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Absa index an indictment of Kenya’s potential for growth

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Expressway along Mombasa Road last month. PHOTO | JEFF ANGOTE | NMG

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Summary

  • Kenya’s economic growth weakened in 2020 with the real gross domestic product (GDP) contracting by 0.3 percent.
  • There is a lot of optimism being projected around 2021 and 2022 growth prospects.
  • Kenya’s risk of external debt distress has weakened from moderate to high, partly speaking to disorderly public finances and partly to the negative impacts of the pandemic on government revenues.

Kenya’s score on the Absa Financial Markets Index Pillar five dropped to its lowest in 2021 since its launch in 2017, reflecting a decline in the country’s economic fundamentals.

The index assesses underlying macroeconomic opportunity through three key areas: economic performance (GDP growth, export competitiveness and living standards), financial risks (overall debt levels and strength of bank balance sheets), and macro transparency (monetary policy committee communication, budget communication and data standards).

First of all, Kenya’s economic growth weakened in 2020 with the real gross domestic product (GDP) contracting by 0.3 percent. But the nation wasn’t in isolation in terms of growth contraction as the Covid-19 pandemic reared an ugly head across the board.

In fact, for the first time in a long time, sub-Saharan Africa printed a contraction. There is a lot of optimism being projected around 2021 and 2022 growth prospects. The National Treasury is foreseeing a real GDP growth of 6.0 percent and 5.8 percent for 2021 and 2022 respectively, which adds to the overall optimism being projected around.

However, financial risks abound. First, Kenya’s risk of external debt distress has weakened from moderate to high, partly speaking to disorderly public finances and partly to the negative impacts of the pandemic on government revenues.

In the current fiscal year, which ends on June 30, 2022, Kenya plans to spend sh1.1 trillion on public debt service. External debt service stands at Sh489 billion, or just a third of total tax revenues. There is a high chance Kenya will be tapping the international debt markets to refinance some of these maturing external debts.

Broadly, and factoring in Covid-19 overhand on the global economy, Kenya’s fiscal trajectory is looking weak. Beyond the external debt distress, the banking sector is also grappling with a mountain of non-performing loans.

According to the Central Bank of Kenya (CBK), total loans amounting to Sh1.38 trillion the equivalent of 46.5 percent of the total banking sector loan book of Sh2.97 trillion, had been restructured by the end of October 2021, in line with the emergency measures that the apex bank announced in March 2020 to provide relief to borrowers.

In addition to the restructured loans, advances amounting to Sh442 billion (or 14 percent of total outstanding loans), had been classified as delinquent at the close of August 2021.

On the transparency front, there are teething issues. First, the government failed to release the 2020 national accounts statistics in a timely manner, only releasing them in September 2021 (nine months after the end of the period), which is unacceptable.

At the time of my writing, the government was yet to release economic performance statistics for the third quarter of 2021 even as the year draws to a close.

There is need for the government to release national accounts statistics in a more timely manner in order to enhance credibility. Finally, monetary policy signalisation is weak and calls for the following additional reforms on communication and transparency.

Full transcripts of any MPC meeting should be made public including personal statements of monetary policy committee members; the CBK governor ought to testify twice a year to a parliamentary committee that deals with economic matters on the progress of achieving its objectives

The bank should publish ex-post information on its foreign exchange operations, such as volumes and number of participants; and the apex bank should report on the state of its balance sheet on a monthly basis. In essence, the Absa Financial Markets Index Pillar five has been an indictment on the state of Kenya’s macroeconomic opportunities.

Mr Bodo is a writer and financial analyst