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.

A rise in petroleum prices has the impact of pushing up the cost of transport and ultimately the cost of goods and services, piling inflationary pressure across the entire economy.

The decline in oil prices is however yet to cool nerves at home where caution remains over the possibility of Europe finding a quick fix to its debt problems.

“The average oil price for the year will be higher than 2009, putting pressure on the current account deficit,” says Judd Murigi, the head of research at CfC Stanbic Financial Services.

Should commodity prices led by petroleum take an upward direction, households will have to part with more money to meet their energy needs leaving them with less money to spend on other products.

Economists are also closely watching the shilling, which has shed five per cent of its value against the US dollar from Sh77.30 in April to lows of Sh81.9 early this month.

Currency traders say that the shilling could gain some strength in the medium term as a result of positive sentiments arising from a successful referendum if the polls are to be believed.

Renewed euro strength as a result of successful bank stress tests could also give the shilling strength against the dollar.

“A lot also depends on the extent to which CBK purchases dollars in the open market as it seeks to bolster the country’s months of import cover,” says Mr Murigi.

Expensive fuel and metal products could also weaken the Kenya shilling against the dollar as demand for the greenback rises among importers seeking to import the commodities.

The slowdown in global hard commodity prices came as the Greek debt crisis and the prospect of weaker growth in Asia led to fears of decreased demand for raw materials.

Earlier on in the year, a sharp rally in commodity prices with the ongoing global economic recovery could increase the exposure of frontier economies such as Kenya’s to imported inflation and exchange rate instability, the International Monetary Fund (IMF) has warned.

The IMF says such instability could slow down growth in the near term, leaving many countries behind their medium term targets with serious consequences on the economic environment.

The global outlook report released by the IMF had forecast that the prices of commodities would continue rising in the short term on renewed demand from countries such as China and India, posing a fresh external challenge to economic management in many countries around the globe.

Although the value of merchandise exports dropped by Sh18.3 billion to stand at Sh375 billion in March this year, the country’s primary export commodities tea and coffee moved to shore up Kenya’s export receipts.

Coffee export earnings increased by Sh3 billion to Sh16.3 billion reflecting mainly improvement in prices, while earnings from tea exports increased by Sh7.1 billion on account of improved prices to Sh83 billion.

As a direct consequence of the woes in the Euro zone, horticultural exports however dipped from Sh58 billion to Sh57.1 billion in March this year.

Even though manufactured goods fell from Sh49.6 billion to Sh43.9 billion, an expanded East African Community still presents a viable market for Kenya’s manufactured exports in a fast growing region that is set to grow in economic prominence.

Uganda for instance is Kenya’s biggest export destination and is set to be one of the fastest growing economies in the world over the next few years.