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Balance of Payments Discussion

Balance of payments is the accounting of all the international monetary transactions a country has made with the rest of the globe in a certain period. A balance of payment statement is essential for countries because it shows their position in international trade. Also, a balance of payment statement enables governments to plan the future of their economy and the right policies and strategies to implement.

Kenya’s balance of payments consists of the current account, goods account, services account, capital and financial account, and remittances (Muli & Ocharo, 2018). Kenya has a current account deficit of USD 5,518 million, resulting from low services receipts that offset the improved agricultural earnings and resilient diaspora remittances (Kogo, 2021). Kenya has a current goods account deficit at USD 9,527 million and a services account deficit at USD 1,150 million. Also, Kenya has a high consumption of imported goods, including machinery, refined petroleum, plastics, and organic chemicals, with high prices in the international market (Socrates, 2020). Kenya imports most of its goods from China, accounting for 23.8 percent of its imports, while those from the European Union account for 14.8 percent of its total imports. Kenya’s exports to the Netherlands, the European Union, East Africa Community, and the COMESA region increased while it decreased to the rest of the world. Kenya’s remittances inflows have increased by 6 percent to USD 305.9 million, with the USA being the largest source of remittances to the country. The capital and financial account increased its inflows by USD 275 million due to the increased grants and inflows from international financial institutions such as the world bank and the international monetary fund. The foreign exchange rate remained resilient, and the foreign reserves are at USD 9,957 million.

The government of Kenya should put corrective measures to improve its balance of payments and its position in the international markets (Kogo, 2021). The government should develop import substitution policies to reduce the consumption of imports in the country. Also, the country should stimulate and encourage exports through producing better quality and quantity of highly demanded products in the international markets. In addition, the government of Kenya should implement programs that will help to achieve a balance of payments surplus. Also, the government should develop policies that reduce consumption and promote savings in the country (Kogo, 2021).

References

Kogo, A. K. (2021). Exchange rate, diaspora remittance, and banking sector development in Kenya (Doctoral dissertation, Moi University).

Muli, J. M., & Ocharo, K. N. (2018). External debt servicing and Current account balance in Kenya.

Socrates, M. K. (2020). The effect of lockdown policies on international trade flows from developing countries: event study evidence from Kenya. Working Paper, University of Nairobi.

The second

Balance of payment is necessary for the determination of the economic stability and dependence of a country. BOP is a documentation of businesses between the people of one country and the people from other nations.. The balance of payment records is kept in check annually and quarterly. In the balance of payment, there is an involvement of international transactions whereby the residents of different countries are trading goods and services.

According to the state administration of foreign exchange (2020), China registered a surplus balance of $ 274 billion on its current account in 2020. The current account great money value of international flows, an association of transactions of products, services, and the free flow of income. However, china recorded a deficit in its financial accounts in 2020 of $ 508 billion. Capital and financial accounts include purchases and sale of assets that occur internationally, including the private sector and central bank transactions. The current deficit mostly occurs when the country spends more than it produces.

The following factors drive the deficit of the surplus balance of payment. Firstly, they are driven by economic factors, including developmental activities. Developing countries depend on developed nations for advanced technological equipment such as machines, leading to increased import levels resulting in a deficit balance of payment. Secondly, political factors such as political stability and good support of the government in parliament encourage capital inflow, leading to a higher inflow than outflows creating a surplus. Lastly, the social factors that occur whereby an unfavorable change for the domestic gods leads to a deficit in the balance of payment (Subbaraman, 2018)

The country can improve its external position by easing exporting restrictions. This will promote and increase the exports to other countries, thus improving its external position.

References

Bussiere, M. (2013). Balance of payment crises in emerging markets: how early was the ‘early-warning signals?. Applied Economics, 45(12).

Subbaraman, R. (2018). Surplus or deficit: What drives the current account matters? English.