What to Expect in 2018 For The Kenyan Economy

How will 2018 hold for the Kenyan economy? From a protracted 2017 Kenyan electoral cycle presented many challenges to the country’s economic growth potential.

“While the path to recovery may not be smooth, meaningful policies that can facilitate the process may be more necessary than before,” said Stephanie Kimani, Research Economist at Commercial Bank of Africa Limited (CBA).

First, the World Bank World Bank cut the country’s 2017 growth estimate to 4.9 percent, due to weak credit extension and political uncertainty due to prolonged election season. The World Bank has termed the growth its “ weakest in five years”.

The World Bank said, “There is a need to consolidate the fiscal stance in order not to jeopardize Kenya’s hard-earned macroeconomic stability.”

On the other hand, the Central Bank of Kenya (CBK) expects the economy to expand 5.1 percent in 2017 from an initial projection of 5.7 percent.

“Kenya’s economy has been surprisingly resilient in 2017. There’s a very strong macro framework: inflation is firmly anchored; an organised and stable forex market; good yield curve,” he said during the launch of the 16th Edition of the Kenya Economic Update.

“Private sector credit growth fell from its peak of about 25 per cent in mid-2014 to 2 per cent in October 2017 — its lowest level in over a decade,” The 2017 Kenya Economic Update report stated.

“The private sector is being starved of credit with more lending going to the public sector. Ideally, for me, I would want to see an economy which is more driven by the private sector rather than by the activities of the public sector,” noted World Bank Country Director for Kenya Diarietou Gaye.

Going forward, the government is being urged to improve its revenue collection and review the capping of the interest rates which has denied credit to the private sector.

The Banking (Amendment) Law (2016) came into effect with the President’s assent on August 24th, 2016. The law aims at regulating interest rates applicable to banks’ loans and deposits, which were set at the discretion of the banking players.

According to Section 33B (1) of the law, the maximum lending rate – chargeable for a credit facility – is capped at no more than 4 percent, the base rate set and published by Central Bank of Kenya.

Ms. Stephanie Kimani says “Aligning fiscal and monetary policies will benefit the economy whilst also avoiding any potential policy disconnect that had previously arisen from the interest rate controls framework. While one can appreciate lawmakers’ decision to enact the interest rate controls framework, it is clear that it came at an obstinate time.”

For instance, credit to the private sector expanded by 2.00 percent in October 2017 after touching an all-time low of 1.35 percent in July 2017.

“That said, the focus point for policymakers should be in finding ways to stimulate economic growth through enhancing private sector expenditure,” adds Kimani.

Read: The Highs and Lows of the Kenyan Retail Sector in 2017

Looking Forward

Kenya’s economic growth will reach 5.5 percent in 2018 and rise further to 5.9 percent in 2019, according to the World Bank.

Lucy James, Associate Consultant at Control Risks Kenya with a more diversified economic base, such as manufacturing and agriculture, will keep sovereign risks at bay in 2018.

“But the outlook is not good. Kenya has a strong appetite for external borrowing and has remained politically intransigent about its downsides, even in the face of warnings by the IMF and rating agencies,” she notes.

In October, Moody’s Investors Service placed the B1 long-term issuer rating of the government of Kenya on review for downgrade due to persistent primary deficits, high borrowing costs continue to drive government indebtedness higher.

“Moody’s expects that Kenya’s government debt burden, which has risen to 56.4 percent of GDP in June 2017, up from 40.5 percent five years ago, will continue to rise due to persistently high primary deficits and borrowing costs.

Pressures on the government primary balance, which posted a deficit of 5.3 percent of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60 percent mark by June 2018,” it noted.

Consequently, Fitch Ratings has said the willingness and ability of the Kenyan authorities to address persistent fiscal and external deficits remain key components of their sovereign credit analysis as President Kenyatta begins his second term.

According to Fitch “Failure to implement fiscal consolidation and stabilise government debt/GDP, or a widening of the current account deficit that led to significant reserves drawdown, could be negative for the