PUBLISHED ON March 6th, 2015

World Bank paints rosy economic forecast for Kenya as oil price dips

The Kenyan economy is set to grow by six per cent this year, riding on infrastructure developments and low oil prices, the World Bank said on Thursday.

However, the Bretton Woods institution warned of over-reliance on government spending in driving the economy.

Economists at the bank said further drops in oil prices to below $50 a barrel could result in a 6.5 per cent growth while an increase could see the economy grow at a lower rate, but not below 5.6 per cent.

Lower fuel costs result in increase in income available for consumption by households increasing their appetite to spend.

“Higher aggregate demand is also likely to incentivise private investment, particularly in the manufacturing sector,” said the bank in its latest report on the Kenyan economy. The report is produced once every six months.

World Bank said the Kenyan economy grew by 5.4 per cent last year against its estimate of 4.7 per cent in January.

Heavy spending on infrastructure projects such as the standard gauge railway is also expected to see the Kenyan economy become one of the fastest growing economies in the continent.

The country has previously been accused of lagging behind other African countries especially those in the East African Community.

World Bank’s forecast is lower than IMF’s 6.9 per cent which also pegged growth to heavy infrastructure spending.

Economists however raised questions on the sustainability of the Kenyan growth given that it was entirely being driven by government spending with private sector lagging behind.

“Past fiscal spending led to growth spurts —but it also increased the fiscal deficit and public debt. These episodes raise the question of whether the growth Kenya has experienced is organic (and therefore sustainable) or fiscally propelled (and therefore unsustainable),” said World Bank.

Data from the bank shows that the manufacturing sector grew by 4.3 per cent in the three years to 2013 compared to the 6.2 per cent growth of the economy.

John Randa, senior economist at the World Bank, noted the economy had stopped being reliant on rain cycles as was previously the case when drought would result in higher food and electricity prices.

Power from geothermal sources has replaced that from hydro as the main source of electricity leading to lower power bills and reduced outages.

Security, especially terrorism, remains the main threat to economic prosperity, said Mr Randa. The gap between the country’s import bill and exports has been widening posing a challenge to the stability of the shilling.

Ms Betty Maina, the chief executive of the Kenya Association of Manufacturers said the country needed to review its taxation policy to encourage local producers.

She gave the example of paper products such as cartons which are charged a 25 per cent tax rate making them more expensive than imports from countries such as China.

Other challengers, she said include possible outflow of foreign investments due to end of America’s stimulus programme and wasteful national and county government expenditures.

“The lack of rationalisation of spending after devolution at the national and county level, the strong appetite for spending at both levels of government and the duplication of functions have worsened Kenya’s fiscal position,” said World Bank.

Source: Business Daily

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.