Kenya’s economy faces headwinds as World Bank cuts growth forecast

World Bank senior economist John Randa delivers a speech during the launch of Kenya economic update edition at a Nairobi Hotel. PHOTO DAVID NJAAGA/STANDARD

NAIROBI: The World Bank has issued four warning shots to Kenya’s economic managers that point to a struggling economy.

In a strongly-worded report titled ‘Storm Clouds Gathering’, the bank warns against the country’s current unsustainable infrastructural spending, which it says presents potential risk to growth.

The Bretton Woods institution also decries a volatile foreign exchange and monetary policy, lack of proper and adequate legal and constitutional mechanism for counties’ to manage finances and the lack of public participation, as key hurdles stifling growth

It’s against these worries that the World bank revised down its growth forecast. It now projects Kenya’s economy to grow by 5.4 per cent in 2015 and 5.7 per cent in 2016, down from the bank’s earlier projection of six per cent and 6.6 per cent.

The bank lists volatility of the shilling and high interest rates as key hurdle. The bank also flagged Kenya’s heavy spending as “unsustainable” and a risk to the country’s short to medium terms growth ambitions owing to the high fiscal deficit.

“While heavy spending on infrastructure development will boost production and overall GDP growth, the current expansionary fiscal path exposes the country to macroeconomic shocks,” said Mr John Randa, World Bank senior economist.

“Kenya’s current account deficit increased from less than one per cent of GDP in 2007 to 9.8 per cent in 2015, while the fiscal deficit has increased from 1.8 per cent to 6.3 per cent of GDP over the same period of time,” the report read in part.

Kenya’s National Treasury Cabinet Secretary Henry Rotich was however quick to defend the Government’s infrastructure spending and borrowing efforts and termed the current worries on the economy as temporary setbacks.

Speaking in Parliament where he had been summoned to explain the cause of the Government’s cash crunch, Rotich stated that Kenya’s mega-projects have been fully financed from external debt sources and does not see the prevailing high interest charges would have a bearing on these project.

“The current challenges we face are temporary and this comes because of our response to the exchange rate depreciation, which is not a unique to Kenya but a global phenomenon,” explained Rotich.

To maintain economic growth, the bank recommends policy makers to focus on improving Kenya’s competitiveness and increasing the production of traded goods and services to enhance foreign exchange earnings. The bank also notes the urgency of consolidating Kenya’s fiscal position in the short to medium term, especially since the fiscal balance has deteriorated from 1.8 per cent in 2007 to 8.3 per cent of GDP in 2015.

According to the bank, Kenya’s currency shocks have further eroded the country’s projected benefits from falling crude oil prices with the country’s current account deficit remaining high.

Earlier this year, World Bank forecast a 30 per cent drop in the price of oil, a scenario the bank hoped would help increase Kenya’s growth rate by an extra 1.2 percentage points in 2015.

“The shilling has depreciated by more than 20 per cent and since we import oil in shillings, this has not allowed the country benefit from the favourable prices of petroleum products,” explained Randa, adding that the bureaucratic hurdles in the pricing mechanism do not allow local petroleum prices to go down.

ACCOUNTABILITY

The World Bank further raised concern over Kenyans’ participation in the budget making and implementation process particularly in the counties and called on the citizens to demand more accountability from their elected county leaders.

“The high cost of participation, lack of administrative capacity and trained staff to implement participatory process continue to hinder effective citizen engagement,” read in part the report.

“While most counties have put in place communication systems, most county budgets are still not readily available despite requirements by the public finance management act,” states the report.  The World Bank was however optimistic that Kenya’s growth projections remain strong compared to her peers in Sub-Sahara.

“Kenya has the potential to become one of the best performing economies in Sub Sahara Africa and also among middle-income countries,” says Diarietou Gaye, the bank’s Country Director for Kenya. “Managing the challenges emerging from the current global economic environment will enable the Government to deliver on its promises.”

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