Economy

Deposits signal reduction in crude import bill and stronger shilling

The announcement that Irish oil exploration firm Tullow has discovered oil in Turkana comes as good news for Kenyans as oil-related imports, which totalled Sh200.8 billion in 2010, account for the largest import bill for the country.

The news that Kenya is likely to join the league of oil producing countries will positively stir wananchi from all walks of life as fuel is the one denominator that cuts across all the facets of living —with projections of reduced cost of living owing to cheaper and abundant oil.

If indeed the deposits are found to be commercially viable, economic activities related to exploration, extraction, refining, transporting and marketing of oil will significantly change the fortunes of East Africa’s largest economy.

The oil import component largely accounts for the country’s widening balance of payments— the difference between exports and imports which stood at a deficit of Sh12 billion ($144 million) in the year to November 2011. If Kenya had its own oil, which would add to its export bill, the balance of payments would most likely be in the positive region.

Import bill

Central Bank Governor Njuguna Ndung’u has consistently blamed the oil import bill which accounts for about 25 per cent of the country’s total imports for fuelling inflation and the resultant weakening of the local unit.

“Higher import prices – initially for food and fuel – have sparked inflation, which in turn weakened the shilling and put further pressure on prices. Because of the sharp depreciation of the cuurency, import prices continued to rise even after global food and fuel costs had started to retreat,” says the Kenya Economic Update released by the World Bank in December 2011.

An oil producing Kenya is likely to achieve single digit inflation and shore up the local currency against major foreign units.

One of the early winners should Kenya begin oil production will be the local aviation and manufacturing industries. A research note by Standard Investment Bank says that volatility in oil prices have forced African airlines to form a joint fuel purchase programme. Therefore, in the event of guaranteed supply, local air industry players are likely to incur less fuel costs.

The Kenya Association of Manufacturers says fuel charges account for as much as 40 per cent of their input costs, further increasing the cost of doing business in the country. A drop in energy costs makes the country attractive to investors. The findings will also spur industries in fields such as petrochemical, pharmaceuticals, fertiliser solvents, pesticides and plastics where petroleum is a raw material.

The service industry like banking, tourism, hotel and accommodation may also grow on the back of increased needs for financial services by oil merchants, business delegations visiting the country and need for catering services for such players.

The spiral effect of such economic activities will be creation of job opportunities and wealth.

Should oil production come to fruition, the country may register high economic growth rates associated with oil producing nations like Nigeria, Angola and Algeria that averaged seven per cent last year.

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