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Home Economy

Report: Kenya’s trade deficit shrinks amid export gains, but debt looms large

Brian Murimi by Brian Murimi
October 28, 2024
in Economy
Reading Time: 3 mins read

Kenya’s current account deficit improved by 34.5% in Q2 2024, dropping to KES 104.1 billion from KES 159 billion in the previous year’s period, as the East African economy saw a boost in exports and continued remittance inflows. Despite the positive trend, a heavy reliance on imports, high debt levels, and subdued foreign investment signal further challenges for the nation’s balance of payments (BoP), according to the latest Cytonn report.

The report notes a 10.9% increase in merchandise exports, reaching KES 276.2 billion in Q2, which outpaced a smaller 2.3% rise in imports, thanks to resilient demand for Kenya’s agricultural products like tea and coffee. “The narrowing of the merchandise trade deficit has been critical in easing pressures on Kenya’s external accounts, largely driven by export growth amid stable currency conditions,” Cytonn analysts reported. In addition to merchandise trade, a 0.6% rise in secondary income from remittances, and a reduction in primary income deficits, have bolstered the current account.

While exports saw gains, the report emphasizes that Kenya’s import costs still eclipse earnings, with machinery, petroleum, and industrial goods making up the bulk of inbound trade. This structural reliance on imported goods and materials continues to sustain a significant trade imbalance. Over the last decade, Kenya’s annual imports have averaged KES 1.9 trillion, exceeding average exports of KES 700 billion, reinforcing a persistent current account deficit.

Although improvements in the current account brought a short-term reprieve, Kenya’s high debt levels and capital outflows remain concerns. In Q2, the financial account posted a surplus of KES 198.3 billion, but this marked a 40% drop from Q2 2023. The report attributes the decline to capital outflows, as foreign investors have shown caution amid rising global interest rates and a challenging local economic climate. Kenya’s debt stock, standing at KES 10.8 trillion as of October 2024, or 66.7% of GDP, also places the country above the recommended threshold of 50% for developing nations. “With debt servicing costs on the rise, this is a significant weight on Kenya’s overall BoP performance,” Cytonn states, highlighting a debt-to-revenue ratio of 69.6% for FY 2023/2024.

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To mitigate these challenges, Cytonn’s analysts suggest policy interventions targeting trade diversification and foreign direct investment (FDI) to strengthen Kenya’s financial stability. They recommend the Kenyan government prioritize new export markets and reduce import dependence by incentivizing domestic production of goods like sugar and wheat. “Increasing agricultural output through enhanced technology and inputs will help to shift the trade balance positively,” the report suggests, noting that agriculture remains central to Kenya’s export profile.

Despite an anticipated improvement in the BoP, foreign direct investment remains subdued. The report reveals that FDI inflows dipped by 5.8% to KES 224 billion in 2023 as global financial tightening drew capital towards more established markets. As a result, sectors like manufacturing and infrastructure—often beneficiaries of FDI—have seen limited inflows, impacting Kenya’s growth trajectory in value-added exports. The report calls for regulatory transparency and the streamlining of investment procedures to make Kenya more attractive to foreign investors, particularly in sectors like renewable energy and agricultural value addition.

The Cytonn report provides an optimistic forecast for the BoP in the near term, with export growth and fiscal consolidation expected to improve external accounts. The Kenyan Shilling has shown signs of strength against major currencies, a trend Cytonn predicts could reduce import costs and support a smaller current account deficit. Moreover, multilateral trade agreements with the European Union, East African Community (EAC), Southern African Development Community (SADC), and Common Market for Eastern and Southern Africa (COMESA) could unlock greater export volume and product diversification, expanding Kenya’s trade footprint.

Debt, however, remains a pressing issue, and Cytonn analysts urge the government to manage external borrowing carefully. “A balanced approach to debt financing is crucial,” the report cautions, particularly as Kenya seeks to avoid heavy external debt burdens that can erode investor confidence. Fiscal consolidation efforts, including a reduction in foreign borrowing in favor of domestic financing, have been laid out in Kenya’s FY 2024/25 budget, with external financing now at 46.3% compared to 53.7% in domestic funding.

Ultimately, Cytonn emphasizes that reducing the BoP deficit requires sustained efforts in export diversification, promoting FDI, and maintaining a sustainable debt profile. While the report acknowledges the administration’s recent steps in fiscal reform, including a fertilizer subsidy to lower farming costs, it suggests that more comprehensive efforts are needed to secure long-term improvements.

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Brian Murimi

Brian Murimi

Brian Murimi is a journalist with major interests in covering tech, corporates, startups and business news. When he's not writing, you can find him gaming, watching football or sipping a nice cup of tea. Send tips via bireri@thesharpdaily.com

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