Sluggish Kenyan economy hit by multiple negative factors

Economists and credit rating agencies paint a grim picture of the economy this year. TEA GRAPHIC 

By JAMES ANYANZWA

In Summary

• With inflation in double digits at 11.48 per cent in April, Kenyans are facing a record high cost of living in the region.
• On Monday, the central bank's MPC retained the benchmark rate at 10 per cent, saying the current policy stance had reduced the threat of money-driven inflation.
• Analysts at AIB Capital said Kenya’s economy will slow down in 2017 due to the prevailing drought situation and reduced credit to the private sector.

Kenya’s Monetary Policy Committee (MPC) met on May 29 to decide on an appropriate policy rate to address the ever increasing cost of living and cost of doing business as seen in rising inflation, declining private sector credit, surging public debt, shrinking revenue collection, increased campaign spending by politicians, falling corporate earnings and massive lay-offs.

Economists and credit rating agencies have used some of these economic indicators to paint a grim picture of the economy this year.

With inflation in double digits at 11.48 per cent in April, and one kilogramme of sugar retailing at more than Ksh200 ($2), Kenyans are facing a record high cost of living in the region.

The gross public debt hit Ksh4.04 trillion ($40.4 billion) in March this year, compared with Ksh3.26 trillion ($32.6 billion) in the same period last year, according to data from the National Treasury.

On Monday, the central bank's MPC retained the benchmark rate at 10 per cent, saying the current policy stance had reduced the threat of money-driven inflation.

Dangerous ground

Multilateral lenders say the country is treading on dangerous ground and that its economy remains exposed to risks that could overturn its growth momentum.

“Kenya is currently facing headwinds that are likely to dampen GDP growth in 2017,” said Diarietou Gaye, the World Bank country director for Kenya. “The forthcoming elections could see a slowdown in growth momentum as investors defer investment decisions until after the elections and election-related expenditure delays fiscal consolidation or cause a cut-back in infrastructure spending.”

In April, the bank revised its growth forecast for Kenya downwards to 5.5 per cent, 0.5 percentage points lower than earlier predicted. The economy grew by 5.8 per cent in 2016.

Consultancy firm Deloitte, in its Economic Outlook Report for Kenya (2017), says Kenya’s GDP is likely to grow at 5.5 per cent, down from an earlier projection of 5.8 per cent, due to a combination of domestic and external constraints.

Brexit and Trump

Elections could inhibit investments while externally the UK’s decision to exit the European Union and the US’s new administration could translate into reduced foreign investments in emerging economies such as Kenya.

By the end of March 2017, Kenya’s total revenues including appropriation-in-aid amounted to Ksh984.6 billion ($9.84 billion) against a target of Ksh1.05 trillion ($10.5 billion), falling below the target by Ksh65.9 billion ($659 million).

Inflation has risen from a low of 3.67 per cent in January 2013 to 11.48 in April 2017 while the value of the shilling has fallen from a high of  Ksh86.44 against the dollar in March 2014 to Ksh103 in May 2017.

Food prices

According to Cytonn Investments Ltd, Kenya’s inflation rate, fuelled by the high cost of food and fuel, remains a big concern to the economy.

“There are a couple of challenges facing the economy, among them being the ongoing drought, political risks as we head into the election and increasing oil prices,” said Cytonn.

The rise in food and energy prices has driven inflation to a 57-months high — 11.48 per cent in April 2017 — and the country is now facing a marked slowdown in credit growth to the private sector, currently standing at around 4 per cent of total credit, a proportion well below the 10-year average of 19 per cent.

This is weighing heavily on private investment and household consumption.

Analysts at AIB Capital said Kenya’s economy will slow down in 2017 due to the prevailing drought situation and reduced credit to the private sector.

“We project a slowdown in 2017 growth due to the low rains and the expected drought in 2017. This will slow down growth in the agricultural sector while credit growth has remained low and we expect that to continue in 2017. The upcoming elections will further slowdown investments and general business,” said AIB in its Economic Update report.