Euro zone turbulence helps Kenya keep inflation in check

Euro zone turbulence is keeping global commodity prices in check, helping Kenya to cut its import bill and slowing down the pace of inflation that is offering consumers much needed relief in the marketplace.

The price of oil, Kenya’s top import item, has remained steady at below $80 a barrel, having dropped from a high of $83 in April on the back of subdued demand in key European and North American markets.

That has helped cut the oil import bill by Sh28.8 billion (or 61.7 percent of the total bill) besides cooling off prices at the pump.

Impressive first quarter performance of the European and the US economies had pushed the price of crude to a 20-month-high in April pushing pump prices to a high of Sh94 a litre in Nairobi up from Sh88 at the end of March.

The May outbreak of the sovereign debt crisis in Greece and anxiety over key European economies such as Spain and Italy has eroded much of the confidence keeping demand for commodities in check.

The Eurozone crisis has also helped smooth out the expected rise in the cost of Chinese imports following Beijing’s recent decision to introduce some degree of exchange flexibility after nearly a three-year peg to the dollar.

Stability of commodity prices has also eased concerns over a possible rise in imported inflation, especially for economies like Kenya’s, whose primary import bill is made up oil, petroleum products and machinery.

Kenya remains a net importer of goods and services and is currently running a huge current account balance that has been growing with the steady increase in the imports bill.

Analysts say Kenya should take advantage of the combination of declining imports bill and a weakening of the shilling against the dollar to aggressively market its exports in new markets.

“Growing exports is key to reducing the deficit rather than lower prices on (hard) commodities prices. The overall solution to our deficit hinges on growing exports,” said Eric Kimanthi, senior research analyst at African Alliance Kenya Securities.

The Central Bank of Kenya’s (CBK) monthly report for April 2010 indicates that the balance of payments swung from a deficit of Sh56.8 billion to a surplus of Sh42.6 billion in March this year.

Within the same period, the value of merchandise imports declined led by a drop in the value of oil, chemicals and imported machinery.

Petroleum and metal products are Kenya’s largest import items that account for about 35 per cent of the total import bill. 

On Tuesday, New York’s main contract, light sweet crude for September delivery, fell six cents to $78.92 a barrel, while Brent North Sea crude, also for September, was eight cents weaker at $77.42 dollars.

Declining crude prices have reflected on local pump prices where a litre of petrol now sells at an average of Sh90.9.