21 May 2019

Kenya Headed for Stable Growth, Healthy Forex Reserve - Study

Kenya's economic growth is likely to increase to an average of six per cent throughout 2020 to 2023, according to a new report from the Economist Intelligence Unit (EIU).

In a generally upbeat analysis of foreign exchange availability and commercial credit for businesses across five key sub-Saharan African economies, the London-based EIU says that key economic indicators in Kenya show that although inflation will rise to nearly six per cent this year the current account deficit should narrow to below three per cent by 2023.

The other economies analysed in the study are Ethiopia, Nigeria, Tanzania and Zambia.

"Kenya is unusual in the region in having a market-determined exchange rate and no restrictions on the availability of foreign exchange. However, the IMF changed the classification of Kenya's exchange rate regime from a float to a stabilised arrangement," says the report.

The EIU says the consequences for this are that there could be foreign exchange shortages "over the medium term."

The report also says that working capital shortages are a noticeable problem for businesses and that the situation is exacerbated by a cap on interest rates that has had the unintended effect of drying up credit for local businesses.

"[Access to finance] is a pervasive problem across sub-Saharan Africa's shallow financial markets for multiple reasons," the report says. "In Kenya, Tanzania and Zambia businesses have a particular concern about their governments crowding out credit."

Nonetheless, no foreign exchange shortages have been reported at present, with businesses able to obtain it from the commercial banks and remit it overseas without restrictions.

Banks offer accounts in US dollars and euros and it is easy to transfer money between accounts. The Kenyan shilling has been quite stable against the dollar over the past 18 months despite a prolonged period of political uncertainty.

"The overall performance of the economy has been supported... by its diversified pool of enterprises," the report says. "Investor and business perceptions of the Forex exchange market are currently very positive."

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