Kenya: Country outlook
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- Economist Intelligence Unit
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Kenya: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Economist Intelligence Unit expects Kenya to continue to function as a relatively stable democracy, but the forecast period will be difficult for the government, with the coronavirus (Covid-19) crisis scarring the macroeconomic landscape. Many years of public-sector overspending and a resulting debt overhang have become pressing issues, forcing the adoption of tighter fiscal policy under IMF oversight. Austerity is likely to prove unpopular, but should not be an insurmountable challenge for the government, with a robust private sector picking up some of the slack and growth returning to fairly strong levels.
ELECTION WATCH: Mr Ruto's hopes of being the Jubilee Party's presidential nominee in 2022-in line with an informal agreement with Mr Kenyatta (currently serving his second presidential term and therefore constitutionally barred from running for re-election)-are fading. The president is building a new alliance, with an alternative candidate (possibly Mr Odinga) to contest the presidency, allowing Mr Kenyatta to retain influence after stepping down. a pressing concern is rectifying the failings of the dysfunctional Independent Electoral and Boundaries Commission, to advance Kenya's democracy and reduce the risk of another fraught contest in 2022. However, we do not expect the same level of division that marred Kenya's previous poll, as the political landscape is now more fluid.
INTERNATIONAL RELATIONS: Foreign policy will be largely influenced by commercial and security interests, especially the maintenance of close relations with multilateral donors and the advancement of regional integration within the East African Community (EAC) and across Africa. Kenya will maintain close ties with the US and the UK (including military co-operation against al-Shabab). A Kenyan-US bilateral trade agreement is being considered, but a deal would pose a risk to the EAC unless all members signed up to the same template. Kenya will be unable to navigate this problem in the short to medium term. Its international status will benefit from its election to a two-year stint on the UN Security Council from January 2021.
POLICY TRENDS: Policymaking in 2021-22 will focus on the Covid-19 vaccine rollout, but a wider theme will be repairing the pandemic-induced damage to the economy and the public finances. Debt and fiscal overhangs will force a return to the consolidation agenda that preceded the pandemic. This will be a difficult balancing act considering the need for an economic recovery, but debt issues are increasingly pronounced. The government has decided to participate in a debt-service-suspension initiative from the Paris Club (with savings of US$631m) until end-2021. Another US$245m has been deferred on Chinese debt to end-June. As private debt will continue to be fully serviced, crucial access to external financing should be unaffected, and the government has reaffirmed that it does not intend to pursue further debt relief than it has already secured.
ECONOMIC GROWTH: Following a marginal estimated real GDP contraction in 2020 (Kenya's first since 1992), we expect a recovery in 2021, with growth of 3.3%. This is below trend, and reflects renewed localised lockdown restrictions (including in and around the capital), as well as fiscal tightening and the enduring impact of the pandemic on domestic sectors such as tourism (which before the pandemic accounted for about 8% of GDP). Kenya's farm-based exports are, however, proving resilient to a challenging global backdrop, with international demand for crops such as tea remaining strong.
INFLATION: Inflation will pick up in 2021 following a slowdown in 2020, which was caused by a crash in global oil prices, as well as by a recession and cuts to the VAT rate and money transfer fees. The reversal of consumer tax measures and higher oil prices are expected to result in average inflation of 6% in 2021, up from 5.4% in 2020. There have been unofficial reports of a government plan to forestall upward fuel price adjustments by introducing subsidies, but petrol price controls are not expected to become a formal policy, as this would run contrary to fiscal consolidation aims under the IMF programme. We expect annual inflation to continue to rise, to 6.3%, in 2022 as world oil prices increase further and domestic demand strengthens. We forecast that inflation will ease to an annual average of 5.9% in 2023-25, reflecting lower world oil prices and monetary policy tightening.
EXCHANGE RATES: The Kenyan shilling regained some lost ground in April, following a credit agreement with IMF and higher remittances as stimulus in the US was rolled out and other key diaspora markets such as the UK reopened their economies. However, as terms of trade worsening, we expect moderate depreciation to take hold in the coming months, with the shilling forecast to average KSh109.1:US$1 in 2021, weakening from KSh106.5:US$1 in 2020. The legacy of historical real effective exchange-rate appreciation presages a correction in the context of a wide current-account deficit, and ongoing coronavirus restrictions in advanced markets will limit tourism earnings. In 2022-25 we expect that external imbalances will maintain pressure on the nominal exchange rate, but that the pace of depreciation will slow, given fiscal tightening and a decline in the current-account deficit. The shilling is expected weaken to an average of KSh124.2:US$1 in 2025.
EXTERNAL SECTOR: With oil accounting for 15-20% of the import bill, rising prices in 2021-22 will widen the merchandise trade deficit. The increase in import spending will only be partly offset by rising export earnings: as an agricultural exporter, Kenya will benefit from sustained external demand for agricultural goods, while manufacturing exports are also set to grow, together with expansion in the sector more generally. As a proportion of GDP, the trade deficit is forecast to peak at 10.3% in 2022, before declining from 2023 as oil prices moderate and exports continue to grow.
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