Experts warn of risks to 5pc economic growth projection

Wednesday, November 29th, 2023 06:54 | By
Economy expanded by 5.4pc in second quarter
Economy growth representation. PHOTO/Sharp Daily

High cost of living remains a key concern among Kenyans as the economy struggles to stay afloat, a new report shows. The report by the Parliamentary Budget Office (BPO) which provides professional and technical services to Committees of Parliament says high prices of food, fuel, energy and other inputs have continued to remain elevated.

The Quarterly Economic and Fiscal report for the period between July to September says the current tough economic environment is due to the rising cost of debt service, tight fiscal space, foreign exchange liquidity challenges, depreciation of the shilling and constrained business environment.

It raises concern that the shilling has lost 23 per cent to the US Dollar, 38 per cent to the GB Pound, 33 per cent to the Euro, 21 per cent to the Uganda Shilling and 12 per cent to the Tanzania Shilling between September 2022 and September 2023.

“The pressure on the shilling is fuelled by sustained demand for imports and subdued recovery in capital inflows as foreign interest rates remain elevated, enhanced dollar demand, and persistent strengthening of the US dollar globally,” the report notes. With respect to development, it adds that although there is growth in some key sectors in others growth has been slow.

According to the National Treasury, the economy is expected to grow at 5 per cent in 2023 up from 4.8 per cent in 2022 majorly driven by favourable weather conditions, performance of the services sector and impact of the Bottom-up Economic Transformation Agenda policies.

“However, given the multiplicity of the downside risks, this growth projection may not be achieved,” the report warns. With regards to public debt, it notes public debt stock stood at Sh10.52 trillion as at end of August 2023 comprising of Sh4.81 trillion and Sh5.71 trillion in domestic and external debt, respectively, which is the highest increase in Kenya’s public debt on record.

On inflation, the report says that domestically, it has decelerated to within the government target range at 6.80 per cent in September 2023 from a high of 9.23 per cent in February 2023.

This is due to the decline in food prices resulting from favourable weather conditions and government-backed duty-free import of food commodities including maize, rice and edible oils. However, the report raises concern that fuel inflation has remained elevated due to increased prices locally. This, the report adds has been aggravated by the jump in VAT on fuel from 8 to 16 per cent in the Finance Act of 2023.

Reads the report: “Going forward, inflation could remain high and even rise if further shocks occur, including those from an intensification of the war in Ukraine, the Israel-Palestine conflict, rise in commodity prices and extreme weather-related events.” It adds that this will continue to weigh heavily on the cost of living especially for the lower income brackets.

On interest rates and credit, the report says that despite the high interest rate on government securities, there has been a notable undersubscription in the 182- and 364-day T-bills and an oversubscription of the 91-day T bills. The 91-day, 182-day and 364-day T-bill rates have increased from 8.95 per cent, 9.62 per cent, 9.90 per cent respectively in September 2022 to 14.8 per cent, 14.82 per cent, 14.95 per cent at the end of September 2023.

The continued appetite for short-term papers, the report notes, may be attributed to the declining spread between the short term and long-term interest rates as well as investor expectations that the interest rates will continue in an upward trajectory.

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