IMF cuts growth forecast to 5.6pc on low spending

The International Monetary Fund (IMF) has revised down its projected real growth rate for this year to 5.6 per cent from the 6.5 per cent it forecast since April.

It said the slower growth is a result of a slow rollout of infrastructure projects, weak tourism receipts and volatile capital flows.

An IMF team has been in Kenya since December 2 reviewing economic developments.

Earlier in the year, the IMF had forecast that the gross domestic product (GDP) would grow by 6.9 per cent citing spending on the standard gauge railway (SGR) and other infrastructure projects as a major driver.

“The growth acceleration in 2015 is slower than projected under the programme due to delay in planned road infrastructure spending, weaker tourism receipts and volatile external capital flows,” said the head of mission to Kenya Vitaliy Kramarenko.

The rollout of road building projects was delayed following the failure of banks and the government to agree on how to finance the projects. The banks insisted they could only lend money to each contractor on creditworthiness rather than on a uniform interest rate proposed by the government.

The 5.6 per cent real GDP for this year will be driven by public infrastructure spending (including SGR), buoyant credit growth and strong consumer demand, the multilateral lender said.

Spending on the SGR has been the most significant infrastructure project carried out this year and is set to be completed by 2017.

The IMF mission to Kenya met with the National Treasury and the Central Bank of Kenya.

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The multilateral lender noted inflation – currently at 7.3 per cent – had edged closer to the 7.5 per cent upper limit set by the Treasury.

Economic growth is, however, likely to accelerate next year to 6.0 per cent due to investments, higher agricultural production and an increase in tourism receipts.

“Real GDP growth is projected to accelerate to about 6.0 per cent in 2016 on account of continuation of strong investment momentum, effect of good rain on agriculture and a pick-up in tourism following removal of travel advisories from major tourism source markets,” said the IMF.

Treasury Cabinet secretary Henry Rotich said Kenya had made reforms including on tax policies and expected the economy to record growth of between 5.5 and 6.0 per cent – which is in line with the IMF’s projection of 5.6 per cent.

“The economy continues to witness macroeconomic stability with inflation within the target band by November 2015, exchange rate stable at Sh102 to the dollar, interest rates low, improved domestic financing for financial year 2015/16 and pick-up in budget execution,” said Mr Rotich.

Mr Kramarenko said Kenya remains vulnerable to global economic developments as indicated by the high current account deficit.

“Kenya’s growing integration in global financial markets has created significant opportunities but has also made the country more exposed to global market developments,” he said.

The IMF head of mission noted the current account deficit has been high but is projected to decline to 8.5 per cent of GDP by the end of this year.

He, however, noted the foreign exchange reserves stand at more than four months of import cover, ensuring that there is a cushion to the local currency.

Kenya currently has access to a Sh702 billion ($690 million) precautionary loan from the IMF, but the Treasury has said it will only draw the cash if there is a real shock necessitating its usage.