A peaceful settlement of Kenya’s political impasse will determine the country’s economic fortunes in the near and medium terms, the World Bank said on Thursday.
The bank announced this as it downgraded its 2017 growth forecast to below five percent.
Severe drought in the first half of the year, a slowdown in credit growth arising from last year’s capping of the lending rate and a prolonged political season had taken steam off economic activity forcing it to lower the growth forecast to 4.9 per cent from an earlier estimate of 5.5 per cent, the bank said in its latest quarterly review.
The multi-lateral lender, however, said it expects East Africa’s largest economy to rebound to a growth rate of 5.5 per cent next year before accelerating to 5.9 per cent in 2019 but subject to the settlement of the political impasse in the coming weeks.
“Our baseline assumes political uncertainty will dissipate in the medium term, and with that, the wait and see attitude adopted by both businesses and consumers will wane,” the World Bank says in its quarterly update report.
“If political uncertainty lingers beyond the near term, its dampening effect will persist into 2018 and 2019, leading to a weaker than projected growth performance,” the report says.
There are concerns that the dark political clouds that have hung over the country since the beginning of the year have yet to clear as opposition leader Raila Odinga, who boycotted the repeat October 26 election prepares to swear himself in on Jamhuri Day – setting up his supporters for a possible clash with the government of President Uhuru Kenyatta.
Mr Odinga and his supporters have vowed never to recognise the presidency of Mr Kenyatta who was sworn in on November 28 after he won 98 per cent of the votes in the repeat election.
Attorney-General Githu Muigai Thursday termed Mr Odinga’s inauguration plan as ‘treasonable’, offering a hint at how the Kenyatta regime might respond to it.
Analysts see this new political development as a key risk to the recent rallying of markets that have seen stock prices recover and the shilling strengthen against major world currencies as foreign investors return to the domestic market.
“This political development on the back of lower market activity as the holiday season approaches could weigh on the shilling,” a forex trader with a local commercial bank said.
The Kenyan economy has weathered a number of shocks that have forced the government and International Monetary Fund (IMF) to scale down their growth projections for 2017.
A severe drought that started in the last quarter of 2016 hurt agricultural production, forcing the World Bank to scale down its forecast by half a percentage point to 5.5 per cent in April.
A slowdown in credit growth coupled with a prolonged political season that saw the country go to its first ever repeat presidential election hurt activity in key sectors such as agriculture, manufacturing and trade – and forcing the Treasury to downgrade its growth forecast to 5.1 per cent from 5.9 per cent previously.
Some sectors, including wholesale and retail, tourism and small businesses, however performed better, according to Central Bank of Kenya Governor Patrick Njoroge.