Kenya’s Economic Growth Robust and to Grow by 6.5% in 2015 — IMF

Nairobi, Kenya, Capital Markets in Africa — Kenya’s economic growth has been robust despite headwinds from the global slowdown and ongoing domestic security problems, according to the International Monetary Fund (IMF) Country Report No. 15/269. However, the IMF revised its forecast for Kenya’s Gross Domestic Product (GDP) growth for 2015 from 6.9% to 6.5%, and trimmed 2016 figure from 7.2% to 6.8%. 

The Fund also revised inflation upwards to 6.4 percent from the previous projection of 5.2 percent while the current account balance is expected at 9.9 percent up from 7.3 percent and gross international reserves forecast for 2015 was slashed to US$7.5 billion from US$8.4 billion. 

According to the IMF’s report,  the reserves cover remains adequate at 3.8 months of prospective imports and 30% of broad money (M3) as of end-June 2015 because the gross reserves remain above the standard adequacy thresholds (3 months of imports and 20 percent of M3). 

The Brookings Institution also agreed that the near-term risks to the outlook remain on the downside and stated that: 

“While the recent lifting of the travel bans to popular tourist destinations could help reverse over time the sharp drop in tourist arrivals, security risks remain a serious challenge. A deterioration of economic and financial conditions in emerging markets or in Europe, the latter a major origination market for tourism in Kenya, could adversely affect growth”. 

The Washington based fund, further stated that private investment could be affected, particularly if FDI inflows for new oil exploration slow down significantly owing to depressed global oil prices.

Additional external risks relate to the timing and pace of exit from unconventional monetary policy in the U.S., which could lead to rapidly rising yields, further U.S. dollar appreciation, and knock-on effects on growth in emerging and frontier economies were also attributed by the Fund.  

Such global shocks could lead to a re-pricing of Kenyan assets and the exchange rate, as well as spillover effects on exports. In the event of economic distress in East Africa, in particular South Sudan, the cross-border activities of Kenyan banks could be adversely affected, IMF emphasized. 

Better still the IMF commended the ongoing scaling up of public infrastructure investment has key to unlocking Kenya’s growth potential. However, the report pointed the need to  maintain fiscal sustainability, to mobilize additional revenue and contain current spending.  

In respect of Kenyan banks’ exposure to foreign exchange (FX) risk , the Fund highlighted that the Central Bank of Kenya stringent limit on net FX open position (10 percent of core capital, including off balance sheet exposures) that has encouraged banks operating in Kenya to restrict FX lending to companies and individuals that are naturally hedged against FX risk.

“Further, Kenyan banks’ exposure to FX risk remained limited. About 16 percent of total assets and 23 percent of total liabilities are denominated in foreign currency, resulting in a net FX open position of 2.9 percent relative to total banks’ capital, which compares well with peer countries,” IMF said.

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