Markets & Finance

Shilling feels the pressure as trade deficit rises 59pc

CARGO

Cargo containers await clearance at the Mombasa port. Trade deficit has increased on high import bill. PHOTO | FILE

The gap between Kenya’s imports and exports widened a massive 59 per cent or Sh37.7 billion in the first quarter of the year, explaining the significant depreciation of the shilling.

The Kenya National Bureau of Statistics (KNBS) reported the gap, also known as the current account deficit, stood at Sh101.5 billion, up from Sh63.7 billion recorded in the same quarter last year. Much of the exports pertain to the standard gauge railway construction.

In the meantime, Central Bank of Kenya data shows the shilling has depreciated by 8.9 per cent since the beginning of the year, underlining the extent to which the current account deficit is weighing down on the domestic currency.

“The deterioration in the current account balance was mainly occasioned by the increase in the import bill and the decline in the value of total exports in the same period. As a consequence, the current account balance recorded a deficit of Sh101.5 billion in the first quarter of 2015 compared to a deficit of Sh63.8 billion in the first quarter of 2014,” said the KNBS.

Simultaneously, the Kenya shilling has weakened to 99.88 units as of last Friday’s opening of the forex market compared to a 90.65 units at the beginning of the year. To obtain a dollar, forex buyers have to pay Sh9 more than they did at the start of the year.

Citigroup Global Markets, the investment banking of the Citibank, said in its latest commentary on the foreign exchange markets that the shilling would remain under siege in the third quarter of this year, owing largely to the large current account deficit.

“Kenya’s wide current account deficit has been weighing on the local currency and appears set to continue to do so in 3Q 2015,” said Citi.

Citi said the increase in government spending by nearly 25 per cent this fiscal year compared to last year would likely result in increased imports, thereby keeping the deficit high and the shilling weak.

“Rising government expenditure will probably keep imports elevated, the trade deficit wide and the shilling on the back foot,” said Citi.

The value of the local currency is expected to rank high in the agenda of the members of the Central Bank of Kenya’s Monetary Policy Committee when they meet Tuesday to determine the policy rate.

READ: Treasury bets on foreign investors to bridge balance of trade gap

Razia Khan, the chief economist for Africa at StanChart Plc, said last Friday Kenya could push interest rates up if it becomes necessary rather than tap the Sh68 billion financing facility by the International Monetary Fund.

“A precautionary $688.3 million IMF financing facility is unlikely to be tapped, except in the event of an external shock. Instead, we expect the central bank rate to be raised further, if it should become necessary to safeguard the Kenya shilling exchange rate,” said Ms Khan.

Citi investment bankers said Kenya’s foreign exchange rate situation would also be affected by the depreciation of the Ugandan shilling, which has also weakened significantly since the start of the year.

Due to the high value of trade between Kenya and Uganda, the currencies move in the same direction in relation to the dollar, the Citi analysts said.

“Recent Uganda shilling weakness and a bleak outlook for this currency in the second half of 2015 might point to limited scope for Kenya shilling appreciation as the dollar-Uganda shilling and dollar-Kenyan shilling exchange rates tend to be highly correlated,” said Citi analysts.