NAIROBI, Kenya, Oct 31 – The Kenyan economy is expected to expand by 6 percent in 2020 on account of favourable weather conditions which should support growth of agriculture and industry at an average of 4.6 percent and 5.6 percent, respectively for 2020-21.
According to a report by World Bank, the expansion will also be made possible should the government stay on course in reducing its deficits and accumulation of debt stock and limited spillover effects from the anticipated global slowdown.
The Kenya Economic Update also expects the services sector to continue growing at an average of 6.6 percent over the medium term.
At the same time, aggregate demand is also projected to strengthen due to pent-up investment demand and improved business sentiment.
Drought and debts pose major risks
The forecasts however face a variety of possible risks which include incidences of drought and crowding out of private sector investment at a domestic front.
On the external side, unanticipated spillover effects from ongoing global slowdown could affect demand for Kenya’s traditional exports especially horticulture and textiles and remittance inflows
Overall, the report terms failure by government to cut its fiscal deficit as a major risk.
Kenya’s fiscal deficit grew to 7.7 percent of GDP in FY2018/19 from 7.4 percent in the previous year-missing the target in FY2018/19 (of 6.8 percent of GDP) by almost a full percentage point of GDP.
This in turn has resulted in the crowding out of the private sector, driving the growth in public debt stock, and anemic private sector credit growth.
“The repeal of the interest rate caps, if approved, is a welcome development as it should eliminate what has been a powerful disincentive for banks to lend to SMEs and restore the potency of monetary policy,” the bank says.
The report recommends fast-tracking of reforms that address the root causes of high interest rates.
These include fiscal consolidation, which should reduce government domestic borrowing, measures that strengthen credit-information sharing and promote transparency in pricing of credit.
On October 16, 2019, the president returned the Finance Bill 2019 to Parliament with a memorandum that calls for the repeal of section 33B of the Banking (Amendment) Act of 2016.