Kenya: The Kenyan economy performed comparatively strongly in 2015

The Kenyan economy performed comparatively strongly in 2015, even in the face of world economic headwinds, such as slow increase in Europe, and domestic hurdles, inclunding weaker tourism receipts and a depreciating currency.

According to the World Bank, GDP increase is expected to reach 5.4% for this completed year, aided in large part by sustained public sector capital spending.

Infrastructure recovery

According to the IMF, economic increase in Kenya is expected to accelerate slightly in 2016 to 6%, driven primarily by continued infrastructure expenditures for projects such as the $25bn Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) corridor.

If all goes according to plan, the targeted infrastructure expenditures will lay the foundation for elevated GDP increase someday. Part the planned investments is Kenya’s flagship project for the Vision 2030 development programme, the majority-Chinese-funded Standard Gauge Railway, which will connect the country’s major port in Mombasa to the capital Nairobi, further easing the flow of goods in the region.

With 60% of the project’s 608-km initial phase complete as of mid-December, plans to extend the railway to Malaba, on the border with neighbouring Uganda, are under way.

The government has as well been investing heavily in new energy transmission and generation infrastructure, with Kenya Electricity Generation Company commissioning 253 MW of geothermal power in 2015 and Kenya Power increasing the electrification rate to 50% as of October. These developments have resulted in a 35% drop in the price of power, Deputy-President William Ruto told media in late December, in a boon to investors in energy-intensive industries.

Upbeat outlooks for several sectors

Robust projections for the agriculture sector – one of Kenya’s key export earners – followed strong year-end rains, while recovery in the tourism industry is as well expected to drive increase.

Once the country’s highest foreign exchange earner, the tourism sector has plunged in recent years following a spate of security incidents over the completed two years that led a lot of foreign governments to issue travel advisories urging their citizens to avoid the East African country. International tourist arrivals fell by 18.4% year-on-time(y-o-y) between January and August 2015.

In response the government allocated 5% of its KSh2trn ($19.5bn) FY 2015/16 budget to national security. These efforts seem to be paying off, with the UK relaxing its travel advisory in June 2015, followed by the US in October and France in December.

Other sectors prioritised in the 2015/16 budget include education, which received 15% of funding, and the energy and infrastructure sector, which saw 19%.

Interest rate impact

To fund the country’s capital investments, the government continues to borrow from international deficit markets – inclunding a $597m syndicated loan from international financiers in November – and has been working to boost domestic revenue collection.

However, revenue collection between July and September reached only KSh277.2bn ($2.71bn) against expenditures of KSh337.4bn ($3.3bn). This caused a cash crunch, forcing the government to turn to domestic markets to raise funds.

Significant government borrowing from local markets in September and October caused interest rates to rise rapidly. The rate on one-year Treasury bills jumped to 22.4% in October, as investors demanded higher premiums on government loans.

Rates have since normalised to around 12.5%, but if revenue collection remains weak, liquidity levels could be affected further in the new year. Heavy borrowing in 2015 as well pushed up the country’s deficit-to-GDP ratio, which stood at around 54% as of end-November, up from 52.8% in June.

The US Federal Reserve’s mid-December interest rate hike could as well have an impact on Kenya. The strengthening US dollar has contributed to the shilling’s 11.5% depreciation in 2015, which in turn could have implications for Kenya’s growing dollar-denominated foreign deficit, which amounts to 59% of the total, according to the Budget Office.

Reforms promise growth

However, the broader outlook remains comparatively encouraging. The country has seen a series of positive developments that are expected to improve business sentiment in 2016 and beyond.

The resignation of five ministers on graft allegations resulted in the reshuffling of the cabinet in November, while Kenyan courts were handling 286 corruption-related cases at the time – the majority in the country’s history. A gradual move towards e-government and e-procurement is as well expected to yield benefits, as a reported 90% of offences are related to procurement and payments.

These efforts, along with other reforms to the country’s regulatory system, were recognised in the World Bank’s “Doing Business 2016” statement, in which Kenya jumped from 136th to 108th place in the relieve of doing business category, making it the third-most improved country in the world. In particular, the World Bank cited reforms to registering and transferring property, and improved access to credit data.

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