Insecurity and devolution hurdles dampen Kenya's growth prospects

Security issues and teething problems facing devolution are likely to dampen Kenya’s growth prospects next year. However, the economy is expected to record a modest Gross Domestic Product (GDP) of 5.6 per cent, according to a Kenyan Macro-Economic 2015 Outlook report by Standard Chartered Bank- Global Research Division.

This rate of growth is below the 6.9 per cent forecast by the International Monetary Fund (IMF). “We expect robust real GDP growth in Kenya over the coming year, although security issues are likely to remain a threat to business and consumer confidence,” said Head of Africa Macro Global Research - Standard Chartered Bank, Razia Khan.

“We forecast 2015 growth of 5.6 per cent year on year versus the IMF’s more upbeat 6.9 per cent projection.”

While there is gloom over rising insecurity in parts of the county, the negative impact of his is that Kenya will be a significant beneficiary of lower oil prices in the near term, given the sizeable contribution of oil to its total imports.

Figures indicate that between October and December 2013, the international price of crude oil has fallen from $95 (Sh8,550) per barrel to the present $ 57.81 (Sh5,220) per barrel. Analysts expect Kenya’s inflation outlook to improve significantly next year, based on weaker oil, and lower electricity and food prices.

The cost of power, which has seen some multinationals exit Kenya is also expected to come down.

The connection of geothermal energy to the national grid will drive down the cost of electricity, help keep inflation in check and reduce reliance on imported oil. This is as the States plans to add 5000MW of capacity to its existing 1,664MW by 2017.

“Commodity import prices are not a key concern; crude oil prices have fallen about 25 per cent year to date. This eases potential concern of a worsening of the current account deficit from this perspective,” said a recent bulletin by Standard Investment Bank

Fiscal fallout

While Kenya’s medium-term outlook remains positive, the Standard Chartered Bank outlook report warns that growth is not evenly spread. Concerns over security and recent international travel warnings mean that tourism will continue to under perform.

This could exacerbate perceived economic marginalisation on the coast, fueling an already-tense situation. Kenya will also need to grapple with issues around fiscal devolution, following the adoption of a new constitution in 2010, and the establishment of 47 new county governments in 2013. “So far, the limited capacity of new county governments to spend has curbed the level of fiscal fallout. Nonetheless, this could change meaningfully over the coming years,” said Razia Khan.

Construction of a standard-gauge railway will  also boost regional integration and reduce transport costs.

While the High Court has temporarily halted the development of a new port at Lamu, the development, which is part of the $ 25.5 billion (Sh2.3 trillion) Lamu Port Southern Sudan-Ethiopia Transport Corridor project will spur growth in the medium term.