BusinessPeople Daily

Mixed expectations on economy as 2017 dawns

Kenyans should expect mixed fortunes as the New Year kicks into gear. To start with, the government has already projected a slight slump in the economy, occasioned by the General Election in August, global economic uncertainty and the cap on loan interest rates.

National Treasury Principal secretary Kamau Thugge told the People Daily that the three factors are expected to impact the economy negatively, hence the slight dip in growth forecast.

“The year’s (2017) economic growth might be slower. Our economic growth is expected to slump from six per cent in 2016 to around 5.9 per cent due to the impending General Election slated for August and the global economic uncertainties, among other reasons,” he said.

“But the slower economic growth will not affect Kenya only but rather affect almost all countries. Currently, the world economy is growing at a much slower pace of around 3.1 per cent. In sub-Saharan Africa, the growth is even lower, at around 1.4 per cent. So when our economy is growing at six per cent, it is very significant when compared to the rest of the world,” added Thugge.

Already, the country has started on a wrong footing with political rivalry, especially on electoral reforms, sparking anxiety. Failure to agree on electoral reforms, including governance and the volatile campaign period commencing in May, is expected to raise the risk of ethnic tensions hence increase chances of pre and post-election violence.

Equally, the Banking Act (Amendment) Act, 2016, which capped lending rates is also expected to have a negative impact on the economy. Advisory firm Cytonn Investments projects that capping of interest will lock out SMEs and other perceived “high risk” borrowers from accessing credit, as the banks opt to loan to the government.

“This will effectively lead to lower standards of living in the economy as the lower access to credit leads to a decline in both consumption and investment expenditure, reducing aggregate demand in the economy,” Cytonn said in an advisory note.

The security challenge, especially the threat posed by Somalia-based Islamist group al-Shabaab, will also put a damper on the economy. But it will not be all gloomy as some sectors are expected to rebound.

For instance, the insurance industry is expected to surge this year after implementation of new Insurance Regulatory Authority (IRA) regulations, which include the introduction of risk-based capital requirements. Requirements increased the minimum core capital for both life insurance business from Sh150 million to Sh400 million and long-term insurance business from Sh300 million to Sh600 million.

Implementation began in June 2016 and will continue till June 2018. Insurance industry is also set to grow because as from 1 January, importers are required to procure marine insurance locally, under the revised Section 20 of the Insurance Act.

The regulation was part of the 2016/17 budget measures introduced by the National Treasury to raise revenue for the government by ensuring that all the insurance premiums initially paid to overseas insurers are instead directed to local insurance companies. It is expected to raise Kenya’s marine cargo insurance premiums from the current Sh2.9 billion to between Sh25 and 30 billion a year.

Construction and infrastructure sectors are also expected to grow exponentially after the Treasury allocated projects in roads, rail, ports and energy Sh205 billion in the current 2016/2017 budget.

The projects have also been allocated a substantial amount of money in the 2017/18 budget, which is expected to be passed by the House in March. In the construction sector, the government is expected to continue with the construction of 150,000 “lower class” housing units, a project supported by the World Bank and UN Habitat.

This year, there will be increased development activities at the counties after the increase of budgetary allocations to the devolved units in the budget. According to the Budget Policy Statement (BPS) report presented to the National Assembly last month, the devolved units are expected to receive Sh299.1 billion of the total sharable revenue for 2017/18.

Counties will also get Sh34 billion as conditional grants. In the current financial year, the devolved were allocated Sh302 billion, including conditional grants. The cash, and the Equalisation Fund for the marginalised counties, is expected to spur economic activities across the country.

The manufacturing sector, which accounts for about 14 per cent of the GDP, is also set to get a lift after the re-opening of new factories including Panpaper (now Rai Paper) in Webuye and Volkswagen Group motor assembly plant in Thika.

Several Chinese manufacturers are already setting up local production plants in Kenya, thereby shifting from the previous strategy where they supplied the domestic consumer market from China.

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