The Bank revised downward Kenya’s 2015 economic growth forecast to 5.4 percent from six percent as well as its 2016 growth forecast to 5.7 percent from a previous estimate of 6.6 percent.
The bank says the current increase in government spending is not sustainable citing that the overall fiscal deficit of 8.3 percent of Gross Domestic Product (GDP) in 2014/2015 financial year and a budgeted 8.7 percent of GDP in 2015/2016 is high by any standard.
Fiscal deficit is the difference between the government’s expenditures and its revenues excluding the money borrowed.
World Bank Senior Economist John Randa highlighted the duplication of functions at the national and county level and the strong appetite for spending at both levels of government that has worsened Kenya’s fiscal position.
He says that lack of fiscal consolidation is raising jitters in the market over whether Kenya has a twin deficit problem.
“The revision of Kenya’s economic growth downward reflects the strong headwinds the economy is facing in foregoing exchange market and the money market and the monetary policy response to calm those fears,” said Randa.
Kenya’s shilling has lost 14 percent against the dollar this year and interest rates have climbed with the Central Bank Rate going up 300 basis points to 11.50 percent up from 8.5 percent.
Central Bank of Kenya (CBK) has also raised the Kenya Bankers Reference Rate (KBRR) to 9.87 percent from 8.5 percent effective 7th July 2015.
According to World Bank, debt sustainability analysis done in 2015, Kenya is at a low risk of debt distress as overall debt remains sustainable in the medium term.
“The reorientation of public debt toward external debt is consistent with Kenya’s 2015 medium term debt strategy, which aims to slow domestic debt growth in order to stabilize liquidity and reduce interest rates in domestic financial markets,” Randa said.
He says that Kenya’s external and total public debt are below the World Bank threshold.
The World Bank also urges the government to work on reducing the imbalances in the external account in a bid to boost the shilling as the country’s current account remain high at 9.8 percent in June 2015.
Kenya’s export sector has been lagging behind since the mid 1990s hence as Randa says, policy makers need to focus on increasing production of traded goods and services to enhance the country’s capacity to earn foreign exchange and boost its external sector.