Kenya's Current Account Deficit Widened, Driven By Global Commodity Markets Shocks

Kenya’s Current Account Deficit Widened, Driven By Global Commodity Markets Shocks

By Soko Directory Team / Published December 8, 2022 | 9:54 am

KEY POINTS

Services receipts improved as international visitors’ arrivals to Kenya continued to increase during most of 2022, rising to 124,928 persons in July 2022 from 69,932 in January 2022.

Despite steady remittance inflows and the recovery in tourism, the current account deficit increased as surging commodity prices pushed imports to an all-time high.

The substantial increase in global prices for oil and other commodities pushed import payments to US$25.0 billion in the year to August 2022, with oil import swelling by 85.7 percent y/y.

Services receipts improved as international visitors’ arrivals to Kenya continued to increase during most of 2022, rising to 124,928 persons in July 2022 from 69,932 in January 2022.

However, this is still about 21 percent lower than the pre-pandemic level recorded in July 2019. Remittances remained resilient, increasing by 13.5 percent y/y to reach $4,019 million in the year to August 2022.

However, these developments were not sufficient to offset the impacts of the large commodity price shock, leading the current account deficit to widen to US$6.3 billion in the year to August 2022 from US$5.5 billion in the same period last year.

The current account deficit is projected to increase to 6.0 percent of the GDP by end of 2022 as the anticipated sharp economic slowdown in North America and Europe dents remittances growth and the continued war in Ukraine keeps global energy prices elevated.

Financial inflows have declined signaling tightened global financing conditions. Over a 12-month period, net inflows in the capital and financial accounts reduced to 5.4 percent of GDP in August 2022 from 6.3 percent in December 2021.

This reflected 0.8 percent of GDP outflow in portfolio investment (compared to average net inflows of 0.1 percent of GDP recorded between June 2021 to May 2022) as international investors rushed towards safe-haven assets such as the US dollar in response to rising uncertainty and aggressive monetary tightening by the Federal Reserve.

The CBK’s reserves of external assets have consistently declined since June 2021. As of November 24, 2022, official usable foreign exchange reserves stood at U$7,045 million (3.95 months of import cover) compared to U$9,957.4 (6.1 months of import cover) in June 2021.

With accelerating imports and the gradual erosion of foreign exchange reserves, the shilling has remained under pressure (depreciating by 6.4 percent against the U.S. dollar between the end of December 2021 and October 6, 2022).

This has put upward pressure on debt service as 68 percent of the external debt is denominated in U.S. dollars.

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