Kenya’s economy could build on rebounding regional and global demand to record a higher than expected growth in coming months, the International Monetary Fund has projected, even as discontent grows over rising food prices that have stoked street protests.

The IMF, in its latest review of the economy, has revised its projection upward, saying growth could hit 5.7 per cent in 2011, up from an earlier outlook of 5.4 per cent.

This expansion, the Bank said, will be driven by a rebound in regional and global demand that would in turn support key sectors like tourism.

“A dynamic private sector has spurred investment and an acceleration of growth across all non-agricultural sectors. Agricultural growth, however, is expected to decelerate sharply because of delayed rains during the main rainy season (April-June),” said the IMF.

“Kenya’s economic recovery continues, but inflation has become a concern. Investment is picking up, spurred by high credit growth and government spending on infrastructure. The surge in global food and oil prices together with a drought that hit the northeastern part of the country has boosted inflation.”

Last week, Nairobi was rocked by street protests that saw scores of people arrested as high food and fuel prices as well as a biting maize shortage continued to hurt households and businesses.

Inflation rose to 14.5 per cent last month, driven by high import costs, drought and a falling currency. The shilling has lost at least 10 per cent of its value against the dollar since January, averaging Ksh89 to the greenback last week.

Food Crisis

As a severe food crisis sweeps across the Greater Horn of Africa, an estimated 10 million people are faced with food shortages, with at least 3.5 million Kenyans battling starvation.

The United Nations has warned the region has been hit by the worst drought in 60 years, with no likelihood of the situation improving until next year.

The mixed projections over the direction the economy will take have political leaders and policymakers in a dilemma as they struggle to turn the negative economic data to their advantage.

An underperforming economy would for example compromise the trickle-down economics President Mwai Kibaki has been espousing as he prepares to vacate office next year when his constitutional term ends.

When he came to power, President Kibaki had set himself a target of growing Kenya’s economy by at least 10 per cent annually by 2012 — a medium-term goal he hoped would create more jobs, raise household earnings and close the gap between the rich and the poor.

The government has come under heavy criticism over the failure of the benefits of growth to trickle down to lower income groups, with household incomes lagging far behind the rate of inflation and the cost of living.

As a result, policymakers have been scampering to craft strategies to ease the pain for households and businesses before it stokes further discontent in the country.

The IMF is set to give up to $509 million in loans agreed on at the end of 2010 on the basis of implementation of several policies under the Extended Credit Facility (ECF). The IMF, for example, wants the CBK to consider pushing interest rates up to tame consumer demand.

The basis of the IMF argument is that relatively low lending rates have fuelled growth in private sector credit, leading the economy to overheat as the supply of goods and services falls behind demand, pushing up inflation.

Two weeks ago, the Central Bank announced it had raised its overnight lending rate to 8 per cent and stopped banks from using overnight loans for foreign exchange trading.

Kenyan Households

Over the past few weeks, commercial banks have been raising their lending rates in response to CBK actions even as the latter warns the institutions they should not increase their interest rates on the strength of its recent review of lending terms.

The IMF said high credit growth has narrowed the liquidity slack in the country’s money markets. CBK statistics show interbank interest rates hovered around 6 per cent in recent weeks from below 2 per cent in January 2011.

But some analysts said Kenya’s economic outlook remains bleak, with latest projections pointing to more belt-tightening as the cost of living soars and economic growth slows down.

Economists from PineBridge Investments say the inflation rate, the index that measures the increase in commodity prices, would peak at 22.9 per cent early next year, eroding the purchasing power of money and thus pushing more people into poverty.

“The low-income segments of society are hardest hit by inflation and we do not see this easing any time soon,” said Peter Wachira, a senior investment manager at PineBridge.

But the IMF differs. “Assuming an increasingly tight monetary policy stance to limit the second-round effects of food and fuel inflation, the bank says, a partial reversal of food price hikes, and oil price trends, we forecast headline inflation at 8-9 per cent at end of 2011,” its review said.

Analysts argue that the protests over high food prices and biting shortages of key foodstuffs are a signal the ordinary sacrifices that consumers have been forced to make since late 2010 will start translating into political discontent as it dawns on households that they may soon barely afford one meal a day.

A slew of problems face households in Kenya as well as across the East African Community, exacerbated by unending political feuds, but none is as pressing as high food and fuel prices, which have hit millions of poor people, and angered opposition leaders, company executives and trade unionists.

Across the region, things are no better. Of the five East Africa Community economies, Uganda and Kenya have been particularly hard hit by inflation since the onset of the global financial crisis, a situation that has been made worse by the weakening of local currencies against the dollar and other hard currencies.