Markets & Finance

Current account deficit falls to 5.5pc of GDP on low import bill, high remittances

NT

The International Monetary Fund (IMF) has urged the Treasury to cut the fiscal deficit. PHOTO | FILE

The International Monetary Fund (IMF) says Kenya’s current account deficit has fallen to 5.5 per cent of the gross domestic product (GDP), confirming projections by Central Bank based on a lower import bill, higher diaspora remittances and improved agriculture exports.
The country is therefore on track to record its lowest end of year current account deficit position since 2009, when it stood at 4.6 per cent.

The findings were made by an IMF team, which was in Kenya from October 19 to November 3 conducting a fiscal review under the precautionary Sh150 billion stand-by credit facility.

“The external current account deficit (on a 12-month basis) declined to 5.5 per cent of GDP by September 2016 from 6.8 per cent in 2015. This decline reflected mainly the lower oil prices, improved tea and horticulture exports, and increasing remittance inflows,” said IMF chief of fiscal policy and surveillance division Benedict Clements in a statement. 

The IMF team’s findings on the current account mirror the projections made by the CBK Monetary Policy Committee in its last meeting in September.

The gap between exports and imports has narrowed this year, going by data provided by the Kenya National Bureau of Statistics.

In the first seven months of 2016, Kenya’s imports stood at Sh807.2 billion and exports at Sh347.1 billion, resulting in a trade gap of Sh460 billion.

Over the same period in 2015, the gap stood at Sh577.6 billion, arising from imports worth Sh901.9 billion—driven by the railway construction—and exports worth Sh324.3 billion.

READ: IMF sees rising fiscal deficit as economy’s biggest challenge

KNBS shows that horticulture exports for the first eight months of the year rose by 11.2 per cent, to Sh56.5 8 billion from Sh50.8 billion over the same period in 2015.

On the diaspora remittance side, CBK data shows an increase of 14.5 per cent in the first half of this year.

Kenyans abroad sent home Sh86.2 billion in the six months to June, compared to Sh75.3 billion in the first half of 2015.

“The increase in remittances has mainly been driven by Kenyan diaspora in the United States, whose economy is on a relatively stronger footing than in Europe, the other abode of a strong Kenyan diaspora,” the World Bank said in its latest Kenya economic update released last week.

While the narrowing current account balance has helped keep the currency stable, the World Bank notes that this has come despite a widening fiscal deficit, which could bear pressure in the future especially if the mitigating factors such as the low price of oil dissipate.

The IMF has also raised concerns on the impact of rising public debt that is financing the budget deficit, urging the Treasury to cut the fiscal deficit as had been agreed under the standby programme.

In the recently released 2016 Budget outlook paper (BROP), the Treasury has revised downward the development budget for the 2016/17 fiscal year by Sh216 billion to Sh600 billion, which would in turn cut the fiscal deficit as a percentage of GDP to 8.1 per cent, from the 9.7 per cent, as was originally budgeted.