Manufacturing slowdown, debt burden to cut Kenya growth

Financial Standard
By Graham Kajilwa | Feb 27, 2024
Bian Obagiwa (left) and Edward Gitonga roll-forming iron sheets at Mabati Yetu Factory. [Silas Otieno, Standard]

Kenya’s shrinking manufacturing sector and growing debt burden have been singled out as the limiting factors to the growth of Kenya’s economy in the upcoming 2024/25 financial year by two new separate reports.

Agriculture, which is the backbone of Kenya’s industries, is not expected to be as vibrant as was the case last year. 

According to the projections from ICEA Lion Asset Management, Kenya’s Gross Domestic Product (GDP) will expand by 5.5 per cent this year. 

This is according to projections by the African Development Bank Group, which show the country’s GDP will grow by 5.4 per cent this year and 5.5 per cent in 2025. 

The African Development Bank (AfDB)

in a new report titled Africa’s Macroeconomic Performance and Outlook – January 2024 has highlighted the negative impact Kenya’s growing debt burden on economic growth. 

The AfDB report pegs this argument on the Purchasing Managers Index (PMI), which is used to determine how the economy is expanding. It tracks supply and demand. 

“The average PMI values for Egypt, Kenya, and South Africa through November 2023 were even below the benchmark of 50, indicating deeper weakening of industrial activity,” reads the report. 

It adds that for the first 11 months of 2023, relative to the corresponding period in 2022, the PMI value declined in three of Africa’s top seven economies, including Kenya. 

The average PMI value was 6.9 points lower for Nigeria, 3.1 points for South Africa, and two points for Kenya compared with the same period in the previous year, according to the report.

AfDB notes that the continued underwhelming PMI performance in Egypt, Kenya, and South Africa reflects the combined effects of domestic and external factors. 

“On the domestic front, continued structural weaknesses remain a major drag on economic activity in most countries. On the external front, the growth momentum in key export markets remains weak, slowing export demand for Africa’s products,” the report says. 

These structural weaknesses, it says, are reinforced by elevated inflationary pressures and strong pass-through effects of exchange rate depreciation, particularly in countries with managed or floating exchange rates. 

“The elevated inflationary pressures in many African countries, and particularly in Egypt, Kenya, and South Africa, led to sharper increases in domestic prices, leading to deteriorating business conditions,” the report says. 

AfDB indicates that the estimated higher growth in real GDP in 2023 for Kenya of 5.4 per cent compared to 4.8 in 2022, was catapulted by the strong rebound in agriculture. 

ICEA Lion Asset Management Kenya Economic Outlook 2024/25, however, casts doubt on a similar rebound in 2024.

“The rebound in the agriculture sector in 2023 is unlikely to be sustained and we expect more moderate growth this year if there are adequate rains,” says the report. 

The financial services firm projects that in 2024, there will be a slight reduction in GDP growth to 5.5 per cent driven by high base effects in agriculture. 

“The manufacturing sector is expected to continue to record low growth due to higher taxation and pressure on disposable income,” it adds. 

AfDB further notes that business conditions in the country could be impacted by the rising debt burden. 

“Debt service payments have risen substantially in tandem with the growing share of debt owed to private creditors. This is a cause for concern because current debt restructuring negotiations are failing to reach an agreement with private creditors,” the report says. 

It says that in 2024, African countries are expected to spend around $74 billion ( Sh10.4 trillion) on debt service, up from $17 billion (Sh2.4 trillion) in 2010. 

AfDB notes that some $40 billion (Sh5.6 trillion), or 54 per cent of total debt service, is owed to private creditors. 

“Refinancing risks could further increase, especially for countries with large bullet redemptions, including Angola $6.4 billion (Sh840 billion in 2024), Kenya $5 billion (Sh700 billion in 2024), Côte d’Ivoire $2.6 billion (Sh280 billion in 2024), and Nigeria $2.5 billion (Sh280 billion in 2024),” the report states. 

AfDB warns that in 2025, private creditors will account for more than 50 per cent of total debt service payments falling due.  

“The implication of the dominant share of private creditors for future debt service is that debt restructuring mechanisms under the G20 Common Framework for Debt Treatment should strive to bring private creditors on board. Thus far, only Chad has reached agreement with its main creditors, including the largest private creditors such as Glencore,” says the continental lender.

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