Lower oil prices are set to ease pressure on Kenya’s import costs in 2016 and offer support to the shilling, cushioning consumers from a steep rise in commodity prices.
The price of petroleum, one of the country’s largest imports, closed the year at an 11-year low and analysts forecast lower prices this year on increased supply amid weak demand.
Cheap oil helped cut Kenya’s import bill 4.4 per cent to Sh1.2 trillion between January and October, official data shows.
“Forecasts show oil prices have not found the bottom and could plunge some more or take several years to recover to mid-last year’s level of $115 (Sh11,730) per barrel,” said Aly-Khan Satchu, chief executive of data management firm Rich Management.
“This is certainly a plus for Kenya’s economy in terms of cushioning the shilling against extreme volatility from import pressures and a stronger US dollar,” he added.
Kenya imported Sh197.7 billion worth of fuel and lubricants in the year to October, a huge drop from Sh297.5 billion in the same period last year, according to data from the Kenya National Bureau of Statistics (KNBS).
This saved the economy Sh99.8 billion, which is a seventh of the foreign exchange reserves held by the Central Bank of Kenya at Sh724 billion ($7.1 billion).
Kenya’s import bill has over the years been growing at a faster pace than exports, resulting in an imbalance in the current account and pressure on the shilling.
Global oil prices have dropped 40 per cent since January to $37 a barrel (Sh3,876), helping cut Kenya’s import bill for the first time since 2007.
Kenya’s exports grew to Sh481 billion in the year to October from Sh367 billion last year.
Petroleum products play a central role in the economy because any price movement is transmitted to nearly all sectors of the economy, including transport, manufacturing and agriculture.
The shilling, which in September touched a low of Sh106 on reduced dollar inflows as the key tourism sector came under a heavy battering, is currently trading at Sh102.20 having shed 11 per cent to the US currency during 2015.
Mr Satchu reckons that the shilling would have shed a lot more value in the absence of lower oil prices.
Kenya’s current account deficit has been worsening in the past five years, standing at 9.2 per cent of the gross domestic product last year from five per cent in 2010, raising concerns among Kenya’s development partners, including the World Bank.
The KNBS data shows that petroleum accounted for 15.3 per cent of the country’s import bill in the review period, coming in third behind industrial imports and machinery, whose imports increased in the period.