The political stalemate over next week’s repeat presidential election could dampen Kenya’s economic growth. This may threaten trade with the East African Community member states.
Economists are warning that the impasse together with Kenya’s law that caps interest rates and effects of drought experienced over the past year will depress regional economic growth for the short to medium term.
“The prolonged political impasse, exacerbated by the continuation of the government’s interest rate cap on commercial bank lending rates, which has stifled growth in private credit,” stated a report from the economic think tank Focus Economics.
“This will continue to weigh heavily on the economy and threatens to hinder regional partners through negative spillover effects, including reduced trade.”
This is bad news for the country’s manufacturing sector and re-exporters who rely on the East African Community for more than 20 per cent of exports.
Data from the Kenya National Bureau of Statistics (KNBS) indicates that in the last calendar year, Kenya exported Sh121 billion worth of goods and services to its EAC neighbours.
This crucial export revenue is now in jeopardy as the political uncertainty slows down output in the private sector and among manufacturers. Many investors are holding back.
According to the Purchasing Managers’ Index (PMI), published by IHS Markit and Stanbic Bank early this month, Kenya’s private sector recorded the fifth consecutive month of falling output last month on account of poll jitters.
“The rate of contraction was the fastest recorded over nearly four years of data collection and was linked to limited money circulation and a lower customer turnout,” stated the PMI in part.
Kenya’s PMI posted a four-year record low of 40.9 last month, down from 42 in August and 53 in January this year. Readings above 50 signal an improvement in business conditions while those below 50 show a deterioration.
“Output contracted for the fifth consecutive month, declining at the sharpest rate in nearly four years, due to plummeting demand and constrained money circulation. Consequently, new orders fell at the sharpest rate in the survey’s history,” states the report in part.
Kenya has for years been the leading economy in the trading bloc but has since seen its clout fading as neighbours Ethiopia and Rwanda attract more foreign direct investment. Also, the country’s manufacturing sector is fighting an onslaught from Chinese and Indian imports.
Data from KNBS indicates that Kenya’s share of trade with East Africa, relative to Africa and the rest of the world, has shrunk from 10 per cent in 2011 to seven per cent in 2014.
If Kenya’s output continues to lag behind, the country might find its markets in the EAC usurped by Chinese and Indian competitors and lose more of the remaining dwindling market share.
Economists, however, expect some relief for the country’s agricultural sector with heavy rains anticipated in most parts of the country over the next three months.
“Growth is expected to pick up, however, as the agriculture sector recovers from a long drought and our panellists forecast GDP growth of 5.4 per cent in 2018, which is up 0.2 percentage points from last month’s forecast, and sees it rising to 5.9 per cent in 2019,” reads the report from Focus Economics in part.