A steep drop in global petroleum prices has cut Kenya’s import bill for the first time in eight years, helping to reduce the economy’s exposure to the shilling’s weakening in the past six months.
Kenya’s import bill has over the years been growing at a faster pace than exports, resulting to a current account imbalance that has piled pressure on the shilling.
Official data shows that Kenya, which is East Africa’s largest economy, imported Sh177.2 billion worth of fuel and lubricants between January and September, a huge drop from the Sh271.2 billion it took in during the same period last year and saving the economy some Sh94 billion.
“The drop in the petroleum import bill is largely due to lower global crude prices,” Energy Regulatory Commission (ERC) director- general Joseph Ng’ang’a told the Business Daily.
Oil accounts for about a quarter of Kenya’s annual import bill, underlining the critical role it plays in the exchange market.
Analysts said the lower petroleum prices had partly cushioned the economy from the corrosive effects of a weaker shilling that has shed 13 per cent of its value against the US dollar since the beginning of the year.
“Petroleum is one of Kenya’s biggest expense items and without this sharp price drop we would have experienced a storm in terms of the shilling’s volatility,” said Aly-Khan Satchu, chief executive of financial aisory and data management firm Rich Management.
The shilling, which in September touched a low of Sh106 on reduced dollar inflows as the key tourism sector came under a heavy battering, is currently trading at Sh102.
READ: Governor summons bank CEOs as shilling hits 106 to the dollar
Mr Satchu reckons that the shilling would have shed a lot more value in the absence of lower oil prices.
The ERC said that the drop could also be attributed to a cutback on heavy fuel imported into the country by diesel power generators following increased use of cheaper geothermal energy.
“The thermal IPPs (independent power producers) have been raising concerns over holding onto heavy fuel oil stocks for too long,” said Mr Ng’ang’a.
The country injected additional 280 megawatts of geothermal electricity to the grid between August and December last year, which displaced the use of expensive thermal power.
Global crude oil has been trading at between four- and six-year lows since the beginning of the year on increased supply and weak demand from major economies.
The drop in petroleum expenditure helped Kenya to reduce its total import bill by 3.3 per cent to Sh1.1 trillion, offering support to the economy’s current account — the difference between the value of exports and imports.
This is the first time that imports have dropped since 2007, according to the Kenya National Bureau of Statistics (KNBS) data.
Imports of consumer goods mostly used by households, however, rose in the period under review, defying the effects of the volatile shilling that have made foreign goods expensive.
Kenya’s current account deficit has been worsening in the past five years, standing at 9.2 per cent of the gross domestic product (GDP) last year from five per cent in 2010, raising concerns among Kenya’s development partners, including the World Bank.
READ: Current account deficit hits Sh151bn on imports surge
Mr Satchu holds that Kenya has not enjoyed the full benefits of the lower global crude prices, a position backed by the World Bank.
“Falling oil prices were expected to be a big silver bullet for Kenya’s economy and we had expected a bigger transmission of the lower price structure to the economy, with benefits cascading down to the grassroots,” said Mr Satchu.
At Sh94 billion, the reduction in petroleum spending is slightly more than a seventh of the foreign exchange reserves held by the Central Bank of Kenya (CBK) at Sh705 billion — equivalent to 4.4 months of import cover.
This underlines the benefits that lower petroleum prices have had on the economy in removing some sting from the corrosive effects of the weakening shilling against the greenback.
The KNBS data shows that petroleum accounted for 15.2 per cent of the country’s import bill in the review period, coming in third behind industrial imports and machinery, whose imports increased in the period.
Consumer goods imports grew to Sh92.6 billion in the year to September from Sh84 billion a year earlier, defying the effects of the devalued shilling and high interest rates.
The government’s policy rate rose by three percentage points to 11.5 per cent in June and July as the CBK tightened monetary policy to tame inflation and stabilise the shilling.
READ: Monetary team retains policy rate at 11.5pc for the third time
This, combined with heavy government borrowing from the local markets, has ushered a high interest rates regime that was expected to slow down consumption of imported goods.
The KNBS data shows that Kenya’s exports grew by the largest margin since 2007 to Sh429 billion in the year to September from S23 billion last year.
Institute of Economic Affairs chief executive Kwame Owino said exports growth and a cut in imports look set to put Kenya on the path to improving its current account position, a critical buffer against external shocks.
Crude oil price has dropped from a high of $115 (Sh11,731) per barrel mid-last year to a low of $46 (Sh4,692) in December and has swung within the $50’s range or below since the beginning of the year.
A barrel is equivalent to 159 litres of petroleum.
Mr Satchu said the low prices had prevented a rapid devaluation of the shilling, as it eased demand for US dollars by oil marketers to purchase the petroleum consignment.
The World Bank and consumer lobby groups have held that the monthly price controls on fuel are to blame for Kenya’s failure to realise the full benefits of the plummeting crude prices.
“These benefits were not enjoyed fully by Kenyan consumers because of the shilling’s depreciation and bureaucratic pricing hurdles,” the World Bank says in its latest outlook report on Kenya’s economy.
But the ERC, which caps maximum retails prices of petrol, diesel and kerosene, insists that the weakening shilling eroded gains from lower crude prices, making it costlier to purchase petroleum products in the dollar-denominated global market.
Kenya buys refined petroleum products after its sole refinery, the Kenya Petroleum Refineries Ltd, in Mombasa was shut down in September 2013.
Petroleum products play a central role in the economy because any price movement is transmitted to nearly all sectors of the economy, including transport, manufacturing and agriculture.
Petrol prices stood at Sh92 per litre in January in Nairobi and Sh102 in September while diesel retailed at Sh83 at the beginning of the year and Sh79 in September.
Last year, petrol pump price stood at Sh110 in January and was up Sh1 in September while diesel retailed at Sh104 at the start of the year and Sh2 less in September.
READ: Petrol cut of Sh9 biggest monthly adjustment in fuel price control era
The KNBS data shows that importation of industrial supplies rose to S85 billion from S41 billion in the review period, making it the largest import item.
Machinery and capital goods shipped into the country rose to Sh221 billion from Sh210 on increased investment in infrastructure projects like the standard gauge railway line that will connect the Mombasa port city to Nairobi by 2017.
Transport equipment imports were up by Sh13 billion to Sh169.6 billion while food imports rose by Sh13 billion to Sh93 billion.
SOURCE: BUSINESS DAILY