Rebuilding Macroeconomic Policy Buffers is Key in Building Economic Resilience – World Bank

The Kenya Economic Update 2019 released by the World Bank has revealed that the Kenyan Economy rebounded in 2018 and projected that growth would remain stable over the medium term.

The report has revealed that the demand side in the economy has shown significant slack as a consequence of reduced private sector investment, emerging drought challenges and less favorable external growth prospects.

For this reason, the World Bank has stated that additional macro and structural policy reforms are needed to strengthen aggregate demand and support the government’s inclusive growth agenda.

According to the World Bank’s report, several macro and structural reforms, if pursued, could help rebuild resilience, create fiscal space for implementation of the Big 4 agenda, and speed-up the pace of poverty reduction in Kenya.

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“Several macroeconomic policy reforms, if pursued, could help rebuild resilience and speed-up the pace of poverty reduction,” said Peter Chacha, World Bank Senior Economist and Lead Author of the KEU. “These include enhancing tax revenue mobilization to support government spending, reviving the potency of monetary policy, and recovery in growth of credit to the private sector”.

The Kenya Economic Update 2019 suggests two key approaches; one, rebuilding macroeconomic policy buffers through practical fiscal policy and reviving the effectiveness of monetary policy and, two, monitoring implementation progress in structural and institutional reforms for the inclusive growth agenda.

The 19th Kenya Economic Update (KEU), Unbundling the Slack in Private Investment, attributes the slack on the demand side of the economy to two factors: Insufficient credit growth to the private sector (which stands at 3.4 percent in February 2019), and inherent room for improvement in fiscal management.

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On private sector credit, the report recommends fast-tracking solutions to factors that led to the imposition of the interest rate cap and building consensus for its eventual reform.

On the latter, ensuring prompt payments to firms that trade with the government could restore liquidity and stimulate private sector activities. Other crucial reforms outlined in the report are improved revenue mobilization and accelerated structural reforms that crowd in private sector participation in the Big 4 agenda.

Macro policies could include enhancing revenue mobilization to support planned fiscal consolidation, reviving the effectiveness of monetary policy and recovery in growth of credit to the private sector, and improving debt management. The following areas, while not exhaustive, require special focus from policymakers, notes the World Bank.