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Trade and Regional Integration in Kenya: FY2019/20

Trade and Regional Integration in Kenya: FY2019/20

Kenyan exports have been volatile and declined during the period from 2015 to 2018. This has not led to a significant deterioration in gross official foreign exchange reserves supported by the persistent depreciation of the KES until 2017. The slower growth in merchandise exports has led to a minor deterioration of Kenya’s current account balance due to the continued improvement in the balance of services trade. Kenya is still dependent on agriculture-based exports which are also its top traded goods with its neighbours in the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). However, Kenya is highly integrated in both COMESA and EAC but its trade is unbalanced due to the significant trade surplus enjoyed by the country in both regions. This suggests that there is significant room for Kenya to increase its imports from both regions and Kenya might want to rebalance its trade towards greater reliance on COMESA in order to reduce its overreliance on the EAC. But the rebalancing of Kenya’s trade in the regions might be restrained by structural factors like geographic proximity.

 

Figure 1: Merchandise Trade Balance in Kenya (2015-2018)

Merchandise Trade Balance in Kenya (2015-2018)

Source: UNCTAD 2019, UNCTADStat Database.

 

Total merchandise imports to Kenya have increased to USD 17.4 billion in 2018, from an annual average of USD 15.6 billion from 2015 to 2017[1]. Exports have also increased to USD 6.1 billion in 2018, from an annual average of USD 5.7 billion from 2015 to 2017[2]. The growth in imports exceeded the growth in exports and worsened Kenya’s merchandise trade balance which deteriorated to a deficit of -USD 11.3 billion in 2018 from a trade deficit averaging -USD 9.9 million from 2015 to 2017[3]. The slower growth in export earnings has not led to a significant deterioration in gross official reserves supported by the persistent depreciation of the KES.

 

Figure 2: Gross Official Reserves in Kenya (2016-2022)

Gross Official Reserves in Kenya (2016-2022)

Source: IMF 2018, Kenya 2018 Article IV Report. Note: (*) Figures from 2018 onwards are projections from IMF, 2018.

 

Gross official foreign exchange reserves increased to USD 8.0 billion in 2018 from an annual average of USD 7.4 billion from 2015 to 2017[4]. During this period, the KES appreciated by 2.1% in 2018 to KES 101.3 per USD (2017: -1.8%)[5]. The appreciation in the currency has driven the growth in imports following the persistent depreciation from 2015 to 2017. The KES depreciated by an annual average of -5.2% from KES 98.6 per USD in 2015 to KES 103.4 per USD in 2017[6]. Gross official reserves are projected to increase to USD 9.2 billion in 2019, which is equivalent to 4.3 months’ import cover[7]. In the forward-looking medium-term from 2020 to 2022, gross official reserves are projected to increase to an annual average of USD 11.0 billion (approx. 4.3 months’ import cover)[8]. The slower growth in exports has had a minor impact on the persistent current account deficit due to improvements in the balance of services trade.

 

Kenya’s current account balance deteriorated to a deficit of -USD 5.5 billion in 2018, from a deficit averaging -USD 4.4 billion from 2015 to 2017[9]. In spite of the deteriorating merchandise trade balance, which deteriorated the current account balance, the balance of services trade has improved to slow deterioration of the current account balance. The balance of services trade is projected to have improved to a surplus of USD 2.6 billion in 2018 from a surplus averaging USD 1.7 billion from 2015 to 2017[10]. The current account balance is projected to deteriorate to a deficit of -USD 5.7 billion (approx. -6.3% of GDP) in 2019[11]. In the forward-looking medium-term from 2020 to 2022, the current account balance is projected to deteriorate further to annual average deficit of -USD 6.6 billion (approx. -6.2% of GDP)[12].

 

Figure 3: Current Account Balance in Kenya (2016-2022)

Current Account Balance in Kenya (2016-2022)

Source: IMF 2018, Kenya 2018 Article IV Report. Notes: (*) Figures from 2018 onwards are projections from IMF, 2018; (**) Current Account Balance in USD millions is calculated by the author from projection in the IMF, 2018.

 

However, Kenya is still dependent on agricultural exports, particularly tea and mate, vegetables, fruits and nuts, and coffee; which have made exports earnings volatile due to exports being vulnerable to the adverse impact of climate change. For example, Kenya is still battling with persistent and recurrent droughts affecting 23 of its 47 counties resulting in crisis-level food insecurity for over 2.7 million people[13]. Maize production has decreased by almost 100.0% from the long-term average and in marginal agricultural areas below-average rainfall is expected to affect 70.0% of crop production[14]. In addition, commodities like petroleum and iron ore contribute a significant proportion of exports which undermine stability of Kenya’s external sector due to the general decline in commodity prices since 2014. Brent crude oil prices declined by an annual average of -24.0% from USD 98.9 per barrel in 2014 to USD 44.0 per barrel in 2016, before recovering to USD 54.4 per barrel in 2017[15]. The spot price of iron ore also declined by an annual average of -22.0% from USD 97.4 per MT in 2014 to USD 58.6 per MT in 2016, before recovering to USD 71.1 per MT in 2017[16]. Agricultural commodity exports constituted 47.0% of Kenya’s total export earnings in 2018 which has increased from the average of 45.2% from 2015 to 2017 (2014: 44.1% of exports)[17]. Petroleum and iron ores contributed an addition 7.9% of total exports in 2018, bringing the total contribution of agricultural and raw mineral commodities to 54.9% of total exports in Kenya (2015-‘17: 50.1% of total exports)[18].  In spite of this concentration of exports, Kenya is highly integrated in terms of regional trade with neighbouring countries in COMESA and the EAC but its trade is unbalanced.

 

Figure 4: Nominal Exchange Rate in Kenya (2015-2018)

Nominal Exchange Rate in Kenya (2015-2018)

Source: CBK 2019, Key CBK Indicative Exchange Rates.

 

The top-five exports from Kenya to COMESA are mainly meat and live animals, which constituted 0.2% of total exports in 2018 (2015-‘17: 0.1% of total exports)[19]. The value of meat and live animal exports from Kenya to COMESA increased to USD 10.4 million in 2018 from an annual average of USD 8.4 million from 2015 to 2017[20]. The value of total exports from Kenya to COMESA decreased to USD 1.5 billion (approx. 25.3% of total exports) in 2018 from an average of USD 1.6 billion (approx. 27.9% of total exports)[21]. These are very high levels of intra-regional trade given that the COMESA average intra-regional exports level was 11.9% of total exports in 2018. The COMESA intra-regional exports, meaning total exports amongst COMESA countries, as a share of total exports to the world increased from an average of 10.5% from 2015 to 2017[22]. Hence, there is little room for Kenya to increase its exports to COMESA countries.

 

Kenya’s top-five imports from COMESA are sugarcane products, maize, feedstock, vegetables and essential oils. Although these imports are diversified they constituted only 2.7% of total imports to Kenya in 2018 (2015-‘17: 1.8% of total imports)[23]. The value of the top-five imports from COMESA to Kenya increased to USD 468.5 million in 2018 from an annual average of USD 286.6 million from 2015 to 2017[24]. The value of Kenya’s total imports from COMESA increased to USD 1.1 billion (approx. 6.6% of total imports) in 2018 from an annual average of USD 874.3 million (approx. 5.6% of total exports) from 2015 to 2017[25]. These are moderate or average levels of intra-regional trade given that the COMESA average intra-regional imports level was 6.5% of total imports in 2018[26]. The COMESA intra-regional imports, meaning total imports amongst COMESA countries, as a share of total imports from the world increased only from an average of 5.5% from 2015 to 2017[27].

 

Kenya maintains a persistent merchandise trade surplus in COMESA which decreased to USD 385.2 million in 2018 (2015-’17: USD 729.9 million).  Hence, there is significant room to increase Kenya’s imports from COMESA countries. This would make Kenya’s intra-regional trade balance in COMESA more equitable.

 

Table 1: COMESA Regional Trade for Kenya (2015-2018)

COMESA Regional Trade for Kenya (2015-2018)

Source: UNCTAD 2019, UNCTADStat Database.

 

The top-five exports from Kenya to the EAC are fabricated steel, soap, pharmaceuticals, petroleum and plastics, which constituted 4.6% of total exports in 2018 (2015-‘17: 4.7% of total exports)[28]. The value of the top-five exports from Kenya to EAC increased to USD 276.2 million in 2018 from an annual average of USD 270.3 million from 2015 to 2017[29].

 

Table 2: EAC Regional Trade for Kenya (2015-2018)

EAC Regional Trade for Kenya (2015-2018)

Source: UNCTAD 2019, UNCTADStat Database.

 

The value of total exports from Kenya to the EAC decreased to USD 1.1 billion (approx. 19.0% of total exports) in 2018 from an average of USD 1.3 billion (approx. 22.2% of total exports)[30]. These are moderate or average levels of intra-regional trade given that the EAC average intra-regional exports level was 17.9% of total exports in 2018. The EAC intra-regional exports, meaning total exports amongst EAC countries, as a share of total exports to the world decreased from an average of 20.8% from 2015 to 2017[31].

 

Kenya’s top-five imports from EAC are vegetables, maize, feedstock, milk and tea. Although these imports are diversified they constituted only 2.2% of total imports to Kenya in 2018 (2015-‘17: 1.2% of total imports)[32]. The value of the top-five imports from EAC to Kenya increased to USD 383.7 million in 2018 from an annual average of USD 190.1 million from 2015 to 2017[33].

 

The value of Kenya’s total imports from EAC increased to USD 758.7 million (approx. 4.4% of total imports) in 2018 from an annual average of USD 486.8 billion (approx. 3.8% of total exports) from 2015 to 2017[34]. These are very poor levels of intra-regional trade given that the EAC average intra-regional imports level was 20.9% of total imports in 2018[35]. The EAC intra-regional imports, meaning total imports amongst EAC countries, as a share of total imports from the world increased only from an average of 20.7% from 2015 to 2017[36]. This illustrates the reliance of Kenya on the EAC for its exports, which is more significant than its reliance on EAC for its imports and at levels well above the average intra-regional trade levels.

 

Kenya maintains a persistent merchandise trade surplus in the EAC which decreased to USD 390.6 million in 2018 (2015-’17: USD 787.2 million). Kenya is quite reliant on the EAC for its exports and there is little room to increase its exports to EAC countries. Moreover, the top-five exports to the EAC are largely manufactured products which means a significant part of the value-addition is done in Kenya and within the region. Hence, there is significant room for Kenya to increase imports from EAC countries. This would make Kenya’s intra-regional trade balance in EAC more equitable.

 

In addition, Kenya might want to reassess the balance of benefits to its COMESA and EAC membership given that it is significantly more dependent on EAC with a clear imbalance between the two regional economic communities. Therefore, there is significant room to rebalance the Kenya’s exports towards COMESA instead of its dependence on EAC; and increase Kenya’s reliance on inputs or imports from COMESA and the EAC. This would also make Kenya intra-regional trade balance with COMESA and EAC more equitable. But the rebalancing of Kenya’s trade with COMESA and EAC might be restrained by structural factors like geographic proximity.

 


[1] UNCTAD 2019. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed: 26 September 2019].
[2] UNCTAD 2019. UNCTADStat Database, ibid.
[3] UNCTAD 2019. UNCTADStat Database, ibid.
[4] IMF 2018. Kenya 2018 Article IV Report; International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 15 October 2019].
[5] CBK 2019. Key CBK Indicative Exchange Rates, Central Bank of Kenya: Nairobi. Available At: https://www.centralbank.go.ke/ [Last Accessed: 26 September 2019].
[6] CBK 2019. Key CBK Indicative Exchange Rates, ibid.
[7] IMF 2018. Kenya 2018 Article IV Report; ibid.
[8] IMF 2018. Kenya 2018 Article IV Report; ibid.
[9] IMF 2018. Kenya 2018 Article IV Report; ibid.
[10] IMF 2018. Kenya 2018 Article IV Report; ibid.
[11] IMF 2018. Kenya 2018 Article IV Report; ibid.
[12] IMF 2018. Kenya 2018 Article IV Report; ibid.
[13] RW n.d. Kenya: Drought – 2014-2019, on the ReliefWeb Website, viewed on 10 October 2019, from https://reliefweb.int/.
[14] RW n.d. Kenya: Drought – 2014-2019, ibid.
[15] IMF 2019. IMF Primary Commodity Prices, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 4 October 2019].
[16] IMF 2019. IMF Primary Commodity Prices, ibid.
[17] UNCTAD 2019. UNCTADStat Database, ibid.
[18] UNCTAD 2019. UNCTADStat Database, ibid.
[19] UNCTAD 2019. UNCTADStat Database, ibid.
[20] UNCTAD 2019. UNCTADStat Database, ibid.
[21] UNCTAD 2019. UNCTADStat Database, ibid.
[22] UNCTAD 2019. UNCTADStat Database, ibid.
[23] UNCTAD 2019. UNCTADStat Database, ibid.
[24] UNCTAD 2019. UNCTADStat Database, ibid.
[25] UNCTAD 2019. UNCTADStat Database, ibid.
[26] UNCTAD 2019. UNCTADStat Database, ibid.
[27] UNCTAD 2019. UNCTADStat Database, ibid.
[28] UNCTAD 2019. UNCTADStat Database, ibid.
[29] UNCTAD 2019. UNCTADStat Database, ibid.
[30] UNCTAD 2019. UNCTADStat Database, ibid.
[31] UNCTAD 2019. UNCTADStat Database, ibid.
[32] UNCTAD 2019. UNCTADStat Database, ibid.
[33] UNCTAD 2019. UNCTADStat Database, ibid.
[34] UNCTAD 2019. UNCTADStat Database, ibid.
[35] UNCTAD 2019. UNCTADStat Database, ibid.
[36] UNCTAD 2019. UNCTADStat Database, ibid.

 


Siya Biniza

Role: Executive Director
Contact: siya@politicaleconomy.org.za
Siya is a Political Economist specialising in Development Finance, Industrial Development, and Regional Integration...

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