Strong household consumption, higher remittance inflows, and lower food prices charged the Kenyan economy to rebound in 2018, the World Bank said, even as it warned that delay in the long rains has taken the shine off this year’s performance.
Persistent under performance in government revenue collection has also cast a shadow of doubt on the prospects of better economic performance—meaning growth may be modest this year.
“The medium-term growth outlook is stable but recent threats of drought could drag it down,” the report which was released last week says.
The Bank’s Economic Update Report for Kenya, says the prevailing drought could delay planting, resulting in poor harvests later in the year.
“Besides, ongoing emergency intervention to address food shortages could impose fiscal pressure, and constrain key capital spending,” the report says, adding that the developments have slowed the growth forecast for 2019 and for the medium term relative to the Bank’s October 2018 Update.
The World Bank estimates that the Kenyan economy grew by 5.8 per cent last year compared with 4.9 per cent in 2017, but that could decline to 5.7 per cent this year after “accounting for potential drag from drought.”
Kenya’s National Treasury has however put the 2018 growth at six per cent, arguing that there was a rebound in economic activity arising from improved weather conditions, resilient service sector, a better business environment and easing of political uncertainty.
The World Bank says the three-year average contribution of Kenya’s household consumption to gross domestic product stood at 4.7 percentage points in 2018, up from 4.4 percentage points in 2017.
The bank says that was the result of improved incomes from agricultural harvests, lower food inflation estimated at 1.6 per cent in 2018 relative to 13.5 percent in 2017, and strong remittance inflows.
Private investment, however, declined during the period as banks cut their lending to households and small businesses.
Kenya’s credit growth stood at 2.4 per cent at the end of December 2018, well below its 10-year average of about 19 per cent.
The report says Kenya’s economic recovery has not been accompanied by a pick-up in private sector credit growth and recovery of key sectors has not translated into a rebound in credit growth to the private sector.
The slowdown in credit growth is attributed to a sharp depreciation of the Kenyan shilling in 2015 as well as the collapse of three banks in succession that created uncertainty in the banking sector, tightening of prudential regulations and the interest rate caps that Kenya imposed in the last quarter of 2016.
“Moreover, with interest rate caps tied to the policy rate, the effectiveness of monetary policy in supporting growth through the credit channel has been compromised,” says the report.
Kenya’s public debt estimated at over Ksh5.1 trillion ($50 billion) stood at about 57.5 percent of the GDP in 2018. Budgetary shortfalls on account of revenue under performance could still compromise Kenya’s macroeconomic stability, the report warns.