OUTLOOK

Kenya's economy to grow 5 per cent – AfDB

The outlook revealed that East Africa is the most resilient region

In Summary
  • According to AfDB, the projection of Kenya's quick rebound assumes that economic activity will normalize due to a full reopening of the economy.

  • Inflation is projected to remain within the Central Bank of Kenya’s target range of 2.5 to 7.5 per cent.

Kenya's growth outlook is positive with the economy projected to grow 5 per cent in 2021, according to the latest African Development Ban African economy outlook.

According to the development finance institution, the projection of Kenya's quick rebound assumes that economic activity will normalise due to the reopening of the economy.

The successful implementation of the Economic Recovery Strategy and the country capitalising on an expected improvement in external liquidity and benefiting from initiatives to meet its external financing needs will also aid the positive growth.

The external initiatives could include debt refinancing, restructuring and debt service relief, and additional concessional loans.

The financial institution's projection is however lower than that of the National Treasury and World Bank.

The two have projected the economic growth to rebound from 0.6 per cent  last year to 6.4 and 6.9 per cent respectively.

According to World Bank, Kenya’s GDP rebound will be the fastest in the East African Community where Rwanda is forecast to expand by 5.7 per cent, Tanzania 5.5 per cent, Uganda 2.8 per cent, Burundi two per cent while South Sudan is projected to contract 3 per cent.

From the outlook, inflation is projected to remain within the Central Bank of Kenya’s target range of 2.5 to 7.5 per cent, and fiscal and current account deficits are forecast to narrow as a result of improved revenue collection and exports.

The outlook also shows that the country's growth in remittances could have also increased it's resilience to the Covid-19 shocks.

Remittances to Africa declined from $85.8 billion in 2019 to $78.3 billion in 2020, with most countries recording a decline according to data from the World Bank, however remittance inflows into Kenya jumped by nearly 11 per cent in 2020 to $3.09billion(Sh338billion).

AfDB however said that downside risks to the outlook could emanate from delays in the full reopening of the economy, failure to secure external financing to execute the budget, a slowdown in global growth, and disruptive social conditions during the run-up to the 2022 elections.

The outlook shows that East Africa is the most resilient region, thanks to less reliance on primary commodities and greater diversification.

It enjoyed 5.3 percent growth in 2019 and an estimated 0.7 percent growth in 2020. In 2021, growth of real GDP is projected at 3.0 percent, and in 2022, 5.6 percent.

According to the outlook, macro-financial regulations in the region helped cushion the adverse effects of Covid–19 but raised financial vulnerabilities.

The pandemic caused many businesses and households to face severe bankruptcy and illiquidity constraints that hamper their ability to pay back maturing bank loans.

Non-performing loans(NPLs) have increased the most in Angola, Republic of Congo, Kenya, Tanzania, Uganda, and Zambia.

Latest data from the Central Bank of Kenya (CBK) shows that NPL ratio of banks stood at 14.1 per cent in December 2020, the highest since August 2007.

At the onset of the Covid pandemic in Kenya, the NPL ratio stood at 12.5 per cent, indicating the difficulties that borrowers faced last year due to the economic disruptions brought about by the pandemic.

According to AfDB, the growth of NPLs could lead to significant macrofinancial vulnerabilities in the banking sector and be a major source of macrofinancial risk that could, in turn, derail the expected recovery.

“Financial market regulators must strike a balance between preserving financial stability, maintaining a healthy banking system, and sustaining economic activity during the pandemic,” the outlook recommended

According to AfDB, this is a tricky but important assignment for banks because financial vulnerability can propagate and amplify the pandemic’s negative effects on the real sector.