What to Expect in 2018 For The Kenyan Economy

By David Indeje / December 28, 2017 | 12:00 am



Kenya's Current Account Deficit Widens in Third Quarter by 28.9 per cent

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 rating.”

Dominic Atika and Sitati Wasilwa both economists further note  “The sustainability of Kenya’s national debt is now highly doubtful.” As documented in the 2017 Budget Review and Outlook Paper published by The National Treasury, the public debt to GDP ratio will be in the region of 59 percent by the end of the 2017/2018 financial year, contrary to the 51.8 percent figure projected in the 2017/2018 Budget Policy Statement

Together with other market analysts continue to reiterate the need for the interest rate cap to be repealed. “Failure to do so will see banks continuing to react to the law and extending as much credit as possible only to the government and other well-established entities,” they note.

“This can be witnessed through increased allocation by listed banks towards government securities, with allocation growing by 15.2 percent to Kshs 776.3 bn from Kshs 684.5 bn in Q3’2016 depriving the private sector of credit in the process,” Cytonn Investments in their Kenya Listed Banks Q3’2017 Report.

“The IFRS 9 commencement in January 2018 is expected to drive commercial banks to tighten credit standards even further with the likely impact of aggravating the current fragile dynamics in private sector credit growth,” notes Stephanie.

“With a common problem on the table amid regulatory changes that threaten to worsen the problem, it may now be a matter of when, and not if, the review of the interest rate controls framework will take place,” she adds.

Read: IFRS 9 will Introduce a new normal for the banking sector – Jeremy Awori

Govt Reduces Electricity Tariffs for Manufactures by 50pc

Manufacturing

The manufacturing sector took the hit in H1 2017 with its output expanding by only 2.6 percent.

“Given the importance of the manufacturing sector for job creation, this weak performance is at a level too low to make a dent to unemployment or absorb the yearly increase in the labor market,” the World Bank noted.

Ms. Phyliss Wakiaga, KAM CEO acknowledged the same “2017 has been a challenging year for the manufacturing sector, the year began with a drought, we also had inflation hit up all-time high at 11.70 percent in May and because of that the manufacturing sector performance slowed slowdown. The second quarter of this year the sector only grew by 2.9 percent compared to 5.3 percent the previous year.”

Flora Mutahi, chairperson of the Kenya Association of Manufacturers (KAM) confidently says “2018 is a year of new possibilities.”

Mutahi says from an ‘eventuful 2017’ “This is the decade for the economy. An economic period to grow.”

President Uhuru Kenyatta has prioritized affordable housing, expanding the manufacturing sector and creating jobs as his key pillars for his second and final term by raising the sector’s share of Gross Domestic Product to 15 percent from the current 9 percent with the hope of spurring job creation for the youth.

 

Wakiaga says “We are pleased that the president picked some of KAM’s ten policy priorities for transforming manufacturing and creating jobs in Kenya.”

“We are keen in 2018 to implement some of the policy reforms and structural change that can lead to the growth of agro-processing at the manufacturing sector because we believe that is the future for growth,” she says.

She further noted that exports will be a key agenda for them.

“Our GDP contribution of our exports is only 15 percent to GDP while our imports at 40 percent to the GDP. The is that big gap that we need to re-seal. One way of doing that is extra value addition and diversification and looking for new markets.”

Further, local procurement is also a priority for the association “Because we believe we are able to uptake what is made within our local market.”

The association will be doing a lot in skills development to get the right skills and productivity levels the sector will be competitive.

KAM’s 10-point plan offers policies for inclusive, sustainable growth in Kenya and improving livelihoods.

They both spoke at a KAM appreciation event themed ‘Regional integration for Africa” in December.

 

World Bank points out that, the competitiveness of Kenya’s manufactured exports in the regional market is being undermined by the influx of cheaper goods (mostly from Asia), intra-regional trade frictions, several non-tariff barriers and the upgrading of the manufacturing capabilities in neighboring countries (Uganda, Tanzania), thereby reducing their reliance on manufactured exports from Kenya.





About David Indeje

David Indeje is a writer and editor, with interests on how technology is changing journalism, government, Health, and Gender Development stories are his passion. Follow on Twitter @David_IndejeDavid can be reached on: (020) 528 0222 / Email: info@sokodirectory.com

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