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IMF raises red flag on rising global current account deficits – The Star Kenya

The International Monetary Fund (IMF) is alarmed by the level at which imports are outweighing exports globally, leading to a high cost of living.
In its latest External Sector Report, the global lender is appealing to countries across the world to adopt policies that will lower the current account balance.
The report comes at a time when countries like Kenya are reporting low levels of forex reserves due to a drop in export earnings,  exposing their local currencies to volatilities in the global market. 
Last week, Kenya breached East Africa’s forex reserve threshold of 4.5 months of import cover. According to the Central Bank of Kenya (CBK), the country’s FX reserve shrunk to 4.43 months of import cover as of August 11.
”The usable foreign exchange reserves remained adequate at $7.68 billion (Sh913.9 billion) down from $7.72 billion (Sh918.7 billion) or 4.45 of import cover the previous week,” CBK said.
The country has been using most of its forex reserve largely drawn from diaspora remittances to manage its weakening shilling.
On Thursday,  the shilling traded at a new low of 119.65 against the US dollar before stabilising to close at 119.47. It has shed six per cent in value against the greenback in the last 15 months. 
Kenya’s export earnings has witnessed a downward trend in the past five years, with diaspora remittances now the country’s highest forex earner. 
Government data shows tea and coffee earnings have been shrinking in recent times due to high global supply and falling prices.
The two crops have for long been Kenya’s main forex earners.
Last week, the Horticulture Directorate said earnings for the first six months of the year declined by 40 per cent to Sh48.4 billion from Sh80.7 billion on the back of reduced returns from flowers, vegetables and fruits.
“There was a huge decline in volumes in the review period that pulled down the overall earnings. We also had issues with our avocado,” said the directorate.
 Tourism sector earnings on the other hand are yet to stabilise from the Covid-19 effects. 
According to IMF, the overall size of deficits and surpluses across countries has been widening for a second straight year amid the Covid-19 effects, rise in inflation and the Russia-Ukraine war.
It now wants countries to integrate policies of mitigating climate change, introduce carbon taxes, provide green subsidies and invest in infrastructure to tame increased current account balance by 2027.
After years of narrowing, balances widened to three per cent of global Gross Domestic Product(GDP) in 2020, grew further to 3.5 per cent last year, and are expected to expand by end of this year.
Kenya’s current account deficit as a percentage of GDP widened to 5.1 per cent in April from 4.8 per cent a year earlier due to higher import costs for fuel, food and industrial goods that outweighed higher inflows from agriculture exports and diaspora remittances.
In the 12 months to March 2022, latest CBK data shows Kenya imported goods worth Sh2.23 trillion against export earnings of Sh789 billion recording a trade deficit of Sh1.44 trillion.
In the year that ended in March 2021, the deficit had stood at Sh1.07 trillion, arising from imports worth Sh1.72 trillion versus exports of Sh652.5 billion.
IMF therefore, in its recommendations, says in order to enforce carbon tax, carbon prices should be calibrated to achieve an 80 per cent reduction in emissions in each region by 2050.
The lender says carbon tax should consist of an initial tax rate followed by an annual increase of seven per cent.
“A quarter of the resulting carbon tax revenue should be transferred back to households to help protect the purchasing power of the poorest households from the increase in energy prices,” IMF says.
The remaining three-quarters of the revenue is recycled to reduce government debt.
It wants solar and wind electricity generation sectors to be subsidised by 80 per cent in countries and low-carbon infrastructure investment prioritised.
The Bretton Woods Institute quips that for every 10 per cent increase in the aggregate stock of infrastructure capital, productivity in private sector output rises by 0.8 per cent.
“Once the new infrastructure is in place, it’s sustained by spending an additional 0.2 per cent of GDP to offset depreciation which in turn locks in the productivity gains of the sectors that benefit from green infrastructure,” IMF says in the report.
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Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.