Kenya: Trade deficit falls by Sh300bn as fuel, machinery imports dip

Mombasa Port. Photo/Shutterstock

By Business Daily Africa

Kenya’s imports of machinery, fuel, and raw materials dropped by double-digit rates last year for the first time since the peak of the Covid-19 pandemic-linked shutdowns three years ago, signalling a slowdown in production activities in key sectors such as manufacturing and construction.

The value of goods ordered from abroad dropped 10.61 percent to nearly $17.12 billion (Sh2.74 trillion under prevailing dollar conversion rates) compared with the year before, according to the provisional data from the Central Bank of Kenya (CBK) and the Kenya Revenue Authority (KRA).

Reduced imports amid a surprise decline in earnings from exports cut the gap between exports and imports by 15.94 percent, or nearly $1.87 billion (Sh298.72 billion).

It marked the first full-year contraction since 2020 when the movement of goods from main source markets such as China was largely curtailed by global lockdowns and shutdowns to curb the spread of coronavirus.

Total exports in the review period dropped a marginal 2.2 percent to $7.26 billion (Sh1.16 trillion), the data shows, going against CBK’s earlier projection of a 6.7 percent growth.

A faster growth in expenditure on shipments from foreign countries than earnings from exports narrowed the goods trade deficit to $9.85 billion (Sh1.58 trillion) from 11.72 billion in 2023.

Kenya has over the years struggled to narrow its goods trade deficit partly due to reliance on traditional farm produce exports such as tea, horticulture, and coffee which are largely sold raw, fetching relatively lower earnings.

The data shows earnings from tea exports dropped 2.2 percent to $1.35 billion last year from $1.38 billion (Sh220 billion), while coffee’s declined 18.7 percent to $269 million (Sh43.04). Vegetables and fruits, on the other hand, fetched $590 million (Sh94.40 billion), a largely flat growth (1.03 percent) over the year before.

Most Kenyan traders export produce raw because of higher taxes slapped on semi-processed or processed products in destination markets like Europe, fearing that value-addition will make exports less competitive in the global markets.

The narrowing of the gap between exports and imports was largely driven more by a slowdown in demand for primary goods, which drive production in key sectors such as manufacturing than luxury goods.

Orders for semi-processed goods used by factories such as iron and steel, paper and paper board as well as textile yarn manufacturers used to make finished goods fell at the sharpest pace of 23.49 percent to cross $2.65 billion (Sh424 billion).

The value of iron and steel, for example, fell by nearly a third (32.14 percent) to $870 million (Sh139.20 billion), paper and paperboard went down 20.3 percent to $376 million (Sh60.16 billion), while expenditure on yarn and fabrics dropped 17.3 percent to $540 million (Sh86.40 billion).

Other key imports whose value contracted in the review period included industrial machinery, which thinned 20.14 percent to $460 million (Sh73.6 billion), while plastics in primary form fell 17.00 percent to $706 million (Sh112.96 billion).

“Manufacturers have been operating in a harsh business environment characterised by rising prices of raw materials, electricity, and high tax rates, among other factors,” Kenya Association of Manufacturers chief executive Antony Mwangi told the Business Daily.

“Consumers’ purchasing power has also been dwindling due to the high cost of living making it impossible for them to purchase the finished goods. The low demand for manufactured products has reduced manufacturers’ cash flow.”

The CBK has in the past also attributed to fall in expenditure on machinery to a slowdown in public investment in infrastructure projects, including roads.

The Ruto administration has slashed expenditure on roads, power generation plants, and transmission lines after cutting the development budget from the government’s main account by more than half (51.34 percent) to Sh70.41 billion—the lowest on record in more than a decade.

Expenditure on petroleum products imports, the single largest imports by value, dipped 14.67 percent to $4.40 billion (Sh704 billion) compared with $5.16 billion (Sh825.6 billion) in the same period the year before.

The fall in value of fuel orders largely mirrors a reduction in prices of Murban crude oil from peaks of about $130 per barrel in March 2022 to current levels of about $81. Kenya imports refined fuel from Murban crude oil, largely from the United Arab Emirates.

Economists say reduced spending on development projects such as roads, water, power plants, housing, and electricity transmission lines slows down economic activities, hurting the creation of new job opportunities and government revenue, largely taxes.

Cement makers, steel manufacturers, contractors, and the thousands of workers employed in the infrastructure pipeline benefit from public spending and usually feel the pinch of a drop in public expenditure on development.