Kenya: Economic Growth Looking Up - World Bank

Increased fuel prices after the imposition of an eight per cent tax on petroleum products could affect the economic growth of Kenya.
17 October 2018

Kenya's economy is projected to grow by 5.8 per cent next year supported by strong remittance inflows and rising household income from agriculture harvests and lower food prices.

According to the World Bank's biannual report, gross domestic product growth in Kenya will increase to 5.8 per cent in 2019 and could rise to six per cent by 2020.

The bank notes that economic headwinds in 2017 adversely impacted manufacturing, but with their easing a modest recovery is underway, albeit uneven.

"Manufacturing is still recovering and activity remains sluggish. The sector growth rose from 0.5 per cent in 2017 to 2.7 per cent in 2018, but still remains weak compared with a three-year average of 3.6 per cent over 2013 to 2016," states the report released in Nairobi last week.

After a prolonged drought and lower credit to the private sector last year, East Africa is projected to grow by 6.1 per cent this year thanks to a rebound in agriculture due to favourable weather and a rise in private sector growth.


Increased rains, an improved business environment as well as easing of political uncertainty are the key drivers of Kenya's recent growth, underpinned by strong agricultural output and good performance by the service sector.

"Apart from the road network, which has improved significantly over the past decade, the standard gauge railway has eased movement of people and the port of Mombasa, which still has its own challenges, has improved vessel turnaround times and reduced container transit time," said Peter Chacha, a senior World Bank economist at the release of the October 2018 economic update.

The downside of the projections is the recently introduced VAT of eight per cent on petroleum products, which, combined with rising global oil prices, will affect household incomes.


Further, the Bank projects that with the law that restricts movement of interest rates and banks leaning towards government securities, credit is unlikely to grow, especially for small and medium-sized enterprises.

"A lack of access to credit for the private sector presents a significant downside risk to growth prospects since it could soften the projected uptick in domestic demand and derail business expansion plans, particularly in terms of funding micro, small and medium sized enterprises," the report states.

SMEs are also likely to be affected by the recent reduction of the policy rate by the Central Bank of Kenya.

In August, the CBR was lowered from 9.5 per cent to 9 per cent. This means that banks will get lower margins of profit, which could result in less lending to SMEs.

"To support private sector-led growth and advance the Big Four agenda, advancements are needed in e-vouchers to target small-scale farmers with fertiliser subsidies, approve warehouse receipts system and provide extension services," said Mr Chacha.

"There is also limited progress on some structures to advance the Big Four agenda, like lack of operational efficiency at NHIF, and a multiplicity of taxes across counties. On affordable housing, minimal prices for professional services on housing have not been eliminated," he added.

The Big Four is a government initiative meant to spur growth through boosting manufacturing, achieving universal health coverage, enhancing food and nutrition security and supporting the construction of at least 500,000 affordable houses by 2022.

"With continued jitters among global investors, emerging and frontier markets like Kenya remain vulnerable to changing sentiments. The country's vulnerability could intensify given the upcoming bullet payment for its Eurobonds and other commercial syndicated loans," says the report.

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