World’s leading banks, consultancies and think-tanks have upgraded Kenya’s growth prospects for this year, citing a return to political stability and increased agricultural output due to improved rains.
A consensus growth outlook for May from 12 global firms’ shows the country’s economy is likely to expand by 5.5 per cent, 0.2 percentage points higher than last month’s projection. This is on the back of March 9 truce between President Kenyatta and Opposition chief Raila Odinga, popularly known as the “Hand Shake”, which has lifted investment sentiment.
The economy last year suffocated on the weight of a biting drought in the first half, which hit farming activities hardest and elevated political uncertainties following a bruising presidential contest in the second half that put on hold many investment decisions.
That, together with the debilitating effect of a sharp drop in loans to the private sector due to September 2016 interest caps, slowed growth to 4.9 per cent, official statistics in the annual Economic Survey on April 25 show.
But the economy is breathing freely again on sufficient long rains since March, a boost to farming activities which account for a third of Kenya’s national wealth – 31 per cent in 2017 – as measured by gross domestic product (GDP).
Private sector investments have risen to a 27-month in March as measured by IHS Markit-Stanbic Bank composite Purchasing Managers’ Index (PMI), which largely focuses on manufacturing and services sectors.
“Against the backdrop of increased political stability, the economy should be buoyed this year by higher agricultural output amid more favourable weather conditions, an upturn in construction activity for planned infrastructure projects, and an expansion in investment,” researchers at FocusEconomics, a Barcelona-based economic forecast and analysis firm that compiles the global forecast data, says in their May report.
All analysts for the first time this year now see Kenya’s economy growing by at least five per cent in 2018 after Standard Chartered Bank revised upwards growth outlook by 0.4 percentage points to five per cent from 4.6 per cent previously.
StanChart’s London-based chief economist for Africa Razia Khan during her late January visit to Nairobi cited expectations of reduced spend on infrastructure development this year compared to last year in projecting flat growth for Kenya.
She also said expansion of credit to the private sector was likely to remain depressed, adding that it will take at least a year for the impact of a modified interest rate regime to be felt in market.
Mr Kenyatta has made it clear the ineffective ceilings on loan charges at four percentage points above Central Bank Rate will be reviewed after June, without indicating whether it will be scrapped or modified.
“The government’s commitment to modify or even entirely scrap the cap on commercial bank lending rates introduced in 2016, which has led to private credit growth tumbling to all-time lows and stymied credit to small- and medium-sized enterprises, is also pushing the growth outlook to the upside, strengthening confidence among investors,” FocusEconomics analysts said.
Euler Hermes of France, a credit insurance firm, has projected the largest growth rate for Kenya in 2018 at 6.5 per cent followed by United Kingdom’s HSBC (six per cent), Oxford Economics (5.7 per cent), New York-based brokerage house Citigroup Global Markets (5.6 per cent) and France’s lender PNB Paribas (5.6 per cent).
Others are Japan’s Nomura (5.5 per cent), Fitch Ratings-owned BMI Research (5.4 per cent), Washington- headquartered Frontier Strategy (5.4 per cent), Economist Intelligence Unit (5.3 per cent), London-headquartered Euromonitor International (5.1 per cent) and consultancy firm Capital Economics of UK (5.0 per cent).
The confidence of investors in the economy is also reflected in increased diaspora remittances that hit $210.36 million (Sh21.08 billion) in first two months of the year and foreign inflows into the Nairobi bourse.
That, together with reduced food import bill, which in February touched the lowest level since April 2017, have helped the shilling appreciate over the US dollar.
The Kenyan currency has gained 3.0 per cent since the beginning of the year, and is seen stable in the foreseeable future, with record $9.51 billion foreign exchange reserves as at April 27 providing the CBK with sufficient ammunition to intervene in case of adverse volatility.
Inflation – a measure of growth in cost of living – has also fallen to a 63-month month low of 3.67 per cent in April, meaning the purchasing power of individuals and firms is little eroded.
Mounting debt repayments, however, remain a damper to growth prospects with Sh5 out of Sh10 will be collected in total tax and non-tax sources such as fees and commissions – ordinary revenue – going into servicing public debt.
The Jubilee administration has ramped up spending since 2013 to build a modern railway, new roads, bridges and electricity plants, driving up borrowing to plug the budget deficit.
Mr Rotich projects the gap in the Sh2.53 trillion budget for 2018-19 financial year to reduce to Sh562.7 billion, excluding grants, from Sh626.7 billion this year. This will be funded through Sh282.5 billion external debt, Sh276.1 billion net domestic borrowing and Sh4.2 billion from other domestic sources.