Global Markets, Insecurity Remain Key Risks for Kenya, IMF Says

  • Kenya's economy to grow 6% this year from 5.6% in 2015
  • Net capital inflows may drop $5 billion on global instability

Adverse weather, insecurity and volatile global financial markets remain the biggest threats to Kenya’s economy, the International Monetary Fund said Tuesday, as it cut its gross domestic product forecast for this year to 6 percent, from a previous estimate of 6.8 percent.

East Africa’s biggest economy expanded by about 5.6 percent in 2015, slower than anticipated, mainly due to delays in planned road infrastructure spending, weaker tourism earnings and volatile external financing conditions. Adverse shocks to the economy in 2015 shaved growth by an estimated 1.3 percent of GDP, it said.

“A potential increase in volatility of capital flows represents the strongest downside risk,” the IMF said in an e-mailed statement. “Other downside risks include residual security challenges, the uncertain impact of weather-related effects of El Nino on agriculture, pockets of vulnerabilities in the banking system, significant uncertainty about FDI in oil and gas exploration, and possible pressures for higher current and capital spending as the 2017 presidential elections approach.”

The IMF last week approved $1.5 billion in precautionary loans to cushion Kenya from external shocks over the next two years.

In the event of another period of global financial instability, net capital inflows could drop by $5 billion over the next two years, including a $3 billion reduction in portfolio flows and $1.2 billion in foreign direct investment, it said.

Kenya’s current account deficit narrowed to an estimated 8.2 percent of GDP in 2015, from 10.4 percent in the previous year, following the decline in oil prices, the IMF said. A drop in financial inflows more than offset that improvement and contributed to faster shilling depreciation.

Economic growth is expected to pick up after 2016, underpinned by a more favorable business environment, better transport and energy infrastructure and regional integration, the IMF said.

It expects inflation to remain above the government’s upper target of 7.5 percent in coming months and to slow below 7.5 percent by mid-2016. Annual inflation came in within the government’s target corridor in February at 6.8 percent.

The shilling has gained 0.6 percent so far this year and lost 11 percent to the dollar in 2015, according to data compiled by Bloomberg.

“The staff argued that inflation risks remain elevated in the near term, reflecting continued demand pressures, including from the fiscal impulse in 2015/16 and still-buoyant credit growth -- about 18 percent at end-December 2015 -- and possible second-round effects of previous exchange rate depreciation and supply shocks as reflected in rising non-food non-fuel inflation,” it said.

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