World Bank warns Kenya of risks from Ukraine war
World Bank has warned that the war in Ukraine is likely to push Kenya’s current account deficit higher this year.
The warning is based on the fact that t the country is a net importer of goods. A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
Already, the deficit in goods and services increased to 10 per cent of gross domestic product (GDP) in 2021 from 8.3 per cent the previous year but the World Bank foresees a surge. “
Kenya’s current account deficit is likely to increase in 2022 as the war in Ukraine pushes up import prices. Kenya imports a significant amount of fuel, wheat, and fertiliser,” reads a report by the Bretton Woods institution. Since 2019, data shows about 25 per cent of imported wheat came from Russia and 10 per cent from Ukraine, the two countries involved in the war.
“Kenya thus faces a balance of payments shock from higher fuel, wheat and fertiliser import prices, although the magnitude and duration of the shock are highly uncertain,” the report says.
The projected increase in the value of imports comes at a time when Kenyan manufacturers are complaining about dollar shortages with some manufacturers threatening to slow down production due to lack of raw material. Kenya pays for most of its imports in dollars.
While the Central Bank of Kenya (CBK) has since dismissed the claims by KAM terming the shortage as artificial, Churchill Ogutu, an economist at IC Group noted that the war in Ukraine has disrupted supply chains forcing importers to look elsewhere for raw materials at a higher cost.
This, he said, could see the prices of commodities go higher as is already happening with cooking oil and petroleum products.
“What we are seeing from some of the manufacturers is that some of the input that they use in production are missing or the prices have escalated. That will have an impact even on commodity prices, he said. “Some of these inputs used to be sourced from Russia and Ukraine but due to the war, we now have to source them from Indonesia. Unfortunately, even Indonesia has limited its exports,” he added.
Last year’s current account deficit widened, driven by a larger trade deficit, which means the value of goods and services imported into the country rose even higher, compared to the value of products Kenya exported over the same period.
“Kenya’s deficit in the trade of goods and services increased to 10 per cent of GDP in 2021, from 8.3 per cent in 2020, as the increase in imports more than outweighed increases in exports,” reads the report in part. Merchandise exports increased by 0.1 percentage point to 6.3 per cent of GDP in 2021, partly due to external demand.
Merchandise imports were driven up by a strong rebound in domestic demand and an uptick in oil prices from mid-2021.