Business: The Current State Of Kenya’s Economy

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Kenyan money. Image from http://www.moneytimes.com/articles/9581/20151121/seized-kenyan-bank-plans-raise-98-million-start-operating-again.htm

Kenya’s current economic state is defined by words such as stagnation, high unemployment rates, reduced wages, high-interest rates, loss of revenue streams costing people jobs, social inequalities, increases in the national debt, extrapolating what compounds to an economic recession.

Nonetheless, according to the 20th edition of the Kenya Economic Update hosted by World Bank, Kenya is said to be experiencing economic growth with projections estimated at 5.8% by 2019 and settling at around 5.9% over the medium term.

World Bank states that the macroeconomic environment in Kenya remains broadly stable with low inflation and manageable current account deficit. This is not what the common mwananchi would say though.

Which begs the question: why don’t the numbers match up to the situation on the ground?

Kenyan money. Image from http://www.moneytimes.com/articles/9581/20151121/seized-kenyan-bank-plans-raise-98-million-start-operating-again.htm

Few key factors came up during the Kenya Economic Update launch, explaining why the majority of the Kenyan population did not feel this GDP growth.

  • In 2019, economic activity primarily softened due to weak private sector investment and lower agricultural activity. This speaks volumes considering that about 75% of Kenyans earn their income from the agricultural sector. University youth encouraged to exploit potential in Agribusiness
  • The fiscal turn out data released by the National Treasury in September 2019 shows a substantial increase in the budget deficit, from 7.4% to 7.7 %. This has resulted in the rise of the public debt stock and weakening of the private sector credit growth.
  • Limited access to credit by the private sector has grown by about 6.3% in August 2019. This has hindered growth as well as provided challenges in delivering social, economic and environmental development, a crucial role played by the private sector in the country.
  • At the heart of the narrowing current account, the deficit is a challenge which comes from the intensified competition in the manufacturing industry. Kenya’s manufacturing exports to Africa have declined for three consecutive years at an average of 3.6% decline each year. Critical tax issues and the impact on manufacturing.
  • Despite low inflations headlined at an average of 5.2%, interest rate caps still constrain the operating environment for the banking sector. This has reduced the effectiveness of monetary policy in responding to the slack in the economy and at the same time choked the growth of SMEs. Hence why president Uhuru Kenyatta has recently called for a repeal of the Banking Amendment Act of 2016.

Something to note is that, if approved, this Bill is expected to have complementary reform measures, which eliminate what has been a powerful deterrent for banks to lend to SMEs. In the same way, it should address government domestic borrowing, returning Kenya to a path of fiscal consolidation and thus boosting the economy.

Image from: https://www.pexels.com/photo/bank-banking-banknotes-business-210574/

What does this (repeal/removal of interest rate caps) mean to the common mwananchi?

It opens a gateway for borrowing as banks will be ready to lend to the majority as compared to now. The downside of this is that Wanjiku will be at the mercies of banks who will again hold the liberty to price their loans depending on their risk assessment. That is unless measures that strengthen credit-information, sharing and promote transparency in the pricing of credit, will accompany this repeal.

Reforms that address the root cause of high-interest rates should also accompany this step.

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Businesses today appreciate the impact of a vibrant SME ecosystem. But the private sector cannot act alone. When it comes to fostering an ecosystem that boosts the growth of SMEs there needs to be credible adjustment measures by the government.

These include implementing actions that increase revenue, economic and monetary policy mix to sustain economic growth, revenue projections that are more realistic, digital infrastructure investment, human capital, strong expenditure controls, debt & cash management and measures that adjust government’s borrowing plans. This could help re-balance the public debt portfolio towards lower cost, reducing its vulnerability to market instability and creating fiscal space.

By placing fiscal accounts back on a prudent trajectory, the government also curbs the crowding-out effect, thus widening the access to credit by the private sector and restoring business confidence. Economic gains from vision 2030.

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