Connect with us

Kenya

The Big 4 priorities to boost Kenya’s economy

Published

on

Kenya’s economy grew by 4.9 per cent in 2017, recording the slowest margin in five years amid prolonged electoral process and adverse weather. That pace of growth falls far below the 5.9 per cent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

The last time Kenya recorded growth below five per cent was in 2012, also an election year, when the economy expanded by 4.5 per cent.

“The slowdown in the performance of the economy was partly attributable to uncertainty associated with a prolonged electioneering period coupled with adverse effects of weather,” said Treasury and Planning Secretary Henry Rotich.

Kenya’s economy remains resilient due to its diversity; services contributed the highest proportion to GDP growth.

Kenya’s economy grew by 4.9 per cent in 2017, recording the slowest margin in five years amid prolonged electoral process and adverse weather. That pace of growth falls far below the 5.9 per cent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

The last time Kenya recorded growth below five per cent was in 2012, also an election year, when the economy expanded by 4.5 per cent. “The slowdown in the performance of the economy was partly attributable to uncertainty associated with a prolonged electioneering period coupled with adverse effects of weather,” said Treasury and Planning Secretary Henry Rotich.

The KNBS data shows that agriculture, which accounted for 31.5 per cent of the 2017 GDP grew by only 1.6 per cent compared with 5.1 per cent in 2016. All the segments except cut flowers shrunk during the period. Export earnings from cut flower grew by 16.1 per cent to hit Ksh82.2 billion ($819.9 million) in 2017.

Kenya’s economy is expected to grow 5.5 percent this year compared with the estimated 4.9 percent in 2017, thanks to better weather and less political risk after last year’s presidential election, the World Bank said in April.

A severe drought in the first quarter of 2017, political turmoil due to a disputed and then re-run presidential election and sluggish private sector credit growth all helped cut the 2017 economic growth to the lowest in five years, from 5.9 percent the previous year.

Notwithstanding the projected rebound in economic activity, risks are tilted to the downside. The Government of Kenya has outlined four big priority areas for the next five years. Thes eare agricultural and food security, affordable housing, increased share of manufacturing, and universal health coverage.

Support from the public and more importantly the private sector will be required to achieve the big 4. Specific measures to create fiscal room to support the big 4 can include: enhancing domestic revenue mobilization through the rationalization of tax exemptions; slowing the pace of expansion of recurrent spending; and improving the efficiency of spending.

Boosting agricultural productivity and food security will require reallocating more resources to agriculture and improving the efficiency of current spending in the sector.

To eradicate poverty by 2030, Kenya will need a combination of higher growth, more inclusive growth, and growth that is increasingly driven by the private sector and translates into more rapid poverty reduction. Kenya’s finance ministry has also reiterated growth to rebound to 5.5 percent this year but pressure to curb the government’s fiscal deficit could cause it to scale back ambitious infrastructure projects, weighing economic output.

“The dissipation of political uncertainty and the recovery in the global economy is supporting a rebound in business sentiment,” the World Bank said in its latest report on the Kenyan economy. The country’s crop growing areas have been enjoying good rains since March, boosting expectations of improved harvests.

Farming is the biggest sector. But the World Bank said higher oil prices, reduced government investment in infrastructure and still-weak credit growth could curb some of the optimism. Kenya capped commercial lending rates in September 2016 at 4 percentage points above the central bank’s benchmark rate, which now stands at 9.5 percent, in an attempt to limit the cost of borrowing for businesses and individuals.

The central bank said last month the cap probably cut last year’s estimated economic growth rate by 0.4 percentage points because it limits credit to small and medium businesses who are deemed too risky by lenders. The World Bank said its forecast was premised on the potential resolution of the cap issue and a reversal of the decline in credit to the private sector.

Private sector investment’s impact on growth had fallen to -0.7 percentage points of gross domestic product in the four years to 2017, from 1.3 percentage points in the four years from 2013, the bank said in the report. It attributed the drop to the higher government spending, investor nerves over last year’s election and the decline in private sector credit that was made worse by the presence of interest rate caps.

INFLATION

Kenyans also had to contend with steady buildup in inflationary pressure on the back of rising oil and food prices through 2017. The KNBS data shows inflation rose to an average of 8 per cent last year, up from 6.3 per cent the previous year.

“We have lined up several interventions, which together with continuing political stability, good rains and macro-economic environment will lead to better economic performance in 2018,” said Mr. Rotich. “Inflation is expected to ease in 2018 supported by lower food prices due to good rains and improved agriculture,” he added.

After multiple headwinds dampened growth in 2017, a nascent rebound in economic activity in Kenya is gaining momentum. Notwithstanding the projected rebound in economic activity risks are tilted to the downside. The Government of Kenya has outlined four big priority areas for the next five years.

These are agricultural and food security, affordable housing, increased share of manufacturing, and universal health coverage. Support from the public and more importantly the private sector will be required to achieve the big 4.

Specific measures to create fiscal room to support the big 4 can include: enhancing domestic revenue mobilization through the rationalization of tax exemptions; slowing the pace of expansion of recurrent spending; and improving the efficiency of spending.

Boosting agricultural productivity and food security will require re-allocating more resources to agriculture and improving the efficiency of current spending in the sector. To eradicate poverty by 2030, Kenya will need a combination of higher growth, more inclusive growth, and growth that is increasingly driven by the private sector and translates into more rapid poverty reduction.

President Uhuru Kenyatta won re-election in November in a second vote after the first in August was annulled by the Supreme Court citing irregularities. Around 100 people, mainly opposition supporters, were killed mainly by Kenya police during the prolonged election season.

“Despite the slowdown in 2017 our outlook is bright,” Rotich said at the launch of the annual economic survey. “We expect growth to recover to 5.8 percent in 2018 and over the medium term the growth is projected to increase by more than 7 percent.”

Growth slowed to 4.9 percent last year from a revised 5.9 percent in 2016, the statistics office said. Rotich said the projected economic rebound is supported by favourable economic fundamentals including inflation, which has dropped to about 4 percent this year. “The ongoing investments in infrastructure, improved business and factory confidence and strong private consumption are expected to support growth,” he said.

Kenya’s diversified economy is better able to withstand shocks like the commodity price drop that started in 2014 and hit oil-producing African countries such as Nigeria and Angola. But its economy was hobbled by a severe drought in the first quarter of last year that was followed by poor rainfall.

The services sector including tourism grew strongly last year and that helped to offset the slowdown in farming and manufacturing, said Zachary Mwangi, director general of the Kenya National Bureau of Statistics. Tourism is vital for hard currency and jobs and grew 14.7 percent while earnings surged 20 percent, he said.

In contrast, growth in the agriculture sector, which accounts for close to a third of overall output, slid to just 1.6 percent in 2017 from 5.1 percent the year before.

The government says manufacturing is a priority due to its potential to create jobs and it grew at 0.2 percent last year from 2.7 percent the year before. Production of cement, sugar and processed milk slid as firms reeled from the impact of the election and high costs.

Continue Reading
Advertisement
Click to comment

Kenya

Kenya’s Economy to Experience Moderate Slowdown In 2019

Published

on

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 Performance

  • It 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 2019

It 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 2019

Furthermore, 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.

 

Continue Reading
Advertisement
Advertisement

Trending