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Kenya’s Economic Growth Declines As Presidential Election Hangs

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Kenya’s economic ordeals continue to worsen following the Supreme Court’s decision on 1 September to nullify the results of the 8 August vote and hold an election re-run.

Deferred focus on economic policy, overshadowed by prolonged political uncertainties, will exacerbate an already challenging economic situation, which has been under severe strain since the start of the year due to an ongoing drought in the north of the country. The country’s trials are likely to persist and weigh heavily on economic performance going forward.

The re-run, scheduled for 17 October, followed a legal challenge to President Uhuru Kenyatta’s victory by the main opposition party led by Raila Odinga. In a ruling backed by four out of six judges, the Supreme Court found that irregularities and illegalities had botched the credibility of the outcome, with a mismatch found between the final vote count and the results declared at polling stations.

In a decision that sets a historic precedent, the Court stated that Kenya’s national electoral commission—the Independent Electoral and Boundaries Commission (IEBC)—had “failed, neglected, or refused to conduct” the presidential election in accordance with the constitution.

The unexpected verdict set off jitters in financial markets, and trading was suspended for a brief period after the Nairobi Stock Exchange 20 Share Index—which comprises the country’s most heavily traded stocks—saw more than 5% of its value wiped off in panic selling.

Presidential Aspirants Uhuru Kenyatta (left) and Raila Odinga (right)

With only a few weeks until the re-run, tensions are running high over the integrity of the upcoming vote, and if it will even proceed according to schedule, as the electoral commission is mired in infighting over who to pin the blame for the failure of the most expensive election in the country’s history.

Moreover, the opposition party has vowed that it will not participate in the re-run unless major reforms are instituted in the electoral commission. Amid the unending political saga, the stock market has been hurled into a downward trend over the past month.

While uncertainties prevail on the political front, the economy will continue to suffer. Economic activity in the private sector was hit by a slump in demand amid escalating concerns over prolonged instability, reflected by a plunge in the PMI, which dropped to a record low in August as unemployment continues to climb.

Also, reduced economic activity due to falling domestic and external demand amid amplified political tensions, high inflation etc. are being compounded by the impact of the devastating drought and have already severely dented economic activity. The economy expanded at a weaker pace of 4.7% in Q1, down from 6.1% in Q4 2016, derailing the previous year’s strong growth momentum.

Recent data indicates the economic picture becoming bleaker: The PMI contracted for a fourth consecutive month, slumping to an all-time low in August, as the worsening drought stokes fears of a famine. On 7 September, the United Nations and its humanitarian partners made an appeal for USD 106 million to step up relief efforts.

Kenya Central Bank Maintains Policy Rate

In the midst of the heightened political tensions from a protracted election period and worsening drought, the Central Bank maintained the main policy rate at 10.00% at its 18 September monetary policy committee meeting, in line with market expectations.

Despite inflation having surpassed the Bank’s upper target bound of 7.5% in August, the Bank decided to hold the rate put. It was motivated by expectations of improved food supplies in anticipation of short rain spells and government aid measures, which are expected to reduce food prices going forward and hold off pressure on inflation.

Central Bank of Kenya

Food shortages due to a pre-election surge in demand and transport disruptions in the aftermath of the now-annulled 8 August presidential election triggered a rise in inflation to 8.0% in August from 7.5% in July. Demand pressures remain subdued, however, evidenced by a stable core inflation rate below 5.0%.

Higher inflation is seen as a temporary phenomenon that is expected to ease in the near term and return to the target range, motivating the Bank’s decision to maintain its stance. However, recent reports of lower rainfall failing to offer respite to the severe drought, raising alarms of a potential famine, cast a shadow of doubt over the Bank’s optimism and suggest a continued rise in inflation as disruptions to agricultural output persist.

The drought, combined with on-going tensions on the political front, has thrust Kenya’s economy into sustained turbulence.

Despite optimism about the trajectory of inflation in upcoming months, with inflation remaining elevated and currently above the Bank’s target range of 2.5%–7.5%, the Bank is constrained and unable to lower rates to support a revival in growth, preferring an unchanged stance in order to anchor inflation expectations.

The Bank’s statement did not contain substantive forward guidance, only stating that future measures will hinge on the close monitoring of domestic and global developments. It is predicted that rates will rise slightly towards the end of the year in order to keep inflation in check. An easing cycle is anticipated in 2018 as price pressures recede.

Deteriorating prospects prompted panelists to downgrade their GDP growth forecasts for the eighth consecutive month in September. The panel projects growth of 4.8% in 2017, which is 0.1 percentage points below last month’s forecast, and expects growth to accelerate to 5.3% in 2018, which is down 0.2 percentage points from previous month’s forecast.

The possibility of a recovery this year seems far out of sight as political uncertainties persist and social unrest is likely to linger. The U.S. recently issued a travel alert to Kenya over possible violence ahead of the election re-run, and other countries are likely to follow suit. Another contest to the results, with a further stretch in uncertainties, would be calamitous for the economy.

Even in the event that the victory is upheld, measures to revive growth will take time to come into play and are unlikely to translate into a stronger economic course this year. Stéphane Colliac, Senior Economist at Euler Hermes sees “a protracted period of sub-potential growth led by weak leadership and policy slippages” as the main risk to a return to robust economic dynamics.

Political tensions and social unrest are likely to persist after the election. Combined with the adverse effects of the ongoing drought, they will continue weighing heavily on economic activity and likely keep growth momentum muted into next year.

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Kenya

Kenya’s economy on sound footing in 2019: Thanks to the political stability

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After a year that began on the wrong footing due to divisions over the hotly contested and controversial 2017 presidential polls, 2019 could bring with it better economic growth prospects.

Among the key issues that could shape economic conversations and the lives of Kenyans this year are whether a law on interest rate caps will be repealed, the national census, a new currency, and the political climate.

This positive outlook could, however, be affected by the high-octane politics that is gaining momentum – specifically a referendum and 2022 succession politics that could hamper the country’s economic growth.

But with the World Bank having projected Kenya’s economy to hit 6.01 per cent this year from 5.475 per cent recorded in 2018, the Government is upbeat about the oncoming economic prospects.

“Our growth outlook at around six per cent remains stable and so are other macroeconomic indicators like inflation, interest rates, and the currency exchange rates,” Treasury Cabinet Secretary Henry Rotich averred.

“We will continue to monitor the global developments especially trade wars, Brexit, commodity prices and US monetary policy and take appropriate actions to mitigate any negative consequences to our growth,” he said.

Since Uhuru Kenyatta became president, the highest rate at which Kenya’s economy has grown in a year was 5.9 per cent in 2016 and 2013, when Mwai Kibaki retired.

 

Remittance inflows

This year’s growth could be supported by strong remittance inflows and rising household income from agriculture and lower food prices.

“Manufacturing is still recovering and its activities remain sluggish. The sector growth rose from 0.5 per cent in 2017 to 2.7 per cent in 2018, but still remains weak compared with a three-year average of 3.6 per cent over 2013 to 2016,” said the World Bank recently.

Among the key drivers of growth this year will be an improved business environment as well as the easing of the political climate, underpinned by strong agricultural output and a good performance by the service sector.

Further, the Bretton Woods institution projects that with interest rates capping and banks leaning towards government securities, credit is unlikely to grow, especially for small enterprises.

This view has also been shared by the Central Bank of Kenya (CBK) which has consistently said that the ceiling on interest rates charged by banks was denying entrepreneurs access to credit which is stifling economic growth.

However, according to a survey released last week by research firm Trends and Insights for Africa (Tifa), four out of 10 Kenyans, or 44 per cent would like to set up a business next year while 32 per cent will be scouting for jobs.

The drafters of Vision 2030 had insisted that for Kenya to be a medium income economy, its GDP was supposed to grow by more than seven per cent annually for two decades.

If the political environment remains stable, Kenya’s economy will for the first time in a decade hit a six per cent growth rate in 2019. Industry leaders are however afraid that all this could be wiped out by the unpredictable operating environment.

“2019 promises to be a strong year for the sector, specifically if the predictable and stable business environment can be guaranteed in policy formulation and implementation,” Kenya Association of Manufacturers Chief Executive Phyliss Wakiaga revealed.

On the bright side, previous economic growth numbers show that Kenya’s economy has in the last two decades grown its fastest in the second year after a presidential election.

The growth, however, starts to decline in the third year as another election approaches.

In 2004, just a year after Mwai Kibaki had been elected as president Kenya’s economy grew by seven per cent. In 2010 it rebounded to 8.4 after the peace deal between Kibaki and his political nemesis Raila Odinga in the 2007 elections that led to the grand coalition government.

Then in 2015, year after Uhuru had been elected for his first term it hit 5.9 per cent. Thanks to the handshake between Uhuru and Raila, Kenya’s business climate has stabilized, though still struggling in some sectors such as mining which remains on the growth path.

In all real GDP grew an estimated 5.9% in 2018, from 4.9% in 2017, supported by good weather, eased political uncertainties, improved business confidence, and strong private consumption. On the supply side, services accounted for 52.5% of the growth, agriculture for 23.7%, and industry for 23.8%. On the demand side, private consumption was the key driver of growth. The public debt–to-GDP ratio increased considerably over the past five years to 57% at the end of June 2018. Half of public debt is external. The share of loans from non-concessional sources has increased, partly because Kenya issued a $2 billion Eurobond in February 2018. An October 2018 International Monetary Fund debt sustainability analysis elevated the country’s risk of debt stress to moderate.

A tighter fiscal stance reduced the fiscal deficit to an estimated 6.7% of GDP in 2018, with the share of government spending in GDP falling to 23.9% from 28.0% in 2017. To stimulate growth, the Central Bank of Kenya reduced the interest rate to 9% in July 2018 from 9.5% in May. Nonetheless, a law capping interest rates discourages savings, reduces credit access to the private sector (especially small and medium enterprises), and impedes banking sector competition, particularly by reducing smaller banks’ profitability. The exchange rate was more stable in 2018 than in 2017. The current account deficit narrowed to an estimated 5.8% of GDP in 2018 from 6.7% in 2017, thanks to an improved trade balance as a result of increased Kenyan manufacturing exports. Kenya’s gross official reserves reached $8.5 billion (5.6 months of imports) in September 2018— a 7% increase from a year before.

Tailwinds and headwinds

Real GDP is projected to grow by 6.01% in 2019. Domestically, improved business confidence and continued macroeconomic stability will contribute to growth. Externally, tourism and the strengthening global economy will contribute.

The government plans to continue fiscal consolidation to restrain the rising deficit and stabilize public debt by enhancing revenue, rationalizing expenditures through zero base budgeting, and reducing the cost of debt by diversifying funding sources. Inflation is projected to be 5.5% in 2019 due to prudent monetary policy. Kenya also benefits from renewed political momentum (including the 2010 constitution and devolution), a strategic geographic location with sea access, opportunities for private investors, and the discovery of oil, gas, and coal along with continued exploration for other minerals.

Among downside risks are possible difficulties in making fiscal consolidation friendly to growth and in finding affordable finance for the budget deficit caused by tightening global markets. Boosting domestic resource mobilization and enhancing government spending efficiency are critical to restrain public borrowing.

Kenya continues to face the challenges of inadequate infrastructure, high income inequality, and high poverty exacerbated by high unemployment, which varies across locations and groups (such as young people). Kenya is exposed to risks related to external shocks, climate change, and security. The population in extreme poverty (living on less than $1.90 a day) declined from 46% in 2006 to 36% in 2016. But the trajectory is inadequate to eradicate extreme poverty by 2030.

Kenya’s Big Four (B4) economic plan, introduced in 2017, focuses on manufacturing, affordable housing, universal health coverage, and food and nutrition security. It envisages enhancing structural transformation, addressing deep-seated social and economic challenges, and accelerating economic growth to at least 7% a year. By implementing the B4 strategy, Kenya hopes to reduce poverty rapidly and create decent jobs.

 

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