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Kenya’s economic growth in question as World Bank, IMF downgrade 2017 forecast

FINANCIAL STANDARD
By Dominic Omondi | December 12th 2017
The Standard Gauge Railway line under construction (GIDEON MAUNDU/STANDARD].

NAIROBI, KENYA: Kenya’s growth prospects have again been called into question, capping a difficult year for the country after a bruising electioneering period.

The World Bank last week released its quarterly economic report on Kenya that almost mirrored that of the International Monetary Fund (IMF) - another Bretton Wood - in giving a downgraded economic forecast for the year.

Both institutions revised the country’s growth projections for 2017 downwards, with the World Bank putting the figure at 4.9 per cent, a climb-down from an earlier projection of 5.5 per cent, while the IMF in its October projection predicted the country’s economy to expand by five per cent, down from a forecast of 5.3 per cent in April.

With a crippling drought that swept through the Horn of Africa, depressing harvests and driving up prices of food, reduced credit to the private sector and a prolonged electioneering period that left investors jittery, even the National Treasury has had to climb down from its earlier lofty projection.

Treasury now expects Gross Domestic Products (GDP), which is the sum of finished goods and services produced in the economy in a given year, to go up by 5.1 per cent, down from an earlier estimate of 5.9 per cent.  

Despite the downgrade, the World Bank, IMF and Treasury agree that the economy will rebound in 2018, with the onset of rains and improved political stability after the upheavals that characterised the election year.

They also expect banks to start extending credit to the private sector to reawaken a sluggish economy that registered the lowest economic activity in 2017.

However, the elephant in the room, according to the World Bank and IMF, is how the country will sustain its growth momentum without crossing the red line as far as its debt stock is concerned.

“Nonetheless, there remain significant downside risks that could scuttle the projected rebound in economic activity,” said the World Bank in its 16th Kenya Economic Update.   

Both reports by World Bank and IMF paint a bleak fiscal environment where Kenya is running out of wiggle room to amass more debt to finance its mega infrastructural projects.   

The Bretton Wood institutions’ prescription for this fiscal malady is familiar - less spending, more taxes.

In other words, both institutions are vouching for the dreaded fiscal consolidation, involving a raft of policies undertaken by Governments to reduce their fiscal deficits and accumulation of debt stock.

According to the IMF, the country will soon fork out Sh25 for every Sh100 that it collects in taxes to service debts, leaving little to undertake development projects.

Economist Kwame Owino, who is also the chief executive of the Institute of Economic Affairs, said this year alone, a good chunk of the country’s total revenue has been gobbled up by creditors, salaries and wages.

“Debt tenure in Kenya is shrinking. This year alone,  40 per cent of the country’s revenue has gone to servicing debts and first obligations,” he said during a panel of discussion organised by the World Bank where it also launched the report in Nairobi.

Positive impact

The World Bank expressed concern that of all the money that the country collected, very little went into development, a situation that has compelled the country to binge-borrow to undertake some development projects.

“Delays to fiscal consolidation risks jeopardising Kenya’s hard-earned macroeconomic stability with adverse implications on medium growth and the inclusivity of that growth,” said the World Bank.  

Some of the policies proposed by the lender of last resort might prove politically difficult, even suicidal for some political players to implement.

For example, the IMF said, African countries that are running out of fiscal space with large budget deficits have called for the removal of subsidies that have had no visible positive impact.

In Kenya, the fertiliser subsidy comes to mind. Although the programme has been around for the last five years, maize production has not improved. If anything, it has been going down, with the country forced to cross the border to source for more of the cereal.

The World Bank wants the Government to broaden its tax base, by getting rid of what it terms unnecessary tax exemptions.

“One of the areas of the greatest VAT revenue losses stems from VAT on domestic-exempt supplies,” said the lender, noting that there is an additional 1.4 per cent for VAT exemption provided on these supplies.

The World Bank has also identified zero-rated supplies and VAT on exempted imports as other areas in need of streamlining.    

The two Bretton Woods institutions agreed that, though Kenya was yet to slide into debt distress, its public debt stock was fast hurtling towards unsustainable levels.

The country’s public debt stock surged to a whopping Sh4.5 trillion as of September this year, up from Sh1.8 trillion in March 2013.

Political goodwill

The IMF in its Regional Economic Outlook for sub-Saharan Africa released last month said Kenya’s ratio of debt to real GDP had increased from 44 per cent in 2013 to 52.6 per cent last year, an indicator that the country is not producing fast enough to service its debts.

Both global lenders want the Government to better assess the large projects it invests in so as not to pump money into white-elephant projects.  

Economist Owino, meanwhile, noted that the rate at which the country’s debt obligation is piling is worrying.

“The numbers tell you that our growth rates relative to our debt rates are not very good and that is why those obligations will catch up with us very quickly,” he said.

“The amount of wastage that takes place in the public sector tells you that we can consolidate by cutting the kind of things that we spend on.” 

Mr Owino said it will take political goodwill to bring about fiscal consolidation.

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