Kenya Spotlight

Economic resilience set to continue in 2017/18. This week's data releases by the IMF, World Bank and Kenya's National Bureau of Statistics highlighted the robustness of the economy last year. Despite weather-related agricultural difficulties. solid consumer demand, its non-dependence on resource exports, whose prices remained subdued, and prudent monetary policy stance helped to keep both economic growth and inflation close to 6%. The weakness in energy prices (Kenya is a net oil importer) and a dip in infrastructure spending also underpinned improvements in both the current account and government balances. These trends are poised to continue over 2017/18.

However, the August general election is a source of concern. Signs of a pickup in politically motivated violence have rekindled memories of the aftermath from the 2007 vote.

There is also scope for significant fiscal slippage. The government has promised an ambitious increase in infrastructure spending this year, especially in transport and energy while also vowing to maintain a tight grip on its fiscal consolidation path. In the event, there is a real possibility of an overshoot in public debt and a post-election hangover as external borrowing costs spike.

The interest rate cap is another key downside risk. Last year's politically popular introduction of an interest rate cap on bank loan charges, ostensibly to reduce excessive borrowing costs, has reduced access to credit, hindered financial inclusion and weakened the monetary policy transmission mechanism. Such negative impacts could realistically outweigh the potential benefits from lower borrowing costs and push GDP growth towards 5% this year.