Rise in oil cost set to erase fall in Kenya’s trade deficit

An attendant fuels a vehicle at a Nairobi outlet. Petroleum imports contribute to as much as a fifth of the import bill. PHOTO | FILE
An attendant fuels a vehicle at a Nairobi outlet. Petroleum imports contribute to as much as a fifth of the import bill. PHOTO | FILE 

The rise in the price of oil is likely to erase the decline in Kenya’s current account deficit recorded last year, economists at Stanbic Bank have cautioned.

Stanbic projects that with the rising price of crude raising the local import bill, the current account deficit (trade deficit) as a percentage of GDP will hit 6.7 per cent this year, similar to the 2015 level before falling below six per cent last year.

Kenya is a net importer of goods with petroleum imports contributing to as much as a fifth of the import bill.

The price per barrel of crude in the international market has risen by 12 per cent to $56 in the past six months and is expected to edge higher now that oil producing countries have agreed on production cuts.

“The average oil price is likely to be higher in 2017 than that of 2016 and hence the current account deficit is likely to be wider at around 6.7 per cent of GDP from our estimate of 5.8 per cent for the previous year,” said Stanbic regional economist Jibran Qureishi in the outlook report.

The wider deficit would put pressure on the shilling as traders demand more dollars to meet the higher cost of imports.

The country, however, has the option of calling on a standby loan facility with the International Monetary Fund in addition to the existing foreign exchange reserves should the CBK need to come in and support the shilling.

The shilling is already under pressure this year, depreciating to the 104 level to the dollar from 102.50 at the end of December 2016.

“The IMF stand-by credit facility along with potential new external loan issuances in 2017 may yet help provide adequate ammunition for the CBK to ensure that any weakness in the exchange remains orderly,” he said.

The build-up of external debt, coupled with a weaker currency, is also a risk though given that repayments would not just put a strain on the country’s revenue but also forex reserves.

According to Mr Qureishi, global financing conditions and terms are likely to become more expensive over the coming years, making it important for the government to obtain funding for projects that will be able to generate adequate returns in order to pay back the debts.

“Thus, careful selection of public investment projects should be a key priority over the medium term.

‘‘But more importantly, Kenya needs to bolster its capacity to finance projects via domestic savings as a means to eventually rely less on external debt,” said Mr Qureishi.

The government has signalled it intends to rely more on domestic financing in the 2016/17 fiscal year, having thus far kept off the Eurobond and syndicated loan markets while remaining ahead of schedule in domestic borrowing.