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Drought to Impair Kenya’s Economic Outlook in 2019

Drought to Impair Kenya’s Economic Outlook in 2019

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 percent 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 percent 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 percent projection in October 2018. It is also lower than the government’s own forecast, which is 6.3 percent, 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 rainy 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 the 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 the 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 percent of the gross domestic product in 2018 from 6.3 percent 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 the monetary policy.

“There is a 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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