Economy in Focus: The Macro Economic Performance For Kenya in 2016

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According to International Monetary Fund, (IMF) the Kenyan economy was projected to grow by 6.0 percent in 2016, up from 5.6 percent in 2015, underpinned by:

  • low oil prices, given Kenya is a net importer of oil
  • stable agricultural performance as result of stable weather conditions
  • supportive monetary policy
  • ongoing infrastructure projects being undertaken by the government
  • recovery of tourism sector.

So far, the economy has done well having grown by 5.9 percent in Q1, 6.2 percent in Q2 and 5.7 percent in Q3 with economists like Cytonn Investments expecting  the overall 2016 growth to come between 5.7 and 6.0 percent a bit stronger that the 2015 growth of 5.6 percent.

In the third quarter, GDP growth came in at 5.7 percent, down from 6.2 percent in the second quarter, attributed to slow growth in Agriculture (3.9%), Manufacturing (1.9%), Construction (9.3%), Electricity and Water (7.0%) and Financial Services (6.1%). According to Cytonn Investments, GDP growth is expected to remain stable going forward on account of the following:

  1. Stable macroeconomic environment despite both local and global challenges,
  2. Consistent agricultural performance and
  3. The recovery of the tourism sector, which grew 13.8% y/y during the third quarter of 2016, with tourist arrivals into the country increasing significantly by 25.8% y/y over the same period

Key challenges facing the Kenyan economy

  1. Relatively lower earnings expected from the banking sector following the signing of the Banking Amendment Act 2015, which is expected to suppress earnings especially in the fourth quarter of the year, and may stifle revenue collection by the Kenya Revenue Authority,
  2. Diminishing Private Sector Credit Growth, further weakened by the signing of the Banking Amendment Act 2015, which slowed for the 15thconsecutive month in October to close at 4.6 percent, the slowest pace since June 2008, a key variable that influenced National Treasury into revising GDP growth forecast for 2016 downwards to 6.0 percent from 6.5 percent, previously,
  3. Increased cases of corruption and mismanagement of public funds which continue to persist,
  4. The upcoming Kenya general elections, scheduled to be held in August 2017, have also brought about some measure of uncertainty in the market, with investors wary of the post-election violence experienced in the previous election, and concerns if the economy will witness significant withdrawal of funds. The persistent wrangles between the ruling coalition and the opposition, which have recently heightened, coupled with periodic threats for mass protests do not augur well for the stability of and confidence in the Kenyan economy.

The Kenyan budget continues to grow with the 2016/2017 coming in at 2.3 trillion shillings from 2.0 trillion shillings in the last financial year. The budget shall be funded by tax collection (1.5 trillion shillings), domestic borrowing (236.1 billion shillings), and foreign borrowing (462.3 billion shillings), with the balance of 101.6 billion shillings being topped up by grants and aid.

This budget was based on a GDP growth assumption of 6.5 percent for the year 2016; the projected growth of around 6.0 percent might lead to a shortfall in the budget. The treasury further released the 2016 Budget Review and Outlook Paper (BROP), the 4th under the current administration, in a bid to amend the existing budget.

The BROP’16 reviewed crucial elements of the budget leading to some key variances on the FY2016/2017 projections. Key changes highlighted on the paper include;

  • Total expenditure set to decline by 8.9 percent attributable to a 26.5 percent reduction in development expenditure while recurrent expenditure is expected to increase slightly by 1.3 percent;
  • Total revenue set to be revised downwards by 2.9 percent to 1.46 trillion shillings from 1.50 trillion shillings, accounting for 20.1 percent of GDP compared to 20.7 percent previously;
  • Foreign borrowing expected to go down significantly by 37.8 percent to 287.6 billion shillings from 462.3 billion shillings.
  • Domestic borrowing set to increase by 24.8 percent to 294.6 billion shillings from 236.1 billion shillings following the signing of the Banking Amendment Act 2015, which has driven down interest rates, and hence created an avenue for government to acquire cheap funds from the local market.

The revision though good due to a decrease in expenditure might negatively impact growth because all the reduction is on development expenditure, with recurrent expenditure slightly increasing. The continued reliance on foreign borrowing remains a concern as it opens the country to increased effects of the global economy, while domestic debt continues to crowd out private sector credit growth; both exposure to global shocks and crowding out of the private sector are bad for the economy.

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Juma Fred

Juma Fredrick is an enthusiastic journalist who believes that journalism has power to change the world either negatively or positively depending on how one uses it.You can reach him on: (020) 528 0222 or Email: [email protected]