- Over half of households reduced their food consumption in June 2022.
- World Bank's projection is a bit conservative compared to estimates done by the International Monetary Funds and National Treasury
Image: PCS
Private investments are expected to drive Kenya's economic growth in the medium term amid sluggish growth in household consumption.
In its latest economic update for Kenya,World Bank has retained growth prospects forecast in June, placing the country's Gross Domestic Product (GDP) expansion for the current year at 5.5 per cent and 5.2 per cent in 2023-24.
The rate, while still strong, will be a moderation following a remarkable recovery in 2021 from the worst economic effects of the pandemic, when the country’s economy grew by 7.5 per cent.
This is still much higher than the estimated average growth in Sub-Saharan Africa of four per cent.
According to the report, Kenya is likely to witness recovery in employment in the services sector (especially in tourism), resilient diaspora remittances, and an increase in minimum monthly wage.
However, consumption growth is likely to be dampened in the near term due to below-average agricultural harvest, high inflation affecting real incomes, and tighter monetary policy.
"Monetary policy has been tightened in response to persistent inflation pressures following shocks from global commodity markets and the regional drought," the lender says.
Headline inflation started to accelerate from 5.1 per cent in February and has remained above the CBK’s upper bound target of 7.5 per cent since June.
Inflation rose to 9.6 per cent in October 2022, the highest since December 2017, before falling marginally to 9.5 per cent in November 2022, even as price increases were partially muted by government subsidies on fuel, electricity, and maize.
High-frequency monitoring of households shows a rise in food insecurity, most severely in rural areas, and over half of households reduced their food consumption in June 2022.
Further, most households reported an increase in prices of essential food items and over half of the rural households reported being unable to access core staple food such as beans or maize.
In response to the inflationary pressures, the Central Bank of Kenya (CBK) has raised the policy rate thrice since May 2022 by a cumulative 175 basis points to reach 8.75 per cent in the latest update.
Apex banks globally use the interest rates as either a gas pedal or a brake on the economy when needed.
They set the short-term borrowing rate for commercial banks, and the banks pass it along to consumers and businesses.
With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.
World Bank expects this measure to push up the cost of credit, and continue to hurt the weakening shilling hence pushing up the cost of doing business amid muted consumption expenditure.
According to World Bank's Country director Keith Hansen, global sentiment deteriorated this year, raising fears of a global economic recession.
"Global and regional growth continue to weaken amid disruptions in oil and gas flows, tightening financial conditions, Covid restrictions in China, and the worst regional drought in decades," Hansen said.
Kenya’s rebounded from the pandemic continued in 2022, partly reflecting a base effect, real GDP increased by 7.5 per cent in 2021 and six per cent per cent year on year in the first half of 2022.
This was supported by a pickup in private sector credit, lower Covid-19 infections, and a recovery in tourism.
Notwithstanding the strong year-on-year increases, GDP has seen a marked sequential slowdown since Q3-2021 as the base effect dissipated and business confidence weakened because of the global commodity market shock, along with regional drought and domestic political uncertainty.
World Bank's projection is a bit conservative compared to estimates done by the International Monetary Funds and Kenya's forecast of six per cent for the year and 5.6 per cent next year.