Introduction
The Balance of Payments (BoP) is an identity that accounts for the state of two important accounts and two less significant accounts that are related to international economic relations of a nation and the rest of the world. The most important accounts are, namely, the current account and the capital account and the financial account.. The current account tracks changes in the flows of goods and services and the difference between imports and exports. This result is called the balance of trade. The capital account tracks flows of capital and the difference between inflows and outflows of capital. The financial account tracks changes in ownership of financial assets and liabilities. The current account and the capital account are usually the largest accounts in the balance of payments. Finally, as an identity, the balance of payments must add up to zero. For this reason, the balance of payments has a final account called errors and omissions. This account tallies discrepancies and statistical errors that are induced by missing, incomplete, delayed, or inaccurate data, and imperfect records of transactions. Other causes of discrepancies include overreporting or underreporting of the movement of factors of production, goods and services, illicit transactions, and differences in timing of the recording of transactions.
The state of the balance of payments is determined by a states openness and exposure to global trade and global financial markets. The balance of payments explains the state of a nations openness and exposure to global trade and global financial markets and is indicative of the results of a household, firm and state choices and their interactions with the rest of the world.
Fiscal and monetary policy, the integrity of state institutions and the policy posture – whether it is progressive in the classical liberal sense or regressive – contribute to the state of the balance of payments. Together, these factors influence the risks and opportunities that households, firms and the state are exposed to and that they enjoy on the global market for goods, services and factors of production. In sum, the balance of payments tells a story about market fundamentals and the level of integration a market has to global markets.
Current Account Analysis
Chart 1: Kenya, Current Account Balance, 2019 – 2023 (Ksh Billions)
Source: Kenya National Bureau of Statistics
In the year 2023, the value of Kenyan exports in goods was Ksh 1.009 trillion (US$7.80 billion) billion while the value of Kenyan imports in goods was Ksh 2.411 trillion (US$ 18.65 billion)[1][2]. The balance of trade in goods remained negative throughout the period 2019 to 2023. This is not illustrated in the chart as the chart is itself an aggregate of all the components of the current account. In the period 2019 to 2023, the value of exports in goods grew at an average rate of 12% while the value of imports in goods grew an average rate of 8%. The value of imports remained greater than the value of exports for that period of time. In all, the balance between imports and exports improved by 22.75% between 2019 and 2020 only to deteriorate in the years that followed until the period 2022 to 2023 when it improved by 0.27%. In all, over the period 2019 to 2023, the overall balance between imports and exports deteriorated by -4%.
Chart 1 shows that for the 5 years between 2019 to 2023, Kenya maintained a currenct account deficit with the world. At Ksh -694.161 billion (US$ -5.36 billion) in the year 2022, Kenya’s current account deficit with the world was at its highest in the last five years. In the year 2020, Kenya’s current account deficit stood at Ksh -397.116 billion (US$ 3.07 billion). This was the lowest it had been in the last five years.
What Does a Current Account Deficit Mean?
The current account contains the countries trade balance. A current account surplus is an indication that a country is earning more from exports than it is spending on imports for both goods and services. A current account deficit indicates that the households and firms from the domestic market are spending more on goods and services from other countries than they are earning in income from selling goods and services to other countries. Current account deficits are financed by financial account surpluses. More precisely, current account deficits are financed by foreign investmnet or foreign borrowing. The current account and the financial account serve as counterweights to each other. One must balance the other.
Wealth accrues to households and firms through accumulation of the factors of production and the earning of factor returns. When households and firms purchase factors of production, goods, and services from abroad, these are captured in the current account. When household and firm imports exceed exports, the difference is financed through sales of factors of production, foreign borrowing and foreign investments that are captured in the financial account.
The state generates its own revenue – and thereby contributes to the financial account – through borrowing in foreign markets, selling its own assets abroad and by exacting taxes on these factors of production and factor returns.
The current account deficit cannot exceed what the foreign market is willing and able to finance. That is, the current account deficit cannot outstrip foreign demand for domestic assets, debt, and investment opportunities.
Household and firm wealth is accumulated through productive economic activities. Productity is determined by the extent of the division of labour and specialization. Economic complexity is an empirical measure of the level of specialization in a given economy. Productivity is therefore determined by the complexity of the economy, by the relatedness and complexity of economic sectors, and by the complexity of products produced. The complexity of goods demanded and therefore sold both domestically and globally is an indication of the level productivity. An economic structure dominated by complex activities is the most effective driver of the wealth of nations. The manufacturing base grows with growth in the knowledge intensity involved in the production of a given product, the knowledge intensity of related sub-sectors, and the knowledge intensity of the economic structure as a whole. It is knowledge intensity that explains the important role that manufacturing activities play in the welfare of households and firms and in the state of the current account.
The growth and expansion in the knowledge intensity of an economy determines the state of industrialization of a country. The size of the national economy relative to the world, and its exposure to global trade are also important in conditioning a nations economic relations with the world in general, and the behaviour of the current account in particular. All things equal, small, industrialized, trade oriented nations are better placed to face global economic headwinds than their small, less industrialized, globally exposed counterparts.
Finally, the growth and expansion in the knowledge intensity of an economy is highly dependent on the stability of macroeconomic conditions. These macroeconomic conditions are influenced by the states’ fiscal and monetary policy. The economy is influenced by state policy through the states’ revenue generating regime – taxes, borrowing and sale of state assets – and states’ expenditures.
Households and firms must part with those factors of production and factor returns that the state claims through its tax regimes. While both domestic and foreign borrowing take away from future household and firm welfare, foreign borrowing shows up on the balance of payments through the financial account.. A tax regime that is sound must compensate for deadweight loss through taxes with comensurate expenditures. That is to say, the benefits must equal or exceed the cost of taxes. Expenditures should generate public goods whose value exceeds the losses experienced through taxation.
A tax regime that is excessively complex, unpredictable, and unaccountable, narrow in its sources, high in the rates demanded, is unprincipled, erodes fiscal policy soundness, and is by extension, destructive for macroeconomic conditions. As they are paid for through domestic and foreign borrowing, budget deficits are, themselves, future claims on household and firm welfare. Unsustainable claims on future welfare contribute to unsound fiscal policy and are destructive for macroeconomic conditions. Government expenditure that does not generate public goods whose externalities compensate the surplus loss imposed by taxes and deficits also contribute to unsound fiscal policy.
Monetary policy also contributes to macroeconomic conditions. Monetary policy involves market operations and the imposition of rules governing credit that affect interest rates, inflation, and by extension, exchange rates. Monetary policy must trade off between interest rates, unemployment rates and inflation rates. All things equal, high interest rates reduce inflation rates and raise unemployment rates as domestic and foreign households and firms respond by raising their savings and reducing their investments. High interest rates also result in a strengthened currency and result in increased demand for savings denominated in that currency, and decreased demand for goods and services denominated in that currency. This means that high interest rates would result in a strong shilling that would itself incentivize growing imports, and by extension, an expansion in the current account deficit. A strong shilling resulting from high interest rates would attract foreign purchases of shilling denominated securities. A strong currency sustained over time also contributes to weakened export competitiveness.
Put together, public policy can create adverse macroeconomic conditions, destroy the productivity of a nation and contribute to its loss of competitiveness against global markets. As Kenyan producers are relatively uncompetitive, and the shilling has been artificially strengthened, Kenya’s current account deficit countinues to grow, but is financed by growth in Kenya’s financial account. Kenya’s loss of competitiveness has manifested itself in falling machine tool imports by firms. This is explained in the 2024 IEA-Kenya paper ‘And then the Floods’.
Capital Account Balance, 2019 – 2023
Chart 2: Kenya, Capital Account Balance, 2019 – 2023 (Ksh Billions)
Source: Kenya National Bureau of StatisticsAccording to the Kenya National Bureau of Statistics, Kenya’s capital account balance peaked in the year 2021 at Ksh 21.45 billion (US$ 165.77 million) and shrank at an average rate of -10.43% during the period 2019 to 2023. In the year 2020, Kenya’s capital account balance shrank by -50.80% [3]. In the year 2021, the same account expanded by 34.63% only to shrink again at a rate of -29.94% in the year 2022. That was the worst year for Kenya’s capital account.
The capital account tracks changes in ownership of financial, non financial and non produced assets. Capital accounts are usually quite small because they represent small, unusual transactions that involve changes in ownership. The data suggests that in the period 2019 to 2021, Kenya’s ownership in financial and non financial and non produced assets fell. In general, as the capital account represents a small share of total economic output, the growing or shrinking of capital accounts is usually not too important. In
Financial Accounts
Chart 3: Kenya, Financial Account Balance, 2019 – 2023 (Ksh Billions)
During the period 2019 to 2023, the Financial account expanded at an average growth rate of 32.61%. Between the years 2019 and 2020, this component saw an expansion of 146.75%, the largest expansion in that period. In the year 2021, this component shrank by -67.02%, the most significant negative change in that period. The financial account measures net changes in the ownership of financial assets an liabilities. A positive financial account balance means that a country is receiving more investment from overseas than it is taking abroad. Although the value of financial investments in Kenya expanded in the given period, in all, more foreign investment has been leaving Kenya than has been injected into Kenya.
Between the years 2019 and 2020, foreign direct investments into Kenya fell by -8,433% from Ksh 47.93 billion (US$ 370.5 billion) to Ksh -575.2 billion (-US$ 4.44 billion) . On average, during the period 2019 to 2023, direct investments to Kenya fell by -2068% by value. In all, this was driven h the precipitous fall in foreign direct investment in the period 2019 to 2020. In the years 2020 to 2023, foreign direct investments to Kenya grew by 53%. Direct investments from Kenya to the world expanded by 28.83%.
Other accounts contained within the financial account measure changes in portfolio investments, changes in financial derivatives, and changes other investments. The direct investments account shrank by -10% in average growth rate terms. The portfolio investments account shrank by -81.06% on average. Other investments account grew by 1.25% on average terms. Portfolio investments were the most important net positive contributor to Kenya’s financial accounts. The account that tracks other investments revealed that the accumulation of debt instruments made the most important negative contribution to Kenya’s investment liabilities in particular and to Kenya’s financial accounts in general.
Where imbalances between the country’s current account and finncial account emerge, the reserves and related items account acts as a balancing mechanism. Current account deficits must be financed through financial account surplus or foreign currency reserve draw downs. For the last 5 years, Kenya’s current and financial accounts have been largely in deficit. Kenya has been importing more than it exports and experiencing capital outflows.
Furthermore, as its capital account shrinks, Kenya has been losing net ownership of non produced, non financial assets. That is, the one time transfer of assets that do not generate future income has been falling.
These twin deficits must be financed or one will eventually give way to the other. In short, twin deficits are unsustainable. In order to finance its twin deficits, Kenya must spend it’s reserves and issue more debt. Kenya’s fiscal crunch, attempts to correct through monetary policy and poor economic fundamentals are evident in the state of it’s balance of payments.
Risks Associated With Kenya’s External Trade Relations
Table 1: Kenya’s Score on the Economic Complexity Index
Source: Observatory Economic Complexity
. Between the years 1998 and 2023, Kenya remained in the third quartile of the economic complexity index. This means that relative to other countries considered in the index, Kenya’s economic complexity position was stable but stagnant and poor. The perennially low economic complexity with a downward trend that suggests a premature deindustrialization and the evidence that machine imports have been falling since 2018 present risks to Kenya’s external trade relations. In particular, the risk that Kenya fails to extract welfare gains should not attributed to the failure to aim at a specific balance of payments objective but should instead be attributed to policy choices that create an uncompetitive business environment. For one, a business environment with a tax regime that is unpredictable and narrow and whose rates are exceptionally high is not conducive to the competitiveness.
What Does the Balance of Payments Explain About Risks to Kenya’s External Trade Position?
A current account deficit emerges when imports exceed exports. In this situation, the returns on factors of production are lower than the costs incurred by the consumption of factors of production and the consumption of goods and services. Kenya’s import composition has been characterizes by falling machine imports. Falling machine imports are a strong indication of falling investments in Kenya’s manufacturing sector.
The effects of trade deficits include currency depreciation and a dependence on foreign capital in the form of investments and the accrual of debt required to finance the trade deficit. Firstly, demand for imports drives demand for foreign currency. When households, firms and governments buy foreign currency, the value of domestic currencies falls in response to a rise in demand for foreign currency. When households, firms and the state cannot earn foreign currencies through trade to finance imports, they can borrow from foreign markets or stop importing. External financing can be endogenous to Kenyan macroeconomic fundamentals or exogenous to it. That is, external financing may or may not respond Kenya’s fiscal and monetary policy or the state of its exchange rate, interest rates or inflation rates to name but a few indicators. What is important to note is that current account deficits must be financed by financial account surpluses until Kenya can no longer afford to finance its trade deficits at which point the currency must depreciate. The shilling is facing downward pressure.
A weakening currency will raise the cost of imports as the relative price of these imports rises. All things equal, as it attempts to defend its curency, Kenya will also deplete it’s foreign reserves.
When small poor nations like Kenya are insufficiently connected to global value chains and do not contribute manufactured products to world markets, the opportunity to improve the welfare of owners of factors of production is lost.
Kenya’s financial account deficit presents a risk of increasing downward pressure on the Kenyan shilling to depreciate, cause capital outflows, induce the depletion of Kenya’s foreign reserves and raise the cost of debt financing until Kenyan households, firms and the state find it unsustainable ot continue to borrow. Kenya’s fiscal crunch is not aided by a manufacturing base that is faltering and the cost of the debts it accrued.
Global Risks to Kenya’s Balance of Payments
Another important risk to Kenya’s Balance of payments is the unraveling of multilateral trade. Although a DHL study asserts that deglobalisation is not occurring, trade wars initiated by the Trump administration can have unintended consequences for the welfare of poor states. Where trade wars disrupt demand for Kenyan exports – if they include the ending of the AGOA program, for example – or reduced foreign direct investment from the United States and Europe, and overall market uncertainties, the possible unraveling of global trade presents a risk to Kenya’s Balance of payments position.Recommendations for Kenya’s External Trade Relations
The principle driver of Kenya’s external trade relations it’s level of productivity. Kenya’s low level of productivity places it’s external relationsin a perpetually precarious position. This paper by the IEA “And then the Floods.” demonstrated that since the year 2010, Kenyan manufacters have been reducing their machine imports. This can be interpreted as a determination by firms that manufacturing in Kenya could be uncompetitive for the foreseeable future. That is, the prospects for positive factor returns are low compared to what they might be for other nations in the neighbourhood.
After 2016, the Kenya shilling began to appreciate, discincentivizing imports of machine tools and intermediate products exist and reduce them. Another obstacle for investment is the unpredictability, narrowness, and high level of Kenya’s tax regime. Fundamentally, the knowledge intensity is an emergent property that is sensitive to excessive perturbations in the market environment including unpredictable tax rates.
Kenya’s narrow fiscal space will continue to place pressure on the state. the Kenyan state imposes a considerable distortionary burden on Kenyan manufacturing that if left unaddressed will leave the state with little room to engage meaningful measures that create the conditions for firms to reinvest in their productivity.
Another important contributor to Kenya’s connections to global value chains is Kenya’s trade barriers. . Kenya needs to accelerate the free movement of goods and services, of factor inputs, and of people and financial capital. Uncertainty related to the Trump administrations’ erratic trade policies will require an alertness and foresight. The Kenyan administration must think beyond Donald Trumps next five years and seek free trade agreements with it’s trade partners. Kenya could go further and unilaterally liberalize its trade.
Finally, none of this suggests that Kenya should aim to have a specific current account deficit, or surplus, or that it should set a goal for a specific financial account achievement. Far from it. Rather, fiscal policy should move towards the soundness prescribed above that includes a low, broad based, simple tax regime, sustainable deficits, and the provision of goods. Monetary policy should be independent from state interference, set appropriate inflation and interest rate targets, and absolutely abstain from artificial defence of the currency.
[1] (Google Query, Morningstar, 2025)
[2] (Kenya National Bureau of Statistics, 2025)
[3] (Kenya National Bureau of Statistics, 2025)
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Introduction The matatu metaphor can be used to analytically frame Kenya’s budget as a system that is subject to binding constraints, evolving expectations, and continuous adjustment to shocks. Like the matatu sector, fiscal policy reflects a balancing act between efficiency and quick action seeking to respond to public service delivery while constrained by competing sector […]
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| Post date: Mon, Sep 1, 2025 |
| Category: Economic Growth |
| By: Emmanuel Wa-Kyendo, |
Introduction
The Balance of Payments (BoP) is an identity that accounts for the state of two important accounts and two less significant accounts that are related to international economic relations of a nation and the rest of the world. The most important accounts are, namely, the current account and the capital account and the financial account.. The current account tracks changes in the flows of goods and services and the difference between imports and exports. This result is called the balance of trade. The capital account tracks flows of capital and the difference between inflows and outflows of capital. The financial account tracks changes in ownership of financial assets and liabilities. The current account and the capital account are usually the largest accounts in the balance of payments. Finally, as an identity, the balance of payments must add up to zero. For this reason, the balance of payments has a final account called errors and omissions. This account tallies discrepancies and statistical errors that are induced by missing, incomplete, delayed, or inaccurate data, and imperfect records of transactions. Other causes of discrepancies include overreporting or underreporting of the movement of factors of production, goods and services, illicit transactions, and differences in timing of the recording of transactions.
The state of the balance of payments is determined by a states openness and exposure to global trade and global financial markets. The balance of payments explains the state of a nations openness and exposure to global trade and global financial markets and is indicative of the results of a household, firm and state choices and their interactions with the rest of the world.
Fiscal and monetary policy, the integrity of state institutions and the policy posture – whether it is progressive in the classical liberal sense or regressive – contribute to the state of the balance of payments. Together, these factors influence the risks and opportunities that households, firms and the state are exposed to and that they enjoy on the global market for goods, services and factors of production. In sum, the balance of payments tells a story about market fundamentals and the level of integration a market has to global markets.
Current Account Analysis
Chart 1: Kenya, Current Account Balance, 2019 – 2023 (Ksh Billions)
Source: Kenya National Bureau of Statistics
In the year 2023, the value of Kenyan exports in goods was Ksh 1.009 trillion (US$7.80 billion) billion while the value of Kenyan imports in goods was Ksh 2.411 trillion (US$ 18.65 billion)[1][2]. The balance of trade in goods remained negative throughout the period 2019 to 2023. This is not illustrated in the chart as the chart is itself an aggregate of all the components of the current account. In the period 2019 to 2023, the value of exports in goods grew at an average rate of 12% while the value of imports in goods grew an average rate of 8%. The value of imports remained greater than the value of exports for that period of time. In all, the balance between imports and exports improved by 22.75% between 2019 and 2020 only to deteriorate in the years that followed until the period 2022 to 2023 when it improved by 0.27%. In all, over the period 2019 to 2023, the overall balance between imports and exports deteriorated by -4%.
Chart 1 shows that for the 5 years between 2019 to 2023, Kenya maintained a currenct account deficit with the world. At Ksh -694.161 billion (US$ -5.36 billion) in the year 2022, Kenya’s current account deficit with the world was at its highest in the last five years. In the year 2020, Kenya’s current account deficit stood at Ksh -397.116 billion (US$ 3.07 billion). This was the lowest it had been in the last five years.
What Does a Current Account Deficit Mean?
The current account contains the countries trade balance. A current account surplus is an indication that a country is earning more from exports than it is spending on imports for both goods and services. A current account deficit indicates that the households and firms from the domestic market are spending more on goods and services from other countries than they are earning in income from selling goods and services to other countries. Current account deficits are financed by financial account surpluses. More precisely, current account deficits are financed by foreign investmnet or foreign borrowing. The current account and the financial account serve as counterweights to each other. One must balance the other.
Wealth accrues to households and firms through accumulation of the factors of production and the earning of factor returns. When households and firms purchase factors of production, goods, and services from abroad, these are captured in the current account. When household and firm imports exceed exports, the difference is financed through sales of factors of production, foreign borrowing and foreign investments that are captured in the financial account.
The state generates its own revenue – and thereby contributes to the financial account – through borrowing in foreign markets, selling its own assets abroad and by exacting taxes on these factors of production and factor returns.
The current account deficit cannot exceed what the foreign market is willing and able to finance. That is, the current account deficit cannot outstrip foreign demand for domestic assets, debt, and investment opportunities.
Household and firm wealth is accumulated through productive economic activities. Productity is determined by the extent of the division of labour and specialization. Economic complexity is an empirical measure of the level of specialization in a given economy. Productivity is therefore determined by the complexity of the economy, by the relatedness and complexity of economic sectors, and by the complexity of products produced. The complexity of goods demanded and therefore sold both domestically and globally is an indication of the level productivity. An economic structure dominated by complex activities is the most effective driver of the wealth of nations. The manufacturing base grows with growth in the knowledge intensity involved in the production of a given product, the knowledge intensity of related sub-sectors, and the knowledge intensity of the economic structure as a whole. It is knowledge intensity that explains the important role that manufacturing activities play in the welfare of households and firms and in the state of the current account.
The growth and expansion in the knowledge intensity of an economy determines the state of industrialization of a country. The size of the national economy relative to the world, and its exposure to global trade are also important in conditioning a nations economic relations with the world in general, and the behaviour of the current account in particular. All things equal, small, industrialized, trade oriented nations are better placed to face global economic headwinds than their small, less industrialized, globally exposed counterparts.
Finally, the growth and expansion in the knowledge intensity of an economy is highly dependent on the stability of macroeconomic conditions. These macroeconomic conditions are influenced by the states’ fiscal and monetary policy. The economy is influenced by state policy through the states’ revenue generating regime – taxes, borrowing and sale of state assets – and states’ expenditures.
Households and firms must part with those factors of production and factor returns that the state claims through its tax regimes. While both domestic and foreign borrowing take away from future household and firm welfare, foreign borrowing shows up on the balance of payments through the financial account.. A tax regime that is sound must compensate for deadweight loss through taxes with comensurate expenditures. That is to say, the benefits must equal or exceed the cost of taxes. Expenditures should generate public goods whose value exceeds the losses experienced through taxation.
A tax regime that is excessively complex, unpredictable, and unaccountable, narrow in its sources, high in the rates demanded, is unprincipled, erodes fiscal policy soundness, and is by extension, destructive for macroeconomic conditions. As they are paid for through domestic and foreign borrowing, budget deficits are, themselves, future claims on household and firm welfare. Unsustainable claims on future welfare contribute to unsound fiscal policy and are destructive for macroeconomic conditions. Government expenditure that does not generate public goods whose externalities compensate the surplus loss imposed by taxes and deficits also contribute to unsound fiscal policy.
Monetary policy also contributes to macroeconomic conditions. Monetary policy involves market operations and the imposition of rules governing credit that affect interest rates, inflation, and by extension, exchange rates. Monetary policy must trade off between interest rates, unemployment rates and inflation rates. All things equal, high interest rates reduce inflation rates and raise unemployment rates as domestic and foreign households and firms respond by raising their savings and reducing their investments. High interest rates also result in a strengthened currency and result in increased demand for savings denominated in that currency, and decreased demand for goods and services denominated in that currency. This means that high interest rates would result in a strong shilling that would itself incentivize growing imports, and by extension, an expansion in the current account deficit. A strong shilling resulting from high interest rates would attract foreign purchases of shilling denominated securities. A strong currency sustained over time also contributes to weakened export competitiveness.
Put together, public policy can create adverse macroeconomic conditions, destroy the productivity of a nation and contribute to its loss of competitiveness against global markets. As Kenyan producers are relatively uncompetitive, and the shilling has been artificially strengthened, Kenya’s current account deficit countinues to grow, but is financed by growth in Kenya’s financial account. Kenya’s loss of competitiveness has manifested itself in falling machine tool imports by firms. This is explained in the 2024 IEA-Kenya paper ‘And then the Floods’.
Capital Account Balance, 2019 – 2023
Chart 2: Kenya, Capital Account Balance, 2019 – 2023 (Ksh Billions)
Source: Kenya National Bureau of StatisticsAccording to the Kenya National Bureau of Statistics, Kenya’s capital account balance peaked in the year 2021 at Ksh 21.45 billion (US$ 165.77 million) and shrank at an average rate of -10.43% during the period 2019 to 2023. In the year 2020, Kenya’s capital account balance shrank by -50.80% [3]. In the year 2021, the same account expanded by 34.63% only to shrink again at a rate of -29.94% in the year 2022. That was the worst year for Kenya’s capital account.
The capital account tracks changes in ownership of financial, non financial and non produced assets. Capital accounts are usually quite small because they represent small, unusual transactions that involve changes in ownership. The data suggests that in the period 2019 to 2021, Kenya’s ownership in financial and non financial and non produced assets fell. In general, as the capital account represents a small share of total economic output, the growing or shrinking of capital accounts is usually not too important. In
Financial Accounts
Chart 3: Kenya, Financial Account Balance, 2019 – 2023 (Ksh Billions)
During the period 2019 to 2023, the Financial account expanded at an average growth rate of 32.61%. Between the years 2019 and 2020, this component saw an expansion of 146.75%, the largest expansion in that period. In the year 2021, this component shrank by -67.02%, the most significant negative change in that period. The financial account measures net changes in the ownership of financial assets an liabilities. A positive financial account balance means that a country is receiving more investment from overseas than it is taking abroad. Although the value of financial investments in Kenya expanded in the given period, in all, more foreign investment has been leaving Kenya than has been injected into Kenya.
Between the years 2019 and 2020, foreign direct investments into Kenya fell by -8,433% from Ksh 47.93 billion (US$ 370.5 billion) to Ksh -575.2 billion (-US$ 4.44 billion) . On average, during the period 2019 to 2023, direct investments to Kenya fell by -2068% by value. In all, this was driven h the precipitous fall in foreign direct investment in the period 2019 to 2020. In the years 2020 to 2023, foreign direct investments to Kenya grew by 53%. Direct investments from Kenya to the world expanded by 28.83%.
Other accounts contained within the financial account measure changes in portfolio investments, changes in financial derivatives, and changes other investments. The direct investments account shrank by -10% in average growth rate terms. The portfolio investments account shrank by -81.06% on average. Other investments account grew by 1.25% on average terms. Portfolio investments were the most important net positive contributor to Kenya’s financial accounts. The account that tracks other investments revealed that the accumulation of debt instruments made the most important negative contribution to Kenya’s investment liabilities in particular and to Kenya’s financial accounts in general.
Where imbalances between the country’s current account and finncial account emerge, the reserves and related items account acts as a balancing mechanism. Current account deficits must be financed through financial account surplus or foreign currency reserve draw downs. For the last 5 years, Kenya’s current and financial accounts have been largely in deficit. Kenya has been importing more than it exports and experiencing capital outflows.
Furthermore, as its capital account shrinks, Kenya has been losing net ownership of non produced, non financial assets. That is, the one time transfer of assets that do not generate future income has been falling.
These twin deficits must be financed or one will eventually give way to the other. In short, twin deficits are unsustainable. In order to finance its twin deficits, Kenya must spend it’s reserves and issue more debt. Kenya’s fiscal crunch, attempts to correct through monetary policy and poor economic fundamentals are evident in the state of it’s balance of payments.
Risks Associated With Kenya’s External Trade Relations
Table 1: Kenya’s Score on the Economic Complexity Index
Source: Observatory Economic Complexity
. Between the years 1998 and 2023, Kenya remained in the third quartile of the economic complexity index. This means that relative to other countries considered in the index, Kenya’s economic complexity position was stable but stagnant and poor. The perennially low economic complexity with a downward trend that suggests a premature deindustrialization and the evidence that machine imports have been falling since 2018 present risks to Kenya’s external trade relations. In particular, the risk that Kenya fails to extract welfare gains should not attributed to the failure to aim at a specific balance of payments objective but should instead be attributed to policy choices that create an uncompetitive business environment. For one, a business environment with a tax regime that is unpredictable and narrow and whose rates are exceptionally high is not conducive to the competitiveness.
What Does the Balance of Payments Explain About Risks to Kenya’s External Trade Position?
A current account deficit emerges when imports exceed exports. In this situation, the returns on factors of production are lower than the costs incurred by the consumption of factors of production and the consumption of goods and services. Kenya’s import composition has been characterizes by falling machine imports. Falling machine imports are a strong indication of falling investments in Kenya’s manufacturing sector.
The effects of trade deficits include currency depreciation and a dependence on foreign capital in the form of investments and the accrual of debt required to finance the trade deficit. Firstly, demand for imports drives demand for foreign currency. When households, firms and governments buy foreign currency, the value of domestic currencies falls in response to a rise in demand for foreign currency. When households, firms and the state cannot earn foreign currencies through trade to finance imports, they can borrow from foreign markets or stop importing. External financing can be endogenous to Kenyan macroeconomic fundamentals or exogenous to it. That is, external financing may or may not respond Kenya’s fiscal and monetary policy or the state of its exchange rate, interest rates or inflation rates to name but a few indicators. What is important to note is that current account deficits must be financed by financial account surpluses until Kenya can no longer afford to finance its trade deficits at which point the currency must depreciate. The shilling is facing downward pressure.
A weakening currency will raise the cost of imports as the relative price of these imports rises. All things equal, as it attempts to defend its curency, Kenya will also deplete it’s foreign reserves.
When small poor nations like Kenya are insufficiently connected to global value chains and do not contribute manufactured products to world markets, the opportunity to improve the welfare of owners of factors of production is lost.
Kenya’s financial account deficit presents a risk of increasing downward pressure on the Kenyan shilling to depreciate, cause capital outflows, induce the depletion of Kenya’s foreign reserves and raise the cost of debt financing until Kenyan households, firms and the state find it unsustainable ot continue to borrow. Kenya’s fiscal crunch is not aided by a manufacturing base that is faltering and the cost of the debts it accrued.
Global Risks to Kenya’s Balance of Payments
Another important risk to Kenya’s Balance of payments is the unraveling of multilateral trade. Although a DHL study asserts that deglobalisation is not occurring, trade wars initiated by the Trump administration can have unintended consequences for the welfare of poor states. Where trade wars disrupt demand for Kenyan exports – if they include the ending of the AGOA program, for example – or reduced foreign direct investment from the United States and Europe, and overall market uncertainties, the possible unraveling of global trade presents a risk to Kenya’s Balance of payments position.Recommendations for Kenya’s External Trade Relations
The principle driver of Kenya’s external trade relations it’s level of productivity. Kenya’s low level of productivity places it’s external relationsin a perpetually precarious position. This paper by the IEA “And then the Floods.” demonstrated that since the year 2010, Kenyan manufacters have been reducing their machine imports. This can be interpreted as a determination by firms that manufacturing in Kenya could be uncompetitive for the foreseeable future. That is, the prospects for positive factor returns are low compared to what they might be for other nations in the neighbourhood.
After 2016, the Kenya shilling began to appreciate, discincentivizing imports of machine tools and intermediate products exist and reduce them. Another obstacle for investment is the unpredictability, narrowness, and high level of Kenya’s tax regime. Fundamentally, the knowledge intensity is an emergent property that is sensitive to excessive perturbations in the market environment including unpredictable tax rates.
Kenya’s narrow fiscal space will continue to place pressure on the state. the Kenyan state imposes a considerable distortionary burden on Kenyan manufacturing that if left unaddressed will leave the state with little room to engage meaningful measures that create the conditions for firms to reinvest in their productivity.
Another important contributor to Kenya’s connections to global value chains is Kenya’s trade barriers. . Kenya needs to accelerate the free movement of goods and services, of factor inputs, and of people and financial capital. Uncertainty related to the Trump administrations’ erratic trade policies will require an alertness and foresight. The Kenyan administration must think beyond Donald Trumps next five years and seek free trade agreements with it’s trade partners. Kenya could go further and unilaterally liberalize its trade.
Finally, none of this suggests that Kenya should aim to have a specific current account deficit, or surplus, or that it should set a goal for a specific financial account achievement. Far from it. Rather, fiscal policy should move towards the soundness prescribed above that includes a low, broad based, simple tax regime, sustainable deficits, and the provision of goods. Monetary policy should be independent from state interference, set appropriate inflation and interest rate targets, and absolutely abstain from artificial defence of the currency.
[1] (Google Query, Morningstar, 2025)
[2] (Kenya National Bureau of Statistics, 2025)
[3] (Kenya National Bureau of Statistics, 2025)
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