Kenya braces for a tough economic year, despite growth predictions
After a period of sustained economic growth, the East African economic giant is struggling to balance its looming debt repayments, global and regional shifts, and a struggling private sector.
According to analysts, the country’s growth prospects for 2020 range from 5.5% percent to 6.1%, mainly driven by a revitalised private sector.
- Over the last few months, President Uhuru Kenyatta’s administration worked to remove the interest rate cap, which had seen banks cut lending to the private sector.
- Central Bank of Kenya Governor Patrick Njoroge has also promised that “this time will be different”, referring to the runaway interest rates that preceded the 2016 interest rate cap.
President Kenyatta’s administration also pushed both the central and county governments to stop delaying payments to suppliers, in a bid to get more money circulating in the economy.
- Treasury Cabinet Secretary Ukur Yattani said in the draft budget policy statement for 2020: “We project the economy to further expand by above 6.1% in 2020 and 7.0% over the medium term. This growth will be supported by the strong services sector, stable macroeconomic environment and ongoing investments strategic priorities of the Government under the ‘Big Four’ Agenda.”
Njoroge said he had “secured commitments from banks that they will act responsibly…[and] work for and with Kenyans”. At a press conference after the bank’s monetary policy committee further cut the benchmark interest rate, Njoroge also said that lenders will not use a “one size fits all” approach to determining credit risk, which he called “lazy banking”.
- “We were doing lazy banking before, that is what it was,” the governor said.
For lenders in Kenya, the current economic downturn and slow growth prospects present a major challenge.
The country’s once booming real estate sector is struggling, with dailies carrying multiple pages of properties on auction. But the challenge is that no one is buying the foreclosed properties, because of what some lenders say is a legal infrastructure that prevents them from selling them at lower prices.
- John Gachora, the CEO of the recently merged NCBA Group said last December, “Today, those who have money are sitting on it and those with assets are sitting with them. We are looking at each other. Only lawyers and auctioneers are making the money.”
A 2012 law prevents banks from disposing off foreclosed properties at any price below 75% of the market value. This was meant to ensure that borrowers would not have to dig further into their pockets to complete paying their outstanding loans, but lenders are now stuck in a situation where they have to offer properties for auction at prices far higher than what anyone is willing to pay.
Like the government, lenders now expect agriculture, small and medium sized enterprises and a robust private sector credit growth to close the gap. There are other challenges, such as climate change and global events.
- “Global outlook has not been good, with trade tensions, the outbreak of the coronavirus and other factors increasing the risk,” Njoroge said in late January. The country is also battling an unprecedented locust invasion, which may hurt or at least slow down its plans to improve food security.
Foreign remittances, by Kenyans in the diaspora and possibly Kenyan residents engaged in the gig economy, now account for the country’s largest source of foreign exchange.
Remittances in 2019 reached a peak of $2.8 million; in its draft budget policy document, the country’s treasury outlined a plan to revitalise other traditional foreign exchange earners, such as tourism and agriculture.
- As the situation at home grows dire, the country is growing increasingly dependent on FDI and Diaspora remittances. FDI now accounts for 2% of GDP.
- Despite the obvious risks of depending so heavily on foreign remittances to cover the foreign exchange accounts, Njoroge expects regional trade to offer the country “some sense of security”.
Kenya’s other foreign exchange earners, such as tourism and agricultural products, are not doing as well due to terror attacks, global tensions, and climate change which has caused flooding, followed by an unprecedented locust invasion.
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Currently battling a large-scale locust invasion, its first in over seven decades, the East African country has “already begun taking steps by being pioneers in green finance.
The inaugural green bond was cross listed on the Nairobi and London stock exchanges: “Climate change is real, with Africa contributing the least carbon to the atmosphere, but bearing the biggest brunt”, says the Governor.
- While the scale of the locust invasion was not at first obvious, the Kenyan government has stepped up efforts to halt its spread, but it might take months to bring the swarms under control.
- The newly appointed CS for agriculture, estimated that it would take at least six months to deal with the swarms, in which period the CBK Governor hopes the efforts will be sensible.
- “This is a climate change issue and it is going to affect food production in the country and every other sector,” he warned.
- Several NGOs have filed a petition with the country’s legislature to demand less toxic pesticides as well as public information on the kind of after-effects the chemical warfare against the locusts swarms will have.