Politics and policy
EAC region key to taming Kenya’s trade imbalance
Posted Monday, June 18 2012 at 19:24
Deeper trade with East Africa Community partners could help Kenya tame a widening imbalance between imports and exports that has left the country more vulnerable to external shocks with the risk of slowing down economic growth.
The World Bank has said that Kenya’s economy was pushed “out of balance” by a sharply widening current account deficit which is projected to reach 15 per cent of gross domestic product (GDP) this year.
High oil prices and weak exports have widened Kenya’s trade imbalance, leading to a current account deficit of 13.1 per cent of the GDP presently.
“This is among the worst external balances in the world and poses a significant risk to Kenya’s economic stability,” the World Bank said in a report released yesterday in Nairobi.
“An additional external shock, especially a sharp rise in oil prices, would trigger severe economic stress, especially if accompanied by capital outflows.”
Global oil prices remain volatile due to political turmoil in the Middle-east and uncertainty over the eurozone economy.
Kenya’s vulnerability is fuelled by the fact that it heavily relies on a few exports such as tea, tourism, and horticulture while the import bill remains stressed by high oil prices.
“Kenya is living beyond its means and it’s time to use policy tools to increase savings and exports,” Ms Jane Kiringai, a senior economist with the Bank, told a media briefing.
She said structural weaknesses including a widening current account deficit posed a significant risk to the country’s economic stability.
The bank expects the country’s economy to grow by five per cent this year but cautioned that domestic and global shocks could slash it to 4.1 per cent.
“Another oil price shock, poor harvest, or contagion in the Eurozone could easily create renewed economic turbulence and reverse the recent gains,” Ms Kiringai said.
Economists with the World Bank said deeper trade ties with EAC partners could help Kenya cushion itself from the shocks of a weakened global economy and worsening trade imbalance.
“Deepening Kenya’s intra-EAC trade would help reduce its widening current account deficit, cushion it against global turbulence, and open up the economy to more foreign direct investment,” Wolfgang Fengler, the bank’s lead economist in Kenya said.
Intra-trade bloc triples
Statistics by the bank show that EAC partners presently export more goods and services among themselves than to any other region.