Kenya’s Energy and Petroleum Regulatory Authority (EPRA) reduced petrol prices at the pump by KSh2 ($0.019) per litre on Friday – the first reduction in Kenya this year – after the oil price crash slashed import costs on the commodity.
Diesel prices also fell around KSh3 and kerosene by approximately KSh7 a litre as authorities passed on price cuts to the consumer.
"Lower oil prices are certainly a net positive for the Kenyan economy and, with prices so low, we do expect to see an improvement in the trade deficit," says Murega Mungai, who manages the FX trading desk for AZA, a non-bank currency broker.
"We also expect the local currency to strengthen in the medium term from the current 103.50 levels as there will be less pressure on the shilling from oil purchases. We see inflation levels coming down from the current 6.37%, considering the importance of oil to major sectors of production," he says. Yvonne Mhango, Renaissance Capital
Kenya’s trade deficit shrank by KSh15.55 billion to KSh1.05 trillion in the 11 months through to November 2019, according to data from the Kenya National Bureau of Statistics (KNBS) – the first drop since 2016.
"The lower oil price is positive for inflation, and for the current account," says Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital.
According to Kenya’s central bank, the country’s current account deficit fell from 5% to 4.6% of GDP in 2019. Kenya’s GDP was $89 billion in 2018 and was projected to grow by 5.7% in 2019, according to the World Bank. Reliance on China
The benefits may be short lived, however, given reduced bilateral trade with China and the hit to tourism following the coronavirus outbreak.
According to an economic survey published by KNBS in August 2019, tourism revenue increased by 31.3% to KSh157.4 billion in 2018. And while the impact of the coronavirus pandemic continues to play out, gains made by the tourism industry over the last two years may be wiped out, given border closures and flight cancellations.
Kenya Airways estimates that it could lose up to KSh800 million a month.
“Lower oil prices will relieve pressure on the current account, but this could be more than offset by the hit to tourism, lower remittances and capital flows related to the coronavirus and global market sell-off," says Hasnain Malik, head of global equity strategy at research house Tellimer.
"Kenya – and the region – is overly reliant […]