The current account deficit fell to four percent in the quarter ended March 2024 from 4.7 percent previously, providing a greater cushion for the exchange rate which has made notable gains since start of the year against major world currencies.
The current account records Kenya’s transactions with the rest of the world and specifies net trade in goods and services, payments and cross-border investments.
The current account balance is critical in determining the exchange rate as it shows the difference between foreign exchange inflows and outflows from expenditures such as import payments.
The improved current account deficit was recorded against higher economic output in the period as GDP in the 12 months to March rose to Sh15.4 trillion from Sh13.9 trillion previously.
The current account deficit in nominal terms expanded to Sh131.2 billion from Sh110.5 billion in the first quarter of 2023.
Agricultural exports rose substantially in the quarter under review, but the impact of the international trade receipts was counteracted by growth in imports.
“Favorable export earnings from tea and horticultural commodities resulted to a 28 percent increase in merchandise exports during the first quarter of 2024 to Sh298.4 billion. However, this was not sufficient to reduce the trade deficit which was exacerbated by a 17.9 percent increase in merchandise imports to Sh640 billion in the first quarter of 2024,” KNBS noted in its first quarter balance of payments report.
The increase in the import bill was attributed to increased spending on petroleum and industrial machinery especially air transport equipment.
Kenya’s current account is usually negative (represented by a deficit) to reflect the fact that the country is a net importer of goods and services.
The Central Bank of Kenya (CBK) expects the current account deficit to stick at around four percent of GDP in 2024 as the improving export receipts are backed up by growth in diaspora remittances.
“The current account deficit is expected to remain stable at four percent of GDP in 2024, reflecting improvement in exports especially of agricultural commodities, resilient remittances, effects of regional trade integration initiatives, and recovery in imports supported by a stable exchange rate,” the CBK said in June.
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The current account deficit closed at four percent of GDP in 2023, improving from 5.1 percent of economic output in 2021 and 2022 respectively.
The current account is usually one half of the balance of payments while the other is the capital account which measures cross-border investments in financial instruments and changes in central bank reserves.
Increased debt servicing especially external debt payments have increased outflows from the current account putting pressure on the size of the fiscal deficit.
The external debt repayments are expected to remain prevalent amidst the persistence of high interest rates and a sustained fiscal deficit that will see the National Treasury extend borrowings from international markets.
