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Warning of risk to recovery from ‘lingering political uncertainty’
The World Bank has downgraded Kenya’s economic outlook and warned of “significant downside risks that could scuttle the projected rebound” as the country endures its worst political crisis in a decade.
President Uhuru Kenyatta, who was sworn in last week for a second term, needs to stimulate the private sector, cut spending on government bureaucracy and end months of political uncertainty caused by disputed elections, the bank said in a report.
It downgraded its growth forecasts for the year from 5.5 per cent to 4.9 per cent — its slowest in five years. This is weaker than the government expected but more optimistic than most economists. The bank forecasts it could rebound to 5.5-5.8 per cent in the next two years.
But it warned that “lingering political uncertainty can further undermine business confidence and stunt a robust recovery”.
Many companies have delayed investments since a flawed election in August triggered the crisis in which more than 70 people have been killed in politically motivated violence. The supreme court ordered a repeat presidential vote, but Raila Odinga, the veteran opposition leader, boycotted the October rerun and refuses to recognise Mr Kenyatta as president.
It’s important that the private sector is re-energised so it can contribute towards a more robust economic rebound
Allen Dennis, author of World Bank report
Sporadic protests have continued.
“It’s important that the private sector is re-energised so it can contribute towards a more robust economic rebound,” said Allen Dennis, the lead author of the review.
Lending to private companies in Kenya, east Africa’s dominant economy, has tumbled from an annual growth rate of 25 per cent in mid-2014 to 2 per cent last month, according to official statistics. Several bank failures and a cap on interest rates last year had already hurt the economy as banks tightened lending conditions.
Thousands of workers have been laid off this year as growth has slowed. Five of the bigger companies listed on the Nairobi stock exchange have warned that earnings this year will be more than 25 per cent lower than in 2016.
Removing the rate cap quickly will be “critical to preserving medium-term growth prospects”, the World Bank said.
Patrick Njoroge, the central bank governor, has also called for the cap to be scrapped.
On government spending, Mr Dennis said there was “certainly scope for improvements in efficiency”.
He said the government spends almost half its revenue paying civil servants and legislators compared with a global average of 30 per cent for middle-income nations. Mr Kenyatta has endorsed a recommendation to cut the salaries of legislators, who are among the best-paid in the world, but members of parliament are resisting the move.
Economists warn that the slowdown could worsen.
Razia Khan, chief Africa economist for Standard Chartered, forecasts growth will be 4.5 per cent this year and 4.6 per cent in 2018.
She said Mr Kenyatta needs to restore investor confidence quickly as the government seeks to issue another Eurobond. This is expected to be around €2bn with a maturity of at least 10 years.
“The big focus is going to be on external borrowing at the start of next year and so the government needs to hit the ground running [with reforms] to compensate for this year’s slowdown,” she said.
Copyright The Financial Times Limited 2017. All rights reserved.
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