This year, Kenya’s wealth is projected to expand by 6.5 per cent from 5.3% per cent last year as measured by GDP. The growth momentum is expected to remain robust into 2016 with a projected growth rate of 6.3 per cent.
However, these short to medium term positive growth projections are based on key assumptions which need to be satisfied. A stable macroeconomic environment, continued low international oil prices, stability of the Kenya shilling, increased rainfall and improvement in security to attract tourists back to the country are some of the key assumptions that will determine whether or not the projected economic growth will be achieved.
So far, some of the assumptions have taken a positive trend, but others are clearly a challenge.
Security improvement is one positive, with the eminent revival of tourism particularly following the lifting of travel advisories by some of the key sources of tourists such as Britain. Tourism remains a major foreign exchange earner for the country and suffered most from security and terrorism threats in the last three years. In fact although tourism retained the position of a major sector of the economy and a large foreign exchange earner, its potential was yet to be fully realised. Going forward, tourism has the potential to be the second largest sector of the economy, closely following agriculture.
Security is also a major consideration for investment, for both local and international investors. It also has a great bearing on the cost of doing business as well as cost of living. Heavy burglar proofing, high security walls, electric fences, “mbwa kali” and the growth of private security firms are hallmarks of increased insecurity in the urban areas, rather than a mark of prosperity. Investment that goes into these security measures could be chanelled to improving public education and healthcare or to expand the transport network.
Perhaps a time will come when these measures would not be necessary. In the meantime, security remains a priority area for continued positive economic development.
The low international oil prices in the recent past are a windfall for the global economy and particularly for importing countries like Kenya. Low oil prices should translate into higher spending and therefore support economic growth. However, the impact on the economy will also depend on the extent of pass-through to firms and households. Higher pass-through manifests in low production costs for goods which in turn has the effect of stimulating supply in sectors for which oil is an input. Ultimately this leads to lower prices for consumer goods and people have more money to spend or invest.
While world oil prices have declined substantially, retail prices have declined much less, a sign of limited pass-through. Incidentally, lower oil prices are also a window of opportunity to undertake taxation reforms as we have recently witnessed with the increase in road maintenance levy by Sh3 per litre of fuel from Sh9 to Sh12. The fuel taxes, although perhaps necessary to fund the exchequers kitty, are an additional barrier to the pass-through benefit to firms and consumers.
The tax and the effect of recent exchange rate depreciation have a direct impact of substantially limiting or altogether muting the positive growth effects of lower global oil prices. However, with the low oil prices expected to persist into the medium term, some residue benefits may positively impact on the local economy in support of the projected growth rates.
Perhaps of much more concern is the macroeconomic environment. The much anticipated decline in interest rates is now elusive with increase in Central Bank Rate in the attempt to rescue the rapidly declining shilling. Inflation is edging towards the target upper limit of 7.5 per cent and projected to surpass the target. So far the Monetary Policy Committee has increase the Central Bank Rate rate twice in a span of three months from 8.5 per cent to 11.5 per cent, effectively increasing the Kenya Banks’ Reference Rate that is the base lending rate for the banking industry. Despite this measure and the sale of the foreign exchange by the Central Bank, the Kenya shilling decline is not showing any signs of trading below the 100 shilling mark to the dollar, a pointer to fundamental issues in the economy.
Fundamentally, the increasing imports and declining exports stand as the largest threat to the value of the shilling. True, world currencies have declined in the face of a strengthening US economy, but those economies with higher negative trade deficits - difference between imports and exports - are more vulnerable. The shilling has declined by 22 per cent in the past one year alone, trading from 84 to the dollar to the current level of 103. In comparison, the South African Rand has declined by 21 per cent from trading at 10.54 to the dollar this time last year to the current level of 12.80 showing a similar trend to the shilling. This is no consolation though, because unlike Kenya whose trade deficit is rapidly growing, South Africa has a growing trade surplus, exporting more than it imports.
While the overall medium term outlook for the economy remains favourable, risks exits that could as well hinder the achievement of the projected growth rates. Increased production for export remains the largest potential key driver to unlock economic growth as well as job creation so far.