Kenya’s Balance of Payments
The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. It is a crucial financial record that captures the economic interactions between Kenya and the rest of the world during a specified timeframe. It provides a systematic account of how the country engages with the global economy, encompassing a wide range of economic activities including trade of goods and services, financial investments, and various transfer payments like foreign aid and grants from other nations. The Balance of Payments (BOP) holds significant importance as a key economic metric, offering a concise representation of the movement of resources between a nation and its trade partners. This financial record categorizes transactions into three primary accounts: Current Account, the Capital Account, and the Financial Account.
The Current State of Kenya’s Balance of Payments
Kenya’s overall balance of payments has been fluctuating over the years, with the balance of payments standing at a deficit of Kshs 127.8 bn in Q1’2023, attributable to the running current account deficit and the high cost of debt servicing. The performance has been mainly supported by the financial account, which has accumulated a surplus over the years, except for Q1’2023 when it registered a deficit. However, the overall balance of payments has been weighed down by the running current account deficit, whose deterioration is attributable to faster growth in the merchandise import bill, which outpaced the growth in merchandise exports due to the increased fuel costs and the lower exports. Below is a graph highlighting the trend in the Kenya’s balance of payments over the last nine years;
Source: Kenya National Bureau of Statistics (KNBS)
Below is a summary of how the individual components of Kenya’s balance of payments have been performing;
- Current Account Balance- Kenya’s current account deficit narrowed by 39.0% to Kshs 84.9 bn in Q1’2023 from Kshs 139.3 bn recorded in Q1’2022 despite a 27.3% deterioration in the primary income balance to a deficit of Kshs 56.8 bn in Q1’2023 from a deficit of Kshs 44.6 bn in Q1’2022. over the last ten years, Kenya’s current account balance has been running deficits, implying that the country relies more on the outside world for its goods and services. The current account deficit as a percentage of GDP was at 4.7% in 2022.
- Financial Account and Capital Account- The financial account balance recorded a deficit of Kshs 111.1 bn in Q1’2023, a reversal from the surplus of Kshs 82.9 bn recorded in Q1’2022. On the other hand, the capital account balance recorded a 5.9% decline to a surplus of Kshs 6.9 bn in Q1’2023, down from a surplus of Kshs 7.4 bn recorded in Q1’2022. Key to note, the account has been increasing at a 10-year CAGR of 1.1% to USD 176.0 mn in 2022 from USD 158.4 mn in 2013. The declining capital account is partly attributable to capital flight in the country
Policy Recommendations
In light of the above, below are our specific recommendations that the Kenyan government can apply to improve the BOP position;
- Encourage export diversification- the government should shift from complete over-reliance on traditional exports like tea, horticulture and coffee, through diversification in promoting value added processing and manufacturing to increase export revenue.
- Export promotion- The government can employ different strategies to encourage more export volumes and produce. This can be done through actively engaging in trade pacts that favor Kenyan exports in new markets. For example, the recently signed trade agreement with the EU is meant to give Kenyan exports an advantage in the European market. Additionally, the government can provide export incentives and subsidies to increase Kenyan products’ price competition in foreign markets.
- Increase agricultural produce- the government should support small-scale farmers with improved agricultural technology and quality inputs, as well as improved access to credit. This will help increase the agricultural productivity, thus increasing exports, while reducing the dependence on some of the unnecessary agricultural imports like sugar and wheat.
- Encouraging Foreign Direct Investment (FDI)- The government should be strategic in creating an attractive investment environment for foreign investments through improving regulatory transparency as well reducing hurdles in the process. The Kenyan government can target key investment sectors of global interest like the Renewable energy sector and Sustainable Energy Development Goals (SEDG), and make it favorable for foreign investors
- Reducing Imports- The government should carefully cut down on imports and only import what is needed, while encouraging domestic production of some of the imports. This can be achieved through introduction of import restrictions like quotas and tariffs. To note, this should be carefully done to strike a balance between domestic industry protection as well protecting existing trade relationships with other nations.
- Maintaining a sustainable debt level- The government should also strike a balance between foreign borrowing which helps increase the foreign reserves, while maintaining a good credit score with its creditors. This ensures that the country remains attractive for investors’ capital and financial flows. As such, the government should be intentional in honoring the upcoming maturities like the forthcoming USD 2.0 bn Eurobond in June 2024, given the recent credit rating outlook downgrade by Fitch from stable to negative. This downgrade was a confirmation of both Moody’s and S&P earlier ratings on the Kenya’s credit rating outlook.
For more information, kindly see our topical on Kenya’s Balance of Payments.
