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could shape economic conversations and the lives of Kenyans this year are whether a law on interest rate caps will be repealed, the national census, a new currency, and the political climate.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

Drought to Impair Kenya’s Economic Outlook in 2019

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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.

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