Kenya must tighten its fiscal policy to bridge the widening budget deficit that now exceeds three per cent of its Gross Domestic Product, the World Bank has warned.
In its latest Global Economic Prospects report released on Tuesday, the bank lists Kenya among developing countries whose national budgets "have deteriorated significantly" over the last seven years.
Debt-to-GDP ratios in these countries have also risen by more than 10 per cent since 2007, it said.
"Fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa," the bank said in a statement.
The bank forecasts Kenya's GDP will expand by five per cent this year but slow to 4.7 per cent next year and four per cent in 2016.
Tightening the fiscal policy would mean adopting austerity measures that could see reduction in State spending. Radical moves such as reviewing some taxes downwards would also be in the mix to leave the population with more money to spend.
Increased public spending has seen Kenya's budget balloon year-on-year to Sh1.8 trillion in the 2014/15 fiscal year. Revenue collection is estimated at between Sh700 million and Sh800 million, meaning the country will have to raise almost Sh1.1 trillion in deficit. "Spending more wisely rather than spending more will be key," said Andrew Burns, lead author of the report.
The World Bank report says high government spending has seen fiscal and current account deficits widen across the region. This even as commodity prices fall, fetching less export earnings, while import levels have risen.
It projects a flat GDP growth for the sub-Saharan Africa region this year at 4.7 per cent, which will rise "moderately to 5.1 per cent" in 2015 and 2016.
This will be supported by firming external demand for commodities they export, and investments in natural resources and infrastructure, as well as higher agricultural production.
"Growth is expected to be particularly strong in East Africa, increasingly supported by FDI (foreign direct investments) flows into offshore natural gas resources in Tanzania, and the onset of oil production in Uganda and Kenya, and agriculture in Ethiopia," the report states.
The bank says while Kenya's impending re-base of the economy could hand it a middle income status, which could boost investor confidence, the revision does "not lessen current concerns regarding growth bottlenecks, weak governance and macroeconomic imbalances".
Weaker commodity prices are expected to negatively impact on FDI inflows in to the region, which will rise slightly to $32.5 billion from $31.9 billion in 2013. Higher inflation from extreme currency weaknesses and rising food prices also pose key risks to economic growth.