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Nairobi - Volatility on Kenya’s domestic foreign- exchange market and the monetary policy response to calm those fears will damage the country’s economic output, the World Bank said as it lowered the growth forecast for East Africa’s biggest economy.
The economy will probably expand 5.4% this year, compared with an estimate of 6% in December, the Washington-based lender said in a report titled “Storms Clouds Gathering” published on Thursday. It also cut its projection for 2016 by a similar margin to 5.7%.
“The revisions reflect the reassessment of risks associated with macroeconomic instability resulting from exchange-rate volatility, inflationary threats associated with concerns about currency depreciation and delayed fiscal consolidation, balance of payment pressures, and the poor transmission of the effects of low oil prices,” the World Bank said.
Kenya’s shilling has weakened 12% against the dollar this year, in line with a rout on other emerging-market currencies. The economy has struggled after a spate of Islamist- militant attacks that frightened off tourists, the second- biggest source of foreign-currency revenue after farm exports.
Visitor arrivals dropped 18% in the eight months through August, according to Kenya National Bureau of Statistics data.
Infrastructure spend
In response to the weakening shilling, the central bank’s Monetary Policy Committee has raised the benchmark rate to check market turbulence it said was fueled by inflation expectations. Prices rose 6% in September from a year earlier, but the rate is still within a 2.5% and 7.5% central bank target corridor.
The shilling has recouped some losses to 103.10 per dollar at 08:50 on Thursday, after sliding to a low of 106.67 in September.
While strong consumer demand and infrastructure projects will underpin growth this year, the World Bank said heavy government spending could expose the $55bn economy to shocks in future. Treasury has forecast a budget shortfall of 8.7% for the current fiscal year from 8.3% in the previous year.
“The current expansionary fiscal path is not sustainable and presents a risk to growth,” the World Bank said.
Kenya remained too reliant on short-term capital flows to service its current account, which was wide at a deficit of 9.8% of gross domestic product in June, driven mainly by imports of machinery and transport equipment for infrastructure projects, the bank said. A good portion of demand could be met by items produced locally, it said.
