Kenya Politics August 2017

Kenya

Kenya: Country faces mounting economic challenges as Kenyatta holds on to power

August 21, 2017

Incumbent President Uhuru Kenyatta hailed victory in what was once again a fiercely contested and drama-ridden presidential election on 8 August. Tough trials lie ahead of the president however: to revive the economy’s lost momentum and to stabilize the highly contentious political climate. Violence broke out in street protests after opposition leader, Raila Odinga, accused the winning side of election fraud and has refused to accept the results.

Local and international observers on the whole have shot down Odinga’s claims, voicing that the election process was conducted fairly and urging the opposition to restrain from prolonging political tensions, which have exacerbated a slowdown in business activity in an economy that is already grappling with dwindling growth. GDP growth plunged below 5.0% annually in the first quarter as growth momentum was beset by a severe drought at the start of the year. This fueled an escalation in food prices and disrupted economic activity. In addition, key sectors of the economy ground to a halt during the tense election period due to many businesses closing their operations, which hindered private sector activity into Q2. Despite the political noise, most businesses have now returned to their daily trade, defying calls from the opposition to remain shut in protest of the allegedly rigged results, although it will take time to make up for the lost period of activity.

Slackening growth, especially in the hard-hit agricultural sector, a rapidly rising debt burden and elevated unemployment are among the daunting economic challenges confronting Kenyatta, together with the need to build the economy’s resilience to natural disasters. Once lauded as East Africa’s model economy, Kenya is now being eclipsed by the strides of regional players such as Ethiopia—which overtook the country as the region’s largest economy earlier this year—and Tanzania which is not far behind.

Kenyatta has set ambitious targets for his second term, pledging to take the economy to new heights. He has promised to elevate the economy to middle-income status by 2022 through a program of investment in vital public infrastructure and an expansion in financing for small businesses. The latter will be crucial to driving the growth of small businesses, as private sector credit growth has diminished owing to a cap on commercial lending rates that was introduced in August 2016. This has hampered private sector activity, which is reflected in the PMI which contracted for the third consecutive month in July. The timing of the removal of the cap is likely to feature among the top priorities of the government in its bid to jumpstart growth, amid petitions from at least 12 banks calling for the cap to be lifted. Another primary concern is how Kenyatta will meet his election spending pledges while there is a need for fiscal consolidation to ensure the economy advances along a sustainable debt trajectory. Overall however, Kenyatta’s victory and the resulting continuation of the status quo has been heralded with optimism by investors, who envisage continued stability and Kenyatta’s business-friendly stance as key to putting the economy on to a path of greater prosperity.

The impact of Kenyatta’s proposals will take time to translate into higher growth however, as the economy staggers back to its feet from the adverse effects of the drought and turbulence around the election. Thus, FocusEconomics Consensus Forecast panelists expect GDP growth to slow to 4.9% in 2017, which is down 0.1 percentage points from last month’s forecast. In 2018, our panelists expect growth to pick up to 5.5%.


Author:, Economist

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