Drop in private sector financing eases import bill

Kenya’s short-term import bill is expected to fall after a drop in financing of importers by banks in the last quarter of the year.

Latest data from the Central Bank of Kenya shows that private sector credit for imports financing dropped by Sh2 billion between September and December last year to Sh13 billion following a rise in interest rates in line with a tight anti-inflationary monetary policy.

The decline in funding is expected to ease pressure on the shilling, whose depreciation had also been blamed on foreign currency demand by importers.

But with the Iranian oil crisis, the picture in the medium term is hazier as oil import bill may escalate.

(READ: Tough times ahead as Iran crisis pushes up price of oil)

“The monetary policy stance has slowed borrowing to finance imports which is expected to partly ease pressure on the current account with positive effects on the exchange rate,” said the Central Bank in a report.

Kenya’s balance of payments has been deteriorating following a rapid expansion in the import bill that has not been accompanied by increase in the value of export goods and services.

The lack of corresponding increase in exports indicates that a substantial part of the goods imported were for consumption and not for capital formation or production in the economy.

“Many people finance their imports through loans be it cars or raw materials, so the interest rates worked fast, with the strengthening of the shilling indicating fall of demand in foreign currencies,” said Gerishon Ikiara an economics lecturer at University of Nairobi.

Acting Finance minister Njeru Githae has set contraction of the country’s import bill as one of his major agendas, saying the bill was not sustainable.

The Kenya National Bureau of Statistics showed that the difference between imports and exports had grown to an all time high of Sh116 billion.

To cut public appetite for imported products the Central Bank raised interest rates making loans used in purchase of imports costly.

Sixty per cent of banks and 71 per cent of non-banking institutions surveyed by the Central Bank said they expected the shilling to strengthen in 2012 due to reduced demand for foreign exchange by importers as interest rates surged.

Other factors expected to support the shilling were an increase in short term capital inflows from investors seeking to take advantage of opportunities in money markets, presented by the high interest rates and less pressure from food imports due to improved rains.

Kenya’s main imports are oil, which contributes nearly a third of the import bill, machinery and transport equipment, industry inputs and food.