Kenya Shilling, Rates at Risk From Fed Tapering, World Bank Says

Kenya’s shilling is expected to be more volatile and credit costs will rise when the U.S. Federal Reserve begins cutting monetary stimulus, the World Bank said.

“The tapering of the liquidity injection by the U.S Federal Reserve will cause volatility in Kenya’s exchange rate and increase domestic interest rates as Kenya is a major recipient of short-term flows, which finance the current account,” the lender said in a report distributed today in the Kenyan capital, Nairobi.

The Fed is expected to begin paring its $85 billion of monthly bond purchases when policy makers meet Dec. 17-18, according to 34 percent of economists surveyed by Bloomberg Dec. 6, a jump from 17 percent last month. The purchases have fueled inflows into emerging markets.

Kenya’s shilling has weakened 0.7 percent against the dollar this year, paring its losses after trading at a 14-month low in February ahead of the country’s presidential elections. Kenya’s central bank has cut interest rates twice this year to 8.5 percent, the lowest since September 2011, to stimulate economic growth.

Growth in East Africa’s biggest economy is expected to be 5.1 percent next year, supported by government spending on infrastructure projects, the World Bank said. The forecast expansion compares with anticipated growth of more than 5 percent this year and 4.6 percent last year, the lender said.

Growth is expected to accelerate to 5.2 percent in 2015 and 5.3 percent in 2016, it said. The outlook may be dampened by “the burgeoning wage bill, inadequate implementation of the devolution process, and poor absorption of budget funds,” it said.

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