KenyaDrought to Impair Kenya’s Economic Outlook in 2019 Published 1 month agoon June 20, 2019By Vaultz Publisher Share Tweet In a recent release by the World Bank, the bank accounts that dry weather across much of Kenya was likely to curb the country’s economic growth this year, as it cuts its forecast to 5.7 per cent growth. The World Bank revealed the medium-term growth outlook was stable but recent threats of drought could drag down growth.The bank said Kenya’s economy expanded by an estimated 5.8 per cent last year following its recovery from a slowdown the year before caused by another drought and election jitters. The latest forecast is down from the bank’s 5.8 per cent projection in October 2018. It is also lower than the government’s own forecast, which is 6.3 per cent, according to the central bank.“Risks include drought conditions that could curtail agricultural output, especially if the country’s grain-growing counties are affected,” the bank said.Growth in 2018 was driven by favorable harvests, a resilient services sector, positive investor confidence and a stable macroeconomic environment. Nonetheless, the demand side shows significant slack with growth driven primarily by private consumption while private sector investment remains subdued. So far in 2019, a strong pick-up in economic activity was underway for Q1 of 2019 as reflected by real growth in consumer spending and stronger investor sentiment. However, a delayed start to the long rain season (March – May 2019) could affect the planting season-resulting in poor harvests.“The so-called long rains season from March till May hasn’t started in most parts of the country. Agriculture accounts for close to a third of Kenya’s annual economic output,” the bank said.In addition, the below average short rains (October – December 2018) and the ensuing food shortages across several counties in the northern part of the country that has prompted emergency interventions, could impose unanticipated fiscal pressure constraining development spending. These developments have slowed the growth forecast for 2019.“Delays in the long rain season and a growing need for emergency interventions to deal with food shortages is a reminder of the outstanding challenges in managing agricultural risks in Kenya,” said Felipe Jaramillo, World Bank Kenya Country Director. “Policy measures would be required to transform the agriculture sector through increasing productivity and enhancing resilience to agricultural risks to boost smallholder farmers’ income by improving access to competitive markets.”USD 2.1 billion was recently raised in an oversubscribed dual-tranche Eurobond issue, which will be used to fund infrastructure projects and general budgetary expenses, along with partially or wholly refinancing a USD 750 million Eurobond due to mature in June.Moreover, with revenue collection trailing below target, the president is seeking to enforce a 1.5% housing fund levy on the salaries of employees and employers alike, as part of efforts to build affordable housing under the Big Four Agenda. The policy has sparked uproar, however, with enforcement on hold until the Labor Court hears a case filed by the Consumers Federation of Kenya.“If the government fails to meet its revenue collection targets, the economy could face more risk from macroeconomic instability,” the bank said.In the just ended 19th edition of the Kenya Economic Update (KEU): “Unbundling the Slack in Private Investment,” attributes the slack on the demand side of the economy to two factors: Insufficient credit growth to the private sector (which stands at 3.4% in February 2019), and inherent room for improvement in fiscal management. On private sector credit, the recommendation was fast-tracking solutions to factors that led to the imposition of the interest rate cap and building consensus for its eventual reform.On the latter, ensuring prompt payments to firms that trade with the government could restore liquidity and stimulate private sector activities. Other crucial reforms outlined in the report are improved revenue mobilization and accelerated structural reforms that crowd in private sector participation in the Big 4 agenda.“Several macroeconomic policy reforms, if pursued, could help rebuild resilience and speed-up the pace of poverty reduction” said Peter Chacha, World Bank Senior Economist and Lead Author of the KEU. “These include enhancing tax revenue mobilization to support government spending, reviving the potency of monetary policy, and recovery in growth of credit to the private sector”.Agriculture remains a key driver of growth in Kenya and a major contributor to poverty reduction. The Special Focus section of the Kenya Economic Update highlighted a few of the many factors underlying low agriculture sector productivity and high vulnerability to climate shocks; and proposed policies that could help transform the sector to boost farmers’ income- thereby contributing to the overall poverty reduction in Kenya.“There is a need to reform the current fertilizer subsidy program to ensure that it is efficient, transparent and well-targeted; invest in irrigation and water management infrastructure to build resilience in the sector; and leverage disruptive technologies to deliver agricultural services, including agro-weather and market information and advisory services” said Ladisy Chengula, World Bank Lead Agriculture Economist and author of the special section on Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction.Finally, to boost farmers’ incomes policy could seek to address post-harvest losses and marketing challenges by fast-tracking implementation of the national warehousing receipt system and commodities exchange, while scaling up agro-processing and value addition to increase returns on agricultural produce.Externally, Kenya faces risks from global trade tensions, which could cut its exports and the funds sent home by Kenyans abroad.“An unanticipated spike in oil prices and tighter global financial market conditions … could lead to a disorderly adjustment of capital outflows from Kenya,” it said.Kenya’s current account deficit narrowed to 4.9 per cent of gross domestic product in 2018 from 6.3 per cent in 2017, according to the bank.The deficit was financed by both government and capital inflows, increasing the central bank’s hard currency reserves.“This continues to provide a comfortable buffer against external short-term shocks,” the bank said.The World Bank, which is one of Kenya’s biggest development financiers, urged the government to curb tax exemptions to boost revenue and to inject a dose of realism when forecasting revenue collection. Critics have accused the government of overly optimistic revenue forecasts in recent years, to justify increased spending. The government has regularly failed to meet those targets. There was no immediate comment from the Ministry of finance.“The government should also end caps on commercial lending rates imposed in 2016, which continue to compromise the effectiveness of monetary policy.“There is need to repeal interest rate caps and restore the potency of monetary policy, which is essential in responding to shocks,” the World Bank said.Overall, momentum should be sustained this year on the back of public infrastructure spending and despite the interest rate cap likely continuing to weigh on the domestic economy. The persistence of drought conditions, however, risks further curtailing agricultural activity, while global trade tensions threaten to disrupt exports and remittances inflows. Related Topics:Featured Don't MissKenya’s Economy to Experience Moderate Slowdown In 2019 Continue Reading Advertisement You may like Republic of Namibia Born agile or journey to an agile organization Global Economic Growth Becomes Fragile as Trade Tensions Persist Click to comment KenyaKenya’s Economy to Experience Moderate Slowdown In 2019 Published 3 months agoon April 24, 2019By Vaultz Publisher Kenya’s economy entered the year on a less promising note, with weaker domestic demand causing a notable slowdown in private sector activity. That said, a buoyant tourism sector and solid remittance inflows, which have helped narrow the current account deficit, likely cushioned the impact of the decline. Unfortunately, the country aimed to raise up to KES 50 billion (USD 500 million) through auctioning a tax-free 25-year amortized infrastructure bond on 20 March, with proceeds expected to fund the “Big Four Agenda” development projects and the bond was to some extent undersubscribed and resulted to a total of KES 16.3billion bonds accepted by the Central Bank of Kenya (CBK) as against the KES 50billion bonds anticipated.The government’s appetite for spending, however, is at loggerheads with the need for fiscal consolidation. Reining in the country’s escalating public debt burden is a necessary condition to securing a new IMF standby credit facility; discussions with the IMF are currently underway. Highlights of Kenya’s Economic PerformanceIt is expected that headwinds to growth in private consumption, investment and exports will see Kenya’s economy expand at a slower pace in 2019.The ongoing cap on bank lending rates – which will continue to dampen credit growth – and rising inflation will constrain growth in private investment and household consumption.Public investment directed under the ‘Big Four’ agenda will support GDP growth, but is likely to fall short of government expectations.Moreover, export growth is likely to decelerate in 2019 due to reduced production of tea, the country’s main export.It is forecasted real GDP growth of 5.2% will be experienced in 2019 and 5.5% in 2020 respectively, down from an estimated 5.8% in 2018. Subdued Credit Growth to Hurt Trade Sector and Households In 2019It is expected that the harmful banking sector regulations and rising inflation will temper the pace of growth in private investment and private consumption in 2019. Credit growth will continue to be constrained by an interest rate cap introduced in 2016, which limits bank lending rates to 400 basis points above the central bank policy rate. It is forecasted credit growth will remain in single digits in 2019, growing by 7.5% by year-end, compared to a 2010-2015 year-end average of 20.4% (prior to the cap).This will continue to affect business investment in the wholesale and retail trade sector (the largest recipient of private credit) as well as private consumption, given that household credit represents the second largest share of total private credit. Moreover, these effects will be compounded by an acceleration of inflation to a forecast of 6.0% in 2019 from 4.7% in 2018, given normalizing weather conditions which are likely to boost food prices. It is expected rising inflation will further weigh on private investment and consumption growth in 2019 by increasing firms’ input costs and weakening households’ purchasing power. Meanwhile, public investment as a driver of growth will fall short of the government’s ambitions. It is noted that overall, fixed investment in 2019 will benefit from a healthy infrastructure project pipeline, which includes the Standard Gauge Railway (Phase 2A) and the Lamu Port, scheduled to reach completion in 2019 and 2020 respectively. A forecast on the construction sector is expected to grow at a robust 8.6% in 2019, from 7.5% in 2018, to then tail off from 2020 given project completions.Public investment will also be directed under President Uhuru Kenyatta’s ‘Big Four’ agenda, which aims to boost healthcare coverage, affordable housing, food security and the manufacturing sector. That said, we believe that implementation of the agenda’s objectives will face structural constraints stemming from administrative inefficiencies and funding shortfalls.Moreover, several tax measures introduced in the 2018/19 fiscal budget to fund the various programs encountered resistance from lawmakers, including a value-added tax on fuel that was imposed at half the initially proposed rate (8.0% instead of 16.0%). Therefore, it is believed that public spending under the Big Four agenda will have a lesser impact on growth than the authorities expect.Lower Tea Output to Weigh On Total Export Growth In 2019Furthermore, weaker tea production is likely to weigh on export revenue growth. In February 2019, the Tea Directorate of the Agricultural and Food Authority estimated a 12.0% y-o-y reduction in tea exports for the full year, owing to lower output in the tea-growing regions of the west. Kenya is one of the world’s main producers of tea, which accounted for 25.6% of total exports in 2018 – the largest share of the country’s export revenue.Therefore, it is believed that this will drag on total export growth, further contributing to a slowdown in headline growth. Moreover, it is highlighted the possibility that normalizing weather conditions after favorable agricultural yields in 2018 could also weigh on production growth of horticultural goods, the second largest export component (accounting for 19.5% of Kenya’s exports), posing further downside risks. It is believed that risks are tilted firmly to the downside. Kenyatta’s inability to push many economic policies through parliament have in the past hampered implementation of key initiatives, including proposals to remove or modify the interest rate cap on commercial banks. It is believed that, should Kenyatta’s position weaken further, this could slow policy-making and progress on the Big Four agenda. Moreover, weaker-than-expected global economic activity could see the return of risk-off sentiment to financial markets and renewed pressure on emerging market currencies later in the year (although it is stressed that this is not a core view).Since more than half of Kenya’s government debt (which stands at 61.3% of GDP) is denominated in foreign currency, pressure on the Kenyan shilling would significantly increase debt servicing costs, posing further headwinds to public investment and clouding the country’s short-term growth outlook.While risks are weighted to the downside, it is to be noted that the removal of the interest rate cap on commercial banks in 2019 would pose an upside risk to our view. Indeed, on March 14 2019 a Kenyan court ruled that the cap is unconstitutional, though judges suspended the implementation of the ruling for 12 months to allow legislators to review the law. 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