Kenya’s fragile external position came under renewed pressure in the first quarter of 2025, reversing the modest gains made a year earlier and raising fresh concerns over the sustainability of its foreign exchange inflows.

According to new data from Kenya National Bureau of Statistics (KNBS), the country’s overall balance of payments (BoP) swung to a deficit of Sh77 billion, a sharp turn from a Sh36 billion surplus in the first quarter of 2024.

The deterioration was primarily driven by a wider current account deficit, which grew by 58 per cent to Sh66.6 billion, up from Sh42.1 billion a year earlier.

The plunge was largely traced to a steep decline in diaspora remittances, Kenya’s largest source of foreign exchange (forex), which fell 11 per cent year-on-year to Sh161 billion.  “This was reflected in a lower secondary income balance, which declined by Sh45.5 billion,” KNBS said.

For an economy that leans heavily on remittance inflows to shore up its external finances, the drop could not have come at a worse time.

The shilling has stabilised in recent months following a string of International Monetary Fund (IMF) backed fiscal reforms and robust reserve accumulation.

But the latest numbers raise questions about the durability of Kenya’s forex buffers in the face of weakening inflows.

The goods trade balance offered marginal support. The merchandise trade deficit narrowed to Sh306.1 billion, down from Sh313.3 billion in Q1 2024, as import contraction outpaced the decline in exports.  “This improvement was due to a slower decline of Sh40.9 billion in exports compared to a decrease of Sh48.2 billion in imports,” KNBS said.

This narrowing gap was underpinned by falling export earnings across key commodities. Tea exports plunged 20.2 per cent, while titanium exports tumbled 58.2 per cent, signalling persistent weakness in Kenya’s traditional forex earners.The services account surplus slipped modestly to Sh82.3 billion from Sh83.8 billion, on the back of reduced inflows from transport and financial services.

Dividend payments

Travel earnings remained resilient, however, generating Sh117 billion, underlining the tourism sector’s steady rebound in the post-Covid era. Kenya’s primary income deficit, which includes interest and dividend payments, improved to Sh73.8 billion from Sh89 billion, helped by a slowdown in public debt service obligations. This reflects the impact of recent external debt reprofiling and increased reliance on concessional borrowing.

According to the report, the share of commercial debt shrank 32.3 per cent to Sh291.9 billion, while multilateral debt rose 8.4 per cent to Sh2.88 trillion, suggesting a shift toward lower-cost financing.  However, non-resident holdings of domestic bonds fell 7.6 per cent to Sh314.6 billion, a sign of muted offshore investor confidence despite recent improvements in inflation and the current account. Despite mounting external pressure, net financial inflows surged to Sh48.6 billion, up from Sh7.2 billion in Q1 2024.

Most of this came through the “Other Investment” category, often associated with loans and bilateral funding, offering a temporary cushion for the financing gap. The silver lining was in forex reserves, which rose by Sh77 billion, pushing Kenya’s stockpile to a record high of Sh1.38 trillion.

This build-up gives the Central Bank of Kenya (CBK) additional room to stabilise the currency amid external shocks.

But with remittances softening, commodity exports under pressure, and non-resident capital ebbing, the sustainability of this reserve position remains an open question.

In the near term, Kenya’s import bill may offer some relief. Total imports fell 4.5 per cent year-on-year to Sh652.3 billion, driven by an 18.1 per cent drop in petroleum costs and reduced food imports.

However, increases in purchases of fertilisers, vehicles, and machinery hint at selective investment-led demand, even amid economy-wide caution.