IMF, World Bank cautious about Kenya’s economic growth

Kenya’s economic growth prospects have been dimmed by uncertainties related to this year’s general election, interest rate controls, shortfalls in revenue collection,  and a ballooning public debt.

Although government data has painted a rosy picture of the economic performance over the  nine months to September 2016,  the International Monetary Fund and the World Bank are  cautious about the  country’s growth prospects  as banks  shun  lending to the private sector  in  a controlled  interest rate environment.

According to the World Bank, increased government spending during an electioneering period may crowd out private sector investment and lead to overheating of the economy, resulting in inflation.

“On the external front, challenges include weaker than expected growth in the global economy, volatility in global financial markets and a spike in oil prices,” the World Bank said.

The Central Bank of Kenya confirmed that credit to the private sector decreased, but said the reduction was not a result of the regulator’s review of its policy rate that was retained at 10 per cent in November.

“The slower private sector credit growth witnessed over the past several months was found to be largely an outcome of structural factors in the banking sector rather than monetary policy,” said Governor Patrick Njoroge.

According to the Bretton Woods institutions, the country ran the risk of losing private investments due to reduced credit from banks; other investors suspended their investment plans in the country in view of the 2017 election.

The  fragile economic outlook has been further dampened by reduced credit to the productive sectors of the economy  and the spiralling public  debt burden, which  currently stands  at over Ksh3.6 trillion ($36 billion).

READ: World Bank cautions Kenya to tame borrowing spree

“We expect the economy to grow at around six per cent this year (2016) but we are not certain of next year (2017) until we look at the numbers for 2016. However, the slowdown in credit to the private sector and uncertainties related to the general election may contain this growth momentum,” Armando Morales, the IMF resident representative in Kenya, told The EastAfrican.

“With interest rate caps, banks are going to be stricter in lending, and shy away from various sectors. Investors will adopt a wait-and-see attitude due to these uncertainties,” he added.

Mr Morales also said that Kenya would know its fate on whether it would get access to the IMF’s $1.5 billion precautionary facility soon.

“We shall present the Kenyan case to the board in mid- January,” he said. A team of IMF officials completed a review of the government’s economic and structural reforms in November.

The two year (2016-2018) facility was approved by the IMF board in March, to help Kenya deal with external shocks that distort the country’s balance of payments position.

The IMF team expressed concern that recent amendments to the Banking Act that set limits on deposit and lending rates are likely to have an adverse impact on Kenya’s economy.

Kenya’s economy grew by 5.6 per cent in 2015, up from 5.3 per cent in 2014.

During the first (January-March) quarter and second quarter (April-June) of 2016, the economy grew by 5.9 per cent and 6.2 per cent respectively, though activities in key sectors such as manufacturing and construction declined.

“Nevertheless, Kenya can achieve higher levels of growth by enhancing the productivity of public investments, which has declined in the recent years as reflected in the weak execution of infrastructure projects,” said Diarietou Gaye, the World Bank country director.

According to the CBK,  global growth prospects remain fragile on account of uncertainties due to the impact of Brexit and political developments in the US.

“Uncertainty relating to tightening of the US monetary policy and its implications for global capital flows remain a concern,” said Mr Njoroge.

In the last fiscal year (2015/2016), the Kenya Revenue Authority fell short of its revenue collection, with a total of Ksh1.210 trillion ($11.8 billion) collected against a target of Ksh1.217 trillion ($11.87 billion), citing difficult economic conditions.

The World Bank projects economic growth at 5.9 per cent in 2016, from 5.6 in 2015, strengthening to 6.1 per cent in 2018.

However, growth could slacken due to a slower than expected growth in the global economy that could curtail the anticipated strengthening of Kenya’s exports, remittance inflows, and tourist receipts.

Other risks include resurgence of volatility in global financial markets, and security risks from terrorist activities that could undermine the recovery of the tourism sector.

According to the World Bank’s Working Paper Series dubbed Deal or No Deal, Strictly Business for China in Kenya, the country performs poorly in attracting foreign direct investment.

According to the report corruption, poor infrastructure, and a poor investment climate have reduced FDI flows, compared with pre-1980 levels.

In 2007, Kenya received $729 million in FDI, but post-election violence in 2008 cut down flows to $96 million.

“Kenya’s FDI signals a vulnerable current account because of weak domestic savings and investment,” the report states.

Kenya’s domestic savings as a percentage of GDP dropped from a peak of 22 per cent in 1994 to four per cent in 2014, much lower than the average sub-Saharan African rate of 20.4 per cent in 2014.

According to the report, the low savings rate is partly attributed to Kenya’s large-scale infrastructure projects such as the standard gauge railway, Lamu berths, and Northern Corridor Integration Projects.