Africa-Press – Kenya. Kenya’s economic growth momentum is expected to return to pre-covid levels on easing coast of living pressures, driven by recovery in agriculture.
The latest World Bank economic update projects the country’s Gross Domestic Product (GDP) to expand to five per cent this financial year and grow by 10 basis points in 2024 and 2025.
The growth is above 4.8 per cent reported last year.
“This near-term growth forecast is above Kenya’s estimated potential GDP growth rate of 4.9 per cent 1 and the pre-pandemic average (2010- 2019) of 5.0 per cent,” the lender says.
Real per capita incomes are expected to grow, increasing from 2.8 percent in 2022 to 3.1 per cent in the medium term and poverty is expected to resume its pre-pandemic downward trend.
Besides ease in the cost-of-living pressures – driven by a recovery in agriculture following improved rains, the growth will be boosted by a decline in global commodity prices – and robust private investment.
The cost of living in the country has remained above the baseline of 7.5 per cent since July last year, hitting eight per cent in May, up from a ten-month low of 7.9 per cent in the prior month.
Average consumer price inflation is estimated to rise to 7.8 per cent in 2023 from 7.6 per cent a year earlier, remaining above the central bank target band.
The increase in prices is driven by exchange rate passthrough to domestic prices as well as direct and second round effects of increases in fuel and electricity tariffs.
However, the anticipated decline in global commodity prices and improved agricultural harvest should alleviate inflationary pressures in the second half of 2023.
Even so, the economic outlook assumes a slowdown in public investment reflecting ongoing fiscal consolidation and higher electricity tariffs that are expected to keep energy prices elevated.
This is likely to lead to an increase the cost of production for small businesses, as well as tight monetary policy that is expected to moderate inflationary pressures.
In addition, the government’s ongoing fertilizer subsidy programme is anticipated to continue containing the cost of production.
Inflation is expected to decline to 5.7 per cent in 2024-25, leading to a loose monetary policy in the medium term.
Even though the bank is confident about the country’s growth, downside risks remain substantial, and Kenya’s growth could be lower in the medium term in the event they materialise.
On the domestic side, below average short rains would worsen inflationary pressures and food insecurity.
Growth could also be lower than anticipated due to economic disruptions from political uncertainties that could constrain activities of the contact-intensive services including education, hotels and accommodation, and transport.
Furthermore, political tensions could lead to unexpected fiscal expansion ,aggravating debt vulnerabilities and crowding out private investments.
Further increase in the policy rate by the CBK due to unanticipated shocks to commodity or financial markets would push up cost of domestic borrowing, weaken credit expansion, and thus jeopardise the projected growth trajectory.
Kenya has in recent months hiked the base lending rate to put stops on inflation pressures. Last month, the apex bank retained the anchor rate at 9.5 per cent.
An unexpectedly tighter monetary policy by major central banks could lead to increased capital outflows and shilling depreciation, further fuelling domestic inflation
Furthermore, the lender fears that weaker global demand due to geopolitical risks could hurt Kenya through lower net exports and lower foreign investment.
“A larger than projected slowdown in advanced economies, including the US and Europe, could undercut ongoing recovery in tourism, merchandise exports and remittances,” the bank says.
Upside risks are mostly linked to early easing of global financing conditions and lower international fuel and food prices, which would strengthen Kenya’s external balances.
The global lender hopes that a strong multiyear fiscal consolidation programme will lower the country’s domestic financing needs, expanding available funds with the banking sector for lending to the private sector.
This is also expected to contain medium-term debt vulnerabilities and improve investors’ confidence, leading to robust private investment and GDP growth in the medium term.
It adds that while a tight monetary policy will push up interest rates, real lending rates are expected to remain below historical levels, supporting private sector credit growth.
The financial inclusion fund is also expected to net in an otherwise excluded segment of the population in the credit market opening up private sector led growth opportunities.
While climate change is a recognised threat to Kenya’s economy, global efforts to reduce green-house gas (GHG) emissions could present opportunities for the country.
According to World Bank, efforts to lower GHG emissions and meet NDC commitments are resulting in reconfiguration of global supply chains, creating opportunities in new and “green” markets, and generating a growing appetite for carbon credits that can be transferred internationally and used towards meeting countries’ NDCs or other compliance uses.
“If Kenya maintains a low-carbon development path as it grows, it could seize opportunities created by the global trend to decarbonise economies”.
The lender says the country’s climate-positive investments and policies can contribute to growth, reduce operating costs, increase revenue for private sector, create domestic green jobs, and generate social co-benefits.
This is expected to help in improving the country’s trade balance and foreign exchange stability and lowering the country’s exposure to fuel price shocks and supply chain disruptions.
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