Kenya’s current account deficit is ‘fully financed’ the Central Bank of Kenya said on Tuesday.
The deficit which is the balance of foreign exchange inflows and outflows as a percentage of gross domestic product (GDP), narrowed to a 10-year low of an estimated 4.6 percent of the GDP in 2019 from 5.0 percent in 2018.
Dr. Patrick Njoroge, central bank governor told a media briefing that in 2019, diaspora remittances reached a peak of 2,788 million dollars, which is now the largest source of foreign exchange.
“The current account deficit is expected to remain stable at 4.7 percent of GDP in 2020,” he said.
According to the regulator, the current account deficit narrowed to an estimated 4.6 percent of GDP in 2019 from 5.0 percent in 2018 on lower imports of Standard gauge railway related equipment, resilient diaspora remittances and strong receipts from transport and tourism services.
Foreign direct investment is now at about 2 percent of GDP, and it is interesting to consider the diversity of FDI. There is a larger proportion of diaspora engaging in portfolio investment (investment in securities). This may lead to a concurrent stabilisation of remittances. pic.twitter.com/TGT0mltaPn
— Central Bank of Kenya (@CBKKenya) January 28, 2020
However, Mombasa-based economist Mihr Thakar says remittances as the largest source of foreign exchange opens Kenya to macro risks specific to the regions remitting.
“A crisis in North America would put literally unprecedented pressure on inward remittances,” he says.
On Monday, when the MPC unexpectedly cut the policy rate by 25bps to 8.25% during its first policy review meeting of 2020, Njoroge said, “The CBK foreign exchange reserves, which currently stand at USD8,475 million (5.2 months of import cover), continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.”
The Central bank further says the economy is forecast to grow 6.2% this year, up from 5.7% last year on agriculture recovery and robust private-sector credit growth to support that growth.