Gloomy year ahead as economists cut Kenya’s growth prospects
By Alphonce Shiundu | December 18th 2015
Various economists have cut Kenya’s economic growth prospects to below 5 per cent this year, a pointer to a gloomy New Year.
Yesterday, the Parliamentary Budget Office (PBO) cut Kenya’s growth targets in 2015 to 4.8 per cent following in the footsteps of Bretton Woods Institutions-the World Bank and the International Monetary Fund ( IMF ) that have also revised the country’s gross domestic product projections downwards.
Already, the slowing economy has seen more than a dozen companies report suppressed earnings and others issued profit warnings. Since the beginning of the year, a total of 11 listed companies have issued profit warnings, with shareholders watching in despair as billions of shillings get wiped out from the book values of several firms.
Now, the team of economists, tax experts and fiscal analysts which advises MPs on the economy, say it is impossible to achieve National Treasury’s target of 5.9 per cent, because of reduced government spending and low performance of the tourism sector, one of Kenya’s biggest foreign exchange earners.
PBO said there was a risk posed by the ongoing heavy rains pounding the country which will affect food production and destroy roads. These two things will push food prices up. There is also the threat of reduced private investment due to high interest rates.
The other trouble for the Government is that unless the taxman collects higher revenues, there will be a cash crunch at the beginning of the New Year, a situation which will see some civil servants miss their pay.
The Government is expected in the New Year’s Eve to clear Sh50 billion debt for six two-year bonds, which will mature then. The interest on those bonds is Sh554.3 million. “The total first quarter revenue for the period ending September of Sh277.2 billion cannot match a total expenditure and net lending worth Sh337.4 billion for the same period leading to a deficit of Sh60 billion. If the under-performance in revenue collection persists into the second quarter, then further shortfall in exchequer releases might be experienced into the 2nd quarter. This may be occasioned by the payment of six bonds which are set to mature in November and December respectively,” the Monthly Bulletin of the PBO noted.
The budget office also revealed that the Government was living way beyond its means, and warned that the increased borrowing is likely to push up interest rates especially at a time when the rates in the US have risen. They said the hope of the government that the interest rates will come down will be extinguished because investors are likely to rush to the US to enjoy the rise in interest rates in a fairly stable fiscal market.
“...the anticipated decline in the interest rates might be negated by the... rise in the USA Federal Reserve Rate ... since it might occasion foreign capital flight because investors are likely to respond positively,” said the experts in the House alluding to yesterday’s rise in the interest rates by 0.25 per cent.
“The external debt increased by Sh20 billion compared to the previous month due to the depreciation of the Kenya shilling against all major currencies but in particular the dollar. This is a worrisome trend since the US dollar currency constitutes more than 59 per cent of all foreign debt,” said the Budget Office in its report.
The revision means that the national government is unlikely to roll out major development programmes that the National Treasury Cabinet Secretary Henry Rotich (pictured) promised the country when he read the Budget in June. The National Treasury had already cut the forecast to 5.9 per cent, but the World Bank in its latest report said the country can only manage to grow at 5.4 per cent.
Rotich had banked the growth on low oil prices, increased investment in infrastructure and consumer confidence as a result of reforms. It is not just the Budget Office and the World Bank.
Also, the International Monetary Fund (IMF) told Reuters that it had also cut down the growth target for Kenya to 5.6 per cent. The fund, which has a mission visiting the East African country, previously estimated gross domestic product would grow by 6.5 per cent. But even that of 5.9 per cent is a tad too ambitious according to the House experts.
“For the Treasury growth target for 2015 to be realised, the economy in the second half of the year could have been by least 6.6 percent,” said the PBO. The stability of the shilling is also in trouble given the anticipated capital flight to the US and the fact that most debt is in dollars. Even though there is a boom in tourism as a result of the festive season, an anticipated rise in cost of goods will push up inflation and make life difficult.
“... given the current structure of the economy, where the country is a net importer with a huge fiscal deficit, the current stability of the exchange rate is a temporary reprieve and the shilling remains vulnerable to factors affecting the supply of dollars in the market. Moreover, as the second quarter comes to an end there may be an increase in consumption in the economy due to the festive season and high absorption rate among government institutions. This may result to further weakening of the Kenyan Shilling against the dollar,” said the PBO.
It warned the State about going on with the external borrowing.
Chimphondah: The man putting Shelter Afrique’s house in order
- Gideon and ICT committee laud Konza City's project progress
- Court bars CBK's migration of banks to foreign payment firm
- Forex reserves drop by Sh27b after debt repayment to China
- KQ gets nod to evict rival airline 748 from JKIA property
- Retracing the rise of Nairobi bourse from colonial-era free fall