CBK banks on rains to jump-start growth

The Central Bank of Kenya is banking on increased government spending and the expected heavy rains in October to help revamp the ailing economy.

At a press briefing by the Monetary Policy Committee (MPC), Prof Njuguna Ndung’u, the Central Bank governor and chairman of the committee, on Friday said the two are the only hope Kenya has to improve economic growth already on a slowdown.

The country’s economy has slowed down from a high of 7.1 per cent in 2007 to 1.7 per cent last year with this year’s projection put at 3.2 per cent although the government has said it might be revising the figure downwards.

Drought impact

The slowdown was attributed to the post-election violence at the start of last year and the global economic meltdown during the fourth quarter of 2008.

“The committee was of the view that the downside risks to economic growth had significantly increased for 2009 because of the combination of the impact of drought and the negative effects of the global economic crisis,” said Prof Ndung’u on Friday.

The committee, however, said the stimulus package would spur spending and create jobs, while increased rains would reduce power rationing and result to higher tea and coffee production thus improved earning. It said that with high income from the various projects including agriculture spending would also get a boost.

The government expects to spend about Sh55 billion in accelerating economic recovery by injecting the money in labour intensive projects, such as the Kazi kwa Vijana (Jobs for the youth) initiative and constituency based projects as way of spreading wealth.

“If the fiscal stimulus package expenditure gets underway in early October 2009, it can be expected to generate significant consumer demand particularly in rural areas in the course of the fourth quarter,” the governor added.

Cutting rate

On lending, the committee noted that despite cutting the CBR to 7.75 per cent in July and reducing the cash ratio requirement by 50 basis points to 4.5 per cent, lending rates have remained unchanged limiting uptake of credit by the private sector.

“However, it was noted that structural factors might have contributed to this rigidity,” said Prof Ndung’u. “What remains is a discussion with the banking sector to find ways on how to improve the intermediation process - so that its signals could be transmitted to the various sectors of the economy.

Overall, MPC expects a slowdown in economic growth caused by the effects of drought as the country’s economic bedrock agriculture suffers the most.