Current account deficit: The elephant in our economy

BY JAMES ANYANZWA

NAIROBI, KENYA: Henry Rotich, the Treasury cabinet secretary, has finally come out to speak about the elephant in Kenya’s economy.

Despite the rosy picture painted by several analysts and economists, Kenya has been importing more than it exports for quite some time.  It leaves the country with what is called, in economic speak, a current account deficit.

The country imports all sorts of goods — from heavy machinery and cars to toothpicks, tomato pastes and luxury finishes in apartments — from all over the world, especially China.

And as the appetite for imported goods has been rising, markets for the country’s exports have been shrinking. 

This has raised concerns that, Rotich said last week in a Budget Review and Outlook Paper (BROP), would see him get hawk-eyed on the nature of imports coming into the country.

“Kenya’s large and persistent current account deficit of over 10 per cent of GDP in the last three years raises a major concern for sustained economic growth,” he said. 

“I will focus on promoting growth in exports and ensuring that imports are mostly concentrated on capital goods that will boost growth, particularly in new export sectors.”

A good example of capital goods is an aircraft imported by the national carrier, Kenya Airways. 

When KQ uses the aircraft, the country earns revenues in dollars and also brings tourists and other business people to the country.

One major concern is the flow of funds Kenya relies on to plug the current account deficit could dry up. 

“Moreover, the current account deficit is bound to stay high, driven by high capital imports and high investment demands,” he said, adding that the weak and subdued demand for Kenya’s exports in its traditional European markets will remain a dragon for the current account, as will the Eurozone’s recession.

“The government will undertake appropriate measures to safeguard macro-economic stability should these risks materialise.”

However, the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), though these are usually a small fraction of the total.

Government action to reduce a substantial current account deficit usually involves increasing exports (goods going out of the country) or decreasing imports (goods coming from into the country).

According to the BROP, the country’s outlook for 2014 and the medium term includes continued weak growth in advanced economies that will impact on exports and tourism activities.

Further, geographical uncertainty in the international oil market will slow down the manufacturing sector.

The government, however, projects a gradual decline in the current account deficit from 11 per cent of gross domestic product in 2012/13 to 10.5 per cent in 2013/14.

Thereafter, it will drop to 7 per cent of GDP in the medium term.

“The continued fiscal consolidation and appropriate monetary policy, coupled with easing oil prices, are expected to ease pressure on the current account,” said Rotich.

Stability in interest rates and improved investor confidence are also expected to enable the capital and financial accounts to be in surplus, offsetting the current account deficit.

“This will allow the Central Bank to continue building up foreign exchange reserves from the interbank market.”

The gradual decline will be further supported by initiatives geared towards export promotion, mainly through commodity exchanges, value addition in agriculture exports and expansion of regional markets.

The overall Balance of Payments surplus narrowed to Sh53.12 billion in the year to July 2013, from Sh74.2 billion in the year to July 2012.

This reflects a less than proportionate improvement of the capital and financial account (3.1 per cent) as compared to the deterioration in the current account deficit (10 per cent).

The current account deficit widened to Sh388.45 billion in the year to July 2013, from Sh353.6 billion in the year to July 2012.

According to the BROP, the decline of the current account balance was as a result of faster growth in the merchandise import bill and importation of machinery and transport equipment.

As a result, with a surplus in the overall balance of payments, official foreign exchange reserves held by the Central Bank rose 15.8 per cent to Sh517.65 billion, equivalent to 4.2 months of import cover.

The improvement in reserves reflected a build up of foreign exchange held by CBK and receipt of disbursement under the Extended Credit Facility (ECF).

The shilling exchange rate also stabilised against major world currencies, following increased short-term capital inflows and remittances, disbursements under the ECF programme and central bank activity in the foreign exchange market.