Economic activity in Kenya remained robust in 2016.
For the third consecutive year economic activity in
Kenya picked-up, reaching an estimated of 5.8 percent
in 2016, once again placing Kenya among the fastest
growing economies in Sub-Saharan Africa. Kenya’s
growth momentum in 2016 was supported by a stable
macroeconomic environment, low oil prices, favorable
harvest in the first half of 2016, rebound in tourism,
strong remittance inflows, and an ambitious government
infrastructure drive to relieve supply side constraints.
Near term GDP growth is expected to dip on account of
headwinds, however over the medium term GDP growth
should pick-up. Given headwinds from the ongoing
drought, weak credit growth, and the pick-up in oil prices,
GDP growth is expected to decelerate to 5.5 percent
in 2017, a 0.5 percentage point mark down from earlier
forecasts. However, over the medium term, we expect
these headwinds to ease (rains are expected to return to
normal in 2017), and together with the projected steady
strengthening of the global economy, rebound in tourism,
resolution of some of the underlying causes of slow credit
growth, and the easing of some supply-side constraints
related to the completion of some major infrastructure
projects, GDP growth is expected to accelerate to 5.8
percent and 6.1 percent in 2018 and 2019 respectively,
consistent with the underlying growth potential of the
Kenyan economy.
Downside risks to Kenya’s outlook remain broadly
unchanged. Identified risks include from domestic sources
such as the potential for fiscal slippages, drought conditions
being prolonged beyond 2017, and security concerns.
External risks to Kenya’s growth prospects could emanate
from weaker than expected growth among Kenya’s major
trading partners and uncertainties related to US interest
rate hikes that could lead to a strengthening of the dollar
and destabilizing capital flows from emerging and frontier
markets including from Kenya.
Going forward, prudent macroeconomic policies will
help safeguard Kenya’s robust economic performance.
Kenya’s relatively stable macroeconomic environment has
been supportive of its growth performance in recent years.
Maintaining macroeconomic stability calls for continued
implementation of prudent fiscal and monetary policies.
On the fiscal front, given the elevated levels of the deficit
as well as the lowering of margins for maneuver due to the
rise in debt stocks, the implementation of the Medium Term
Fiscal Framework which seeks to bring the deficit down to
4.3 percent by FY19/20 is a step in the right direction. Fiscal
consolidation however, needs to be implemented in such
a way as not to compromise public investments in critical
infrastructure that will unlock the economy’s productive
capacity. Secondly, given low private sector credit growth
and the ongoing unintended adverse effects of interest rate
caps the Banking Amendment Act needs to be revisited.
Further, structural reforms can accelerate the growth
potential of the Kenyan economy. While Kenya’s growth
has been robust in recent years, it still falls short of the levels
envisaged in the Medium Term Plan II and what is required
to transform Kenya into an upper middle income economy
by 2030. Reaching the target higher level of growth is
possible, but will however require an acceleration in the
pace of structural reforms. The report highlights select areas
that hold potential to accelerate Kenya’s growth potential.
First, beyond changes to the Banking Amendment Act
access to credit by the private sector could be improved
by strengthening credit reporting to the Credit Reference
Bureaus; creating a central electronic collateral registry;
developing a framework to promote property as collateral;
completing the computerization of land registries;
and implementing the National Payments System Act
and regulations. Secondly, efforts to influence the
competiveness of agricultural input (seeds, fertilizer, leasing
machinery etc.) and output markets (including from tariff
and non-tariff barriers) can help address low productivity
in the agricultural sector. Last but not least, new engines
for economic development need to be supported. One
such sector is in addressing the huge housing deficit,
especially among lower income households. Unlocking the
residential housing market through the development of
the housing finance market can provide a wide range of
income opportunities through the construction sector and
related industries.