Markets & Finance

Kenya's economy expands by 4.9 pc

food

Catherine Wangui sells groceries at Nyeri municipal market in central Kenya. Poor performance in the agricultural sector and the subsequent rise in the price of food since April has seen inflation rise to double digits level – eroding consumer purchasing power and hurting growth.

Kenya’s economy expanded by 4.9 per cent in the first quarter of the year, helped by improved productivity in the construction, financial services, transport and communication sectors but analysts warned that the surge in inflation and acute shortage of food since April could hurt growth in the second and third quarters. The out-turn was marginally higher than the 4.3 per cent realised during a similar period last year.

Growth in the period under review particularly benefited from the low rate of inflation that helped construction, financial services and transport sectors to offset poor performance in the agricultural sector that remains a key determinant of Kenya’s economic prospects.

Kenya National Bureau of Statistics (KNBS) said in a statement that the first quarter performance benefited from incipient inflationary pressure during the period, which has since jumped to a 19-month high of 14.49 per cent in June.

“At the start of the quarter inflation was almost contained at the Central Bank’s target of 5 per cent but had risen to 9.19 per cent by March and has since been rising,” the statement said.

Agriculture, which employs more than 60 per cent of Kenya’s workforce and accounts for nearly a quarter of the country’s GDP, also plays a critical role in taming the price of food and ultimately the rate of inflation.

performance

Poor performance in the sector and the subsequent rise in the price of food since April has seen inflation rise to double digits level – eroding consumer purchasing power and hurting growth.

Agriculture expanded at the rate of 2.2 per cent in the first quarter of 2011, down from the 5.7 per cent it recorded in a similar period last year as inadequate rainfall took toll on food production and cut volumes in the key export crops such as tea and coffee.

“Reduced output from the agricultural sector is fuelling the twin evils of rising inflation and unemployment that will hurt growth in the coming months,” said Joseph Kieyah, an analyst at the Kenya Institute for Public Policy Research and Analysis (Kippra).

The financial services sector, led by banks, grew by 10.9 per cent, more than double the five per cent realised in a similar period last year, and underlining growth in uptake of loans by individuals and businesses for consumption and investment.

Total domestic credit increased by 26.9 per cent in the first quarter of the year to stand at Sh3.9 billion compared to 3.1 per cent in 2010. Total credit to the private sector rose by 22.8 per cent against an increase of 16.7 per cent in the same quarter of 2010.

High uptake of loans that began early last year as interest rates dropped helped banks to expand credit and cut the rate of default for a record Sh70 billion pre-tax profit. Rising inflation, coupled with the CBK’s latest decision to tighten monetary policy targeting inflation and exchange rate turbulence has seen a number of banks raise their base lending rates to 15 per cent this month, a move that could push the cost of credit beyond the reach of many potential borrowers and slow down uptake of loans in the near term. Expansion of commercial bank lending particularly benefited the construction sector, one of the best performing in the first quarter of the year.

“The construction sector expanded substantially mainly supported by increased bank credit for real estate development,” KNBS said.

CBK data shows that real estate accounted for the single largest segment or one third of the Sh1.2 trillion lent in the 12 months to February. The sector grew by 10.7 per cent in first quarter, more than 10 times the 0.3 per cent growth a year earlier.

“Growth in the sector was also supported by the massive road infrastructure projects being undertaken in various parts of the country,” the bureau said.

Builders consumed 779.3 million tonnes of cement, up from 667.1 million tonnes last year, representing a growth of 17 per cent and making cement manufacturers the main beneficiaries of the construction boom.

Transport and communication grew at the rate of 6.5 per cent up from 6 per cent last year, with a well spread expansion in road and air transport. 

KNBS says the vicious price wars among mobile telephone firms was the biggest contributor to the overall growth in the sector, lending credence to the argument that lower calling tariffs are good for the economy.

Growth in road transport also fuelled demand for light diesel, whose consumption rose to 318.4 thousand metric tonnes from 301.5 thousand metric tonnes last year and increasing oil marketers’ revenues even as the margins fell with the onset of retail price regulation.

Most analysts, however, worry about the continuing surge in the rate of inflation, exchange rate turbulence and poor performance of agriculture which they see as the biggest threat to realising the target annual growth rate of 5.3 per cent.

Sluggish agriculture

A sluggish agricultural sector means fewer jobs will be created and food-related inflation could rise further, piling pressure on the level of demand in the economy.

The negative impact of the sector’s weakening is already being felt among manufacturers who are producing and selling lees products.

The manufacturing sector grew by 3.2 per cent, nearly halve last year’s six per cent.

“The slower growth was partly a consequence of a slowdown in some economic activities among them processing of coffee, manufacture of motor vehicles tyres, soap, beer, and assembly of motor vehicles during the quarter,” KNBS said.

Inflationary pressure is expected to persist in the near term mainly driven by a combination of domestic and external factors such as the high pricing of oil and commodities such as maize that Kenya must import to meet its consumption needs.

“These are supply side pressures and there is little that can be done,” Prof Kieyah said, adding that better rainfall levels later in the year and easing of international fuel prices could give reprieve to the economy.

[email protected]