Kenya’s Economic Outlook to Dip in 2017

April 12, 2017

NAIROBI, April 12, 2017—Kenya’s GDP growth is projected to decelerate to 5.5%, a 0.5 percentage point mark down from the 2016 forecast, according to the World Bank’s Kenya Economic Update (KEU) released in Nairobi today.

“Consistent with its robust performance in recent years, once again economic growth in Kenya was solid in 2016, coming in at an estimated 5.9%—a five-year high. This has been supported by a stable macroeconomic environment, low oil prices, earlier favorable harvest, rebound in tourism, strong remittance inflows, and an ambitious public investment drive,” said Diarietou Gaye, World Bank Country Director for Kenya. “Nonetheless, Kenya is currently facing headwinds that are likely to dampen GDP growth in 2017.”

Firstly, the ongoing drought which has led to crop failure, dying herds of livestock, and increased food insecurity. Further, with hydropower being the cheapest source of energy in Kenya, poor rains increase energy costs, their effects spilling over to other sectors. The rise of in food and energy prices drove inflation to a five-year high of 10.3% in March.

Secondly, Kenya faces a marked slowdown in credit growth to the private sector. At 4.3%, this remains well below the ten-year average of 19% and is weighing on private investment and household consumption. Thirdly, as a net oil importer, the rise in global oil prices compared to the lows of 2016 has a dampening effect on economic activity. However, in the medium term, economic growth is projected to rebound to 5.8% in 2018 and 6.1% in 2019, consistent with Kenya’s underlying growth potential.

But while the medium- to long-term outlook appears favorable, Kenya’s economy remains vulnerable to downside risks. These include potential for fiscal slippages, a more prolonged drought in 2017, and external risks from a weaker than expected growth amongst Kenya’s trading partners, as well as uncertainties related to US interest rate hikes and the resultant stronger dollar.

“Going forward, prudent macroeconomic policies will help safeguard Kenya’s robust economic performance, in particular fiscal consolidation consistent with the Medium Term Fiscal Framework,” said Allen DennisSenior Economist and Lead Author of the KEU. “Fiscal consolidation needs to be implemented in such a way so as not to compromise the development spending needed to unlock the country’s productive capacity. This will require adjustments on recurrent spending and improvements on domestic resource mobilization.”

The report recommends a number of structural reforms that could accelerate growth potential. Credit access can be supported by reducing public sector borrowing, and the transactions cost for accessing credit through better credit reporting, the creation of a central electronic collateral registry, and a framework to promote property as collateral with the automation of land registries and the implementation of the National Payments System Act.

Agricultural productivity can also be improved by increasing the competitiveness of agricultural input and output markets. New engines for economic growth need to be supported, such as unlocking the affordable housing market, which is the focus of the Kenya Economic Update.

But the special focus of the 15th edition of the KEU advocates a concerted campaign to develop the housing finance market that will present new avenues of income through the construction sector and other related industries.

“Kenya can make housing more affordable to many more Kenyans, which will in turn create new channels to boost overall economic growth both at the national and county levels,” said Mehnaz Safavian, Lead Financial Sector Specialist and co-author of the report. “With an urbanization rate of 4.4% and 61% of urban households living in slums, the provision of housing finance and new housing finance products can help unlock the housing market to address the pressing need for affordable dwellings, create new jobs, deepen the financial sector, and catalyze overall economic growth in the medium- to long-term.”

The KEU was prepared by the World Bank Group in consultation with the Kenya Economic Roundtable.

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