) they sent home in the same period last year.

On the import side, the biggest fall in nominal terms has been in food imports, which declined by $208 million (Sh20.9 billion) to $1.7 billion (Sh171.2 billion) in the nine months to September 2019 compared to a similar period in 2018, as per the latest CBK data.

Machinery and transport equipment imports fell by $158 million (Sh16 billion) to $4.33 billion (Sh436 billion) in the period, chemicals by $107 million (Sh10.8 billion) and manufactured goods by $79 million (Sh7.95 billion) to $2.86 billion (Sh288.2 billion).

The biggest beneficiary of the narrower deficit has been the shilling, which has remained stable during the year and is on track for the second straight year to close in the green against the dollar (it had a year-to-date gain of 1.2 percent as at December 23).

On the other hand, falling industrial goods imports is a signal of an economy that is not performing to its full potential, risking job creation and long-term growth.