Political stability, Favourable Weather to Drive Kenya’s Economic Recovery

Kenya’s economic recovery will entirely hinge on political stability and improved weather conditions in 2018, although the country was likely to be dominated by debt sustainability, according to a report unveiled on Tuesday by Barclays Africa Group Limited (BAGL).

“The quarters ahead will look firmer than the ones we have left behind,” said Chief Economist Jeff Gable.

This was as regards to the dramatic recovery of Kenya’s private sector in December 2017 from the Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) that saw manufacturing and services rise to 53.0, from 42.8 in November.

The sector declined by 34.4 in October its lowest level.

Gable however, cautioned on the country’s debt sustainability. “The debt burden has increased sharply over the last 5 years.  More than 3 per cent of the tax we pay went in to paying interest rates of previous debt as opposed to growth of the country,” he said.

Gable noted that Kenya’s credit rating since 2010 has been stable. However, Moody’s Rating Agency in October  placed Kenya’s B1 long-term issuer rating on review for downgrade.

This is because of: persistent large primary deficits and high borrowing costs, government liquidity pressure risk due to increasingly large financing needs, uncertainty over the direction of fiscal and economic policy, in part due to evolving political dynamics.

However, the major cause here is around public finance “Fiscal deficit, raising taxes and spend on current expenditure, the gap is very large,” said Gable. “What that means, the country’s debt keeps raising and the mix between that is that each time the shilling moves, the impact is felt. This is not unique to Kenya, debt is raising significantly across Sub-Saharan Africa,” he added.

“Is our debt sustainable? More than one in every three shillings collected in tax one shilling goes to service interest on debt,” noted Gable in 2017 estimates. “As a country, everyone needs to reflect at what level that situation becomes uncomfortable and it becoming a debt challenge.”

Stephanie Kimani, Research Economist says public debt should be structured in such a way that it does not amplify market shocks.

“The coordinated efforts between the government and Central bank, its fiscal agent, is important for the smooth transmission of monetary policy and stability of the financial system. This relates to the management of public debt by way of timing and size of the debt as well as scheduled repayments in a way that does not overwhelm the national budget,” says Stephanie.

She too observes that the Kenyan government’s elevated debt appetite and challenges in debt absorption, in the controlled interest rate environment, has prompted the issuance of short-medium term debt that has sparked criticism among stakeholders given the concentrated debt maturity structure.

He also noted that credit matters a lot in every country, but with the interest caps in place, according to IMF report suggest that the impact tend to result into: reduced access to finance for small borrowers, increase in (costly) informal lending, reduced transparency, reduced competition and innovation in the financial sector, adverse impact on financial inclusion and  reduced monetary policy effectiveness.