IMF sees Kenya capital inflows topping Sh167bn

The International Monetary Fund (IMF) has forecast net foreign direct investment (FDI) to Kenya will rise steadily in the next few years and hit Sh167 billion annually by June 2019.

According to newly released data, the amounts foreigners invest in Kenya is expected to rise from Sh33.4 billion in the financial year 2012/13 to Sh110.6 billion this fiscal year before growing further in future.

The IMF, however, warns deterioration of the security situation could hamper the inflows that serve as a key support to the local unit.

“A deterioration in security conditions would weaken earnings from tourism, and dampen FDI inflows,” said the IMF in an audit of the economy.

Kenya has been a magnet for investment in a wide range of sectors including financial and manufacturing.

The Bretton Woods institution though warned a prolonged economic slump in countries that Kenya trades with such as Europe could hurt inflows.

“A protracted slowdown in trading partner growth, in particular, in the euro area … could reduce remittance and FDI inflows, with a significant impact on economic growth,” said the IMF.

The multilateral lender said Kenya needs to improve the business environment to diversify sources of FDI. Most of the sources have tended to be European and lately Chinese.

Investments in energy will be a major contributor in the increase in FDI according to the fund.

Currently, billions are being invested in the generation of geothermal and wind energy in various parts of the country, especially the Rift Valley.

However, purchases of aircraft by Kenya Airways will drain foreign currency and affect the balance of payments due to the high prices of aircraft though the investment is expected to claw back the forex in future.

KQ has recently received its fifth Dreamliner, with each costing Sh11 billion. It means that five of them cost it Sh55 billion or $620 million, which is equivalent to a tenth of the total foreign exchange reserves currently being managed by the Central Bank of Kenya.

Analysts agree with the IMF report on FDI prospects noting the contribution of newly discovered minerals as well as oil and gas explorations.

Recent research conducted by Deloitte Consulting showed the expanding size of the middle class is also seen as critical in attracting FDI and other private flows.

“With the recent discoveries of oil and gas as well as other minerals, foreigners are keen to get in early enough and reap the benefits that come with this,” said Eric Munywoki, research analyst at Old Mutual Securities who said he has been studying FDI trends.

Mr Munywoki said the growing economy is on top hauling in the capital.

In 2013, gross domestic product grew by 4.7 per cent, but this has now been restated to be 5.7 per cent under the rebased statistics.

“We don’t have capacity in several areas such as extraction of minerals, but foreigners have it, so we have to encourage them to come and help us extract it. Not even the recently introduced capital gains tax is going to keep them away,” said Mr Munywoki.

In May, Kenya Investment Authority (KenInvest) chief executive Moses Ikiara said he was expects that FDI flows would continue to grow even with the challenges facing the economy.

Dr Ikiara said investors were targeting many sectors of the economy, noting that the current infrastructure development was one of the major attractions. Another magnet is adequate and skilled human capital, he said.

IMF report forecasts exports to grow although the pace would be more gradual than that of the FDI. They will grow by between three and 11 per cent from this year to the end of fiscal year in June 2019.

However, because of higher levels of imports such as those incurred by Kenya Airways, machinery and equipment, the current account balance will be in the red up to 2019.

Due to the huge amounts of foreign cash entering the country in the form of FDI and portfolio flows (going into the capital market), the overall balance of payment is expected to be positive in the coming years.