News Column

Growth to Remain Flat in Two Years - World Bank

June 27, 2014

Constant Munda

KENYA's first quarter economic growth could slow by more than half to 2.7 per cent from 5.7 in a similar period last year, according to the World Bank.

Though the official figures are yet to be released by the Kenya National Bureau of Statistics, the bank attributed the decline was blamed on inadequate rainfall that led to increased food prices and a rise in electricity costs due to slowed hydro power generation.

Escalating insecurity further dragged growth, the bank added pointing at dipping tourist arrivals from traditional source markets.

In its bi-annual Kenya Economic Update report titled 'Take-off Delayed?', the global lender further cites government's expansionary fiscal policy and tighter global credit conditions arising from reduction in liquidity injection by the US Federal Reserve-tapering - as main drag feet to Kenya's growth.

"We have taken into account deteriorating security situation and tourism(earnings) will be less than what we thought," lead author of the report John Randa said of the slowed growth estimate. "We didn't have enough rainfall this year which has led to food inflation and increase in cost of electricity."

The bank warns that growth could remain flat at 4.7 per cent for the next two years to 2015- a slight 0.5 per cent downgrade on earlier projection - unless stronger than expected investments are recorded in the second half of the year.

That coupled if with infrastructure-led recovery, increased foreign direct investments, sustained macroeconomic stability and milder shocks in agricultural production could push growth over next two years to a projected five per cent, the bank says.

If the opposite happens, growth could drop to 4.4 per cent in 2014 and 2015 further dragged by the external shock of tapering, according to the economic update report.

The tighter global conditions could cause Kenya's short term capital flows to dry up, create volatility in exchange rate and lead to inflationary pressures that would force a "rapid adjustment" by the Central Bank'sMonetary Policy Committee.

"The main channels of transmission include pressure on interest rates and exchange rates which could strain some banks and other financial institutions, reduce domestic demand and reignite inflation increasing borrowing costs and creating refinancing risks for governments," the report states. "Reduced liquidity and repricing of risk increase both the central bank and commercial lending rates."

The successful Sh175 billion Eurobond and another one planned next fiscal year would however ease some pressure on public domestic borrowing, availing more credit to private sector.

"Both private and public sector corporations now have the ability to tap into the international capital market to fund their business expansions at reasonable costs" President Uhuru said on Wednesday following the oversubscribed debut issue.

Uhuru maintained that key macroeconomic fundamentals of inflation, interest rates and the exchange rate remain "largely stable".

"Growth remains satisfactory and the outlook is bright," the president reassured.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters