Kenya raises funds following decreased growth projections

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The World Bank is pledging to help Kenya build infrastructure, renew agricultural production, and cut inequality with a $4 billion programme to be paid out over the next five years. This comes after low agricultural output and an ongoing sequence of terrorist attacks resulted in Kenya recording slow growth in the first quarter of 2014.

Kenya’s Finance Minister Henry Rotich said in a press conference last week that international investors gave a vote of confidence after the announcement of a $2 billion Eurobond debut. He said that the country will grow at 5.8 per cent this year and 6.4 per cent next year.

The World Bank does not share Rotich’s optimism. It forecasts the country to grow at 4.7 per cent in the next two years, which is a downgrade to its previous 5.3 per cent prediction for this year.

“The new projections reflect the effects of the drought, the deteriorating security situation, the low level of budget execution, and tighter global credit as the US Federal Reserve winds down its expansive monetary policy,” the World Bank said in its report.

“While the first quarter outturn was slightly below our expectations, the steady acceleration in private-sector credit growth over the past year indicates a strengthening of the underlying growth momentum. IHS therefore maintains our forecast for real GDP growth of 5.3 per cent in 2014 and 5.7 per cent in 2015,” says Mark Bohlund, senior economist at economics consultancy, IHS Global Insight.

Tourism decline

Bohlund agrees that bad weather and terrorism affected Kenya’s agricultural and hospitality sectors negatively in the first quarter. He indicated that IHS is not expecting any near-term improvement in the country’s domestic security situation to support tourist arrivals, which declined by 15.9 per cent to 1.49 million arrivals in 2013, and is not likely to improve this year.

Terrorist attacks have been a serious problem in the country since they began in 2011. John Randa, senior economist for Kenya at the World Bank, confirms that the ongoing attacks, largely attributed to Jihadist-group Al-Shabaab, are affecting both tourism revenues as well as investments. Foreign direct investments to Kenya remain low at one per cent of the country’s GDP.

Agriculture output

Growth had been hit hard by low agricultural output because of delayed rains. The World Bank estimates that drought has cost Kenya $12 billion over the past decade. However, Bohlund indicates that Kenya’s agricultural sector should be more supportive  of headline GDP growth in the remaining quarters of the year as weather conditions have improved somewhat.

“This, combined with the steady strengthening in domestic demand, should bring full-year GDP growth towards our 5.3 per cent forecast,” says Bohlund.

Rotich told journalists that the first $600 million of the Eurobond will go to paying off a bank loan, while the rest will likely be used for infrastructure. The World Bank states that it would like to see its backing be used to narrow the income gap and lower poverty levels.

“We expect the increased credit expansion following the March 2013 elections to continue to support acceleration in real GDP growth. We are forecasting real GDP growth of 5.7 per cent and 6.5 per cent in 2015 and 2016 respectively, as a ramp-up in infrastructure and energy-sector investment adds to accelerating private consumption growth,” concludes Bohlund.