By Etaarifa Contributor
The International Monetary Fund has lowered real GDP growth projections for Kenya to 6% in 2016 (from 6.8%). The robust performance is mainly on account of higher growth in agriculture from better rains, and an expected recovery of tourism following the recent removal of travel warnings by several main tourism source markets.
Growth is expected to pick up further after 2016, supported by continued improvements in the business environment, modernized and expanded transport and energy infrastructure, and regional integration. However, the downwards revision of medium term potential growth by about 0.5% (to 6.5%), was as a result of tighter external and domestic financing conditions that will reduce private and public investments relative to earlier forecasts.
The less than favorable financial market conditions explained the IMF approval of a new SDR 709.25m (about USD 989.8m) 24-month Stand-By Arrangement (SBA) and a SDR 354.629m (about USD 494.9m) 24-month Standby Credit Facility (SCF) for Kenya, for a combined SDR 1.06bn (about USD 1.5bn, or 196% of Kenya’s quota). The IMF also noted that Kenya’s real effective exchange rate (REER) appreciated in real terms by 4% during 2015, and its level is estimated to be moderately overvalued based on the External Balance Assessment “light” methodology.
Kenya and IMF staff concurred that risks to the growth outlook were on the downside for Kenya, but noted a potential increase in volatility of capital flows as representing the strongest downside risk. Other downside risks include residual security challenges, the uncertain impact of weather-related effects of El Nino on agriculture, pockets of vulnerabilities in the banking system, significant uncertainty about FDI in oil and gas exploration, and possible pressures for higher current and capital spending as the 2017 presidential elections approach.
On other policy initiatives; Kenya intends to close the fiscal gap of 1.2% of GDP in the 2015/16 financial year by adopting a supplementary budget envisaging a reduction in current spending (0.4% of GDP), as well as a reduction of lower-priority development spending (0.8% of GDP). In the event that cumulative revenues through to end of March 2016 fall short of target, Kenya will reschedule new investment projects to fully offset the shortfall. The completion of the first phase of the Standard Gauge Railway (SGR) project (Mombasa-Nairobi) will contribute to a 1.8% of GDP reduction in the targeted overall deficit.
Kenya intends to achieve the remaining 1.2% of GDP deficit reduction through a package of revenue and expenditure measures, while still maintaining the sizable envelope for infrastructure projects that includes the SGR Phase IIA (Nairobi-Naivasha).