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Economy's growth stunted due to high interest rates

By Alphone Shiundu | November 6th 2015

Kenya's economy will miss the National Treasury's growth target of 6.5 per cent in the current financial year because of the cash crunch that is biting the country and the high interest rates that have made credit unaffordable.

The Parliamentary Budget Office in its latest report on the health of the economy said the low and slow release of the money to counties and other State organs had affected development expenditure, and therefore unless more money is pumped into the projects in a hurry to make sure the infrastructure projects are completed on schedule, the economy will not meet the envisaged targets.

"It is therefore apparent that unless urgent measures are taken, the slow pace of budget execution may adversely affect the economy," said the Budget Office in its report made public yesterday.

The PBO threw a wet blanket on the country's economic prospects because the latest data from the Kenya National Bureau of Statistics showed that between January next year and June when the financial year closes, the economy has to grow consistently at 7.8 per cent every month.

"This is an unlikely to occur, hence the urgent need to re-adjust the forecast and as necessary institute monetary and fiscal measures that will mitigate further slowdown of the economy," the House mandarins said.

KNBS data shows that the economy grew by 5.5 percent in the second quarter of 2015, an increase from the 4.9 per cent growth experienced in the first quarter of 2015.

The cost of repayment for external debt is set to rise by at Sh3.88 billion on account of a weaker shilling thus depleting the country's revenue even further, the budget office said.

"Additionally, if not checked, the effects of a full blown El-Niño episode are likely to be felt in the agriculture and infrastructure sectors with adverse effects on the economy," said the MPs.

The team of fiscal analysts, tax experts and economists said the best way for the National Treasury's Cabinet Secretary Henry Rotich to deal with the fiscal turmoil in the country was to cut the "the non-core expenditure" and direct the bulk of resources toward development projects "that yield high returns".

"In addition, there is urgent need to comprehensively undertake a cost-benefit analysis of all development projects with the view of prioritising those that will yield high returns," the Budget Office said in its report.

The caution in the report is that the Government should pray that the El Nino rains currently pounding the country does not "become catastrophic" because that will disorganise the government spending as more money will be directed towards mitigating the El Nino aftermath.

The PBO said the focus of the CBK should be on stabilising the shilling. But the bad news is that the economists predict the shilling will not fall below the Sh100 mark to the US dollar.

"The CBK has tried to stabilise the shilling by raising both the CBR rate and KBRR rate besides selling of forex reserves in the market. This has helped ease the rate of depreciation of the shilling and stabilised the exchange rate to the dollar at about 103," the PBO noted.

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