NAIROBI, Kenya, Nov 6 – Kenya’s growth still remains exposed to risk despite the onset of the short rains, an analyst has said.
Standard Chartered Bank’s Regional Head of Research in Africa Razia Khan says the long drought has severely affected agriculture which is the mainstay of Kenya’s economy leading them to revise down the country’s 2009 GDP growth forecast to 2.5 percent.
“The drought poses the biggest near-term threat to the economy. Although scattered rains have prompted officials to call an end to the drought, they may have come too late to help rain-fed agriculture in key crop-growing areas,” she says adding that they expect agriculture to contract further in the fourth quarter.
At least four million people may require food aid until the end of March as a result.
Moreover, hydroelectricity shortfalls due to the drought are impacting energy prices, with Kenya switching to more thermal electricity generation as oil prices are pressured globally.
“This may offset the benefits of lower energy imports, prolonging Kenya’s downturn,” she says.
MS Khan says despite measures such as those to facilitate borrowing which have prevented significant interest rate overshooting, they are unlikely to produce the heady seven percent growth that the country enjoyed prior to its end-2007 election crisis when private-sector confidence and credit growth were both more robust.
However, the economy has shown signs of recovery from the dislocation suffered as a result of post election violence last year.
In first quarter of this year 2009, GDP grew by an upwardly revised four percent. Growth was a more subdued 2.1 percent year on year reflecting the lagged impact of the global slowdown and the all-important effect of the drought.
In the second quarter agriculture, the largest sectoral contributor to GDP, with a 23.4 percent share contracted by 2.7 percent year on year.
There was evidence of growth in the economy as demonstrated by the number of tourist arrivals wchi rose by 44.8 percent from January-July 2009. Lower energy prices also helped to boost activity.
Ms Khan says for now, government spending is helping the economy to tick along. Although Kenya’s public and publicly-guaranteed debt rose by a steep 21 percent in the finacial year ended June 30, plans to run a fiscal deficit of 6.6 percent of GDP in the next fiscal year will add to the government’s borrowing requirement.
Innovative ways of facilitating this borrowing have prevented significant interest rate overshooting and the crowding-out of private-sector borrowing.
Such measures include steps such as licensing and regulating microfinance institutions in order to mobilise deposits, lowering the threshold for investment in government debt and modifying the schedule for debt auctions, in addition to more conventional monetary policy easing.
Despite these measures, however overall money supply growth is still decelerating. Kenya’s primary source of reserve money growth is forex buying by the Central Bank.
Even as the government makes use of its overdraft at the central bank, preventing even more borrowing from the market, a large share of new credit growth is directed to the public sector.