NAIROBI, Kenya, Apr 27 – The government is being challenged to put in place sound macro-economic policies that can spur growth in light of the increasingly unfavourable economic conditions both locally and globally.
Although the economic growth for 2010 is expected to have peaked at 5.4 percent, accelerated inflation, a weakening shilling and instability in the Middle East witnessed in the first quarter of 2011 got economists jittery over future growth prospects.
British American Asset Managers have estimated the economy to grow at between 4.5 percent and five percent in 2011 down from earlier estimates of between 5.5 percent and six percent.
"This situation of inflation is creating a dilemma for policy makers who have to come in to contain it while at the same time not destabilising other economic parameters," Dominic Kiarie, the Managing Director of British-American Asset Managers said.
Figures from the Kenya National Bureau of Statistics indicated a 5.4 percent gross domestic product growth during the first three quarters of 2010 with third quarter growth figures showing the economy expanding by 6.1 percent. Full-year growth figures are expected to be released in May.
However, inflation has been on an upward trend affecting the economic gains of the third and fourth quarters.
Inflation advanced to 9.2 percent in March from a low of 3.2 percent in September 2010, mainly due to high food and fuel prices.
Mr Kiarie said the challenges affecting the economy were all intertwined, adding that the government should come with a systematic way of addressing the situation and putting in place long term economic policies that cushion the nation from major external shocks.
"For example, if you reduce taxes then you will have a problem with fiscal deficit. I think the government needs to look at key policy interventions and work with them in tandem starting with the one that will have the greatest positive impact," he said.
The shilling has come under pressure against virtually all major currencies. Mr Kiarie said the currency is likely to remain weak in the medium term versus the major currencies despite recent actions by the Central Bank by raising the Central Bank Rate (CBR) to six percent.
"We maintain our upward expectations on long-term interest rate direction on the back of rising inflation as well as tighter monetary policy by the Central Bank," he said.
Local political tensions and rising inflation have also put negative pressure on the equity markets, as both retail and institutional investors became risk averse.
Following a strong start to 2011, the NSE 20-Share Index fell 4.3 percent in February and 7.2 percent in March 2011 for a cumulative negative 12.3 percent return in the first quarter.
He however said there is a possibility that liquidity could find its way to the equity markets to cushion against inflation.
"There are several IPOs expected in 2011, which could stimulate the market in terms of attracting liquidity, while deepening the equity market," Mr Kiarie said.