Kenya’s economy is expected to grow between 5 and 5.6 percent in 2017, supported by increased government spending and resilient performance in transport, trade and tourism.
According to a report released by Britam Asset Managers, the government needs to grow its expenditure by the targeted 16.4 percent this fiscal year, and achieve the expected 17.6 percent increase in revenues in order to meet the projected economic growth. The government must therefore spend to sustain GDP growth above 5.0% in 2017, as private sector credit growth remains subdued.
However, the report points out that economic activity is expected to slow down, 2017 being an election year. Historically, Kenya’s elections years have been associated with low GDP growth, as the polls delay private sector investments due to political uncertainty.
According to the report, other factors likely to affect economic growth include high inflation, drought, and increased global oil prices.
Heading into 2017, food inflation is expected to be the main driver of overall inflation with cost of transport and household items also going up. Matatu fares, petrol prices, Kerosene and electricity respectively will affect inflation significantly
Speaking during the release of the report themed “Sustaining Growth in a Resilient Economy” at a Nairobi Hotel, Britam Asset Managers CEO Kenneth Kaniu said that unfavourable climatic conditions and drought are expected to affect agricultural productivity, increase electricity costs and reduce the availability of water.
“We expect the above factors to culminate in upward pressure on overall inflation in 2017. Inflation will therefore trend towards the upper range of CBK’s target of 7.5% in 2017,” said Kaniu.
Effect of Interest Caps
The report observes sluggish growth in the private sector due to the introduction of the law capping bank interest rates in 2016, with the sector posting a slowed growth of 4% in Q4 in 2016 from 18% in Q4 2015.
The report recommends that the government should keep directing most of its foreign debt towards development expenditure in order to meet future interest payments, noting that the country’s external debt has steadily increased from 18.9% as a percentage of GDP in 2010 to 25.6% as at June 2016.
The report notes that Kenya has historically underperformed on development expenditure relative to recurrent expenditure, with the 2017 fiscal year targeted development expenditure of 8.3% of GDP being lower than regional peers. The government will therefore need to meet its development expenditure targets during the current fiscal year in order to sustain economic growth.
The resilience of the shilling
The report also notes that despite an increase in the cost of oil and the declining performance of Nairobi Securities Exchange, Kenya’s currency remained one of the most resilient in Sub-Saharan Africa in the last two decades, with an annualized depreciation rate of around 4.0%. In effect, the shilling has outperformed even currencies pegged to the US Dollar such as the Nigerian Naira and Egyptian Pound.
Globally, the report says that growth is expected to pick up slightly in 2017 as commodity exporters benefit from stable prices. Fiscal stimulus in developed countries is also expected to support growth.
Following a decision by OPEC member countries to cut oil production by 1.8million barrels a day, crude oil prices are forecast to increase in 2017. However, upward pressure on crude oil prices will be counteracted by increased supply from the US.
On international trade, the report notes that Kenyan exports to the UK made up 7% of the country’s total exports in 2015 and 2016, underscoring the importance of the trade ties to the Kenyan economy. However, nationalist sentiments in the UK after Brexit, and attendant currency weakness risks have made Kenyan exports to the UK uncompetitive.