Expansion in Kenya’s economic activity is projected to slip below five percent this year on the back of prolonged dry weather, persistent inflationary pressure and rising borrowing costs, signalling a gloomy employment outlook for growing skilled youth.
A consensus growth forecast from 16 world-leading banks, consultancies and think tanks suggest gross domestic product (GDP) will average 4.8 percent in President William Ruto’s first full year in office compared with an estimated 5.3 percent expansion last year.
“GDP growth is seen easing in 2023 due to an ongoing drought, elevated inflation and higher interest rates,” analysts at Barcelona-based FocusEconomics, which compiled the growth forecasts from the 16 institutions, wrote in the report.
“Downside risks to the outlook include a ballooning public debt, further interest rate rises and additional unfavourable weather events.”
Kenya’s GDP — a measure of economic output adjusted to inflation — averaged 5.6 percent in the first three quarters of last year, softer than 7.7 percent in the same period the year before, according to the latest Kenya National Bureau of Statistics data.
This was largely on prolonged drought and the high cost of inputs which hurt agricultural production as well as the increased cost of food and fuel that followed disruptions in global supply chains which were exacerbated by Russia’s brutal invasion of Ukraine.
The Central Bank of Kenya, primarily tasked with stabilising prices, has since last May reacted to elevated inflation by raising the benchmark interest rate by 175 basis points to 8.75 percent, signalling lenders to raise the cost of borrowing.
Increasing the key policy lending rate makes borrowing more expensive, and this is expected to reduce spending by businesses and families with the ultimate goal of lowering the prices of goods and services that have plagued the economy since last year.
Global economists see the downside risks to growth persisting into this year, hurting labour-intensive sectors like agriculture and manufacturing in an economy struggling to create decent jobs for her growing graduate youth.
The forecast mirrors findings of the monthly Stanbic Bank Kenya’s Purchasing Managers Index (PMI) — based on feedback from about 400 corporate managers— which suggested that 89 percent of firms surveyed do not see an expansion in business activity this year.
Economists at JPMorgan, Standard Chartered and London-based Economist Intelligence Unit have, on the other hand, forecast a five percent growth for 2023.
Capital Economics of the UK has projected the lowest growth at 3.0 percent, followed by HSBC (3.9 percent), Oxford Economics (4.0 percent), Switzerland-based Julius Baer (4.1 percent), Moody’s Analytics (4.4 percent), Nigeria’s Vetiva (4.5 percent), Euromonitor International (4.8 percent) and Goldman Sachs (4.9 percent).
The downbeat view on Kenya’s growth prospects comes at a time President William Ruto’s administration, like the majority of peers in sub-Saharan Africa, is battling external headwinds like high oil prices and tight financial markets which have made borrowing abroad expensive since last year.
Dr Ruto has announced a revitalised fertiliser subsidy programme to raise food security and launched a short-term credit facility for small traders — christened Hustler Fund— as part of plans to sustain jobs.
An analysis by FocusEconomics shows that a quarter of the surveyed institutions see Kenya’s economy growing more than five percent.
These are American brokerage house Citigroup Global Markets (5.9 percent), Paris-based BNP Paribas (5.5 percent), Fitch Ratings (5.5 percent), Washington-headquartered consultancy FrontierView (5.5 percent) and Fitch Solutions (5.1 percent).
The projected consensus growth for Kenya will be slowest amongst key economies in the seven-nation East African Community’s trading bloc but above sub-Sahara Africa’s average of 3.5 percent.
Land-locked Uganda is projected to post the highest growth in the EAC bloc at 5.9 percent, mineral-rich DRC (5.8 percent) and Tanzania (5.5 percent).
“Risks [to growth in sub-Saharan region] are skewed to the downside; higher interest rates will increase debt servicing costs and threaten debt sustainability. Weather events are also a risk,” FocusEconomics’ analysts wrote in the report.
