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Low exports, weak shilling dim prospect of 7pc growth

Tuesday September 1 2015

National Treasury Cabinet Secretary Henry Rotich outside the Treasury building in Nairobi on June 12, 2014. FILE PHOTO | SALATON NJAU

National Treasury Cabinet Secretary Henry Rotich on June 12, 2014. A number of factors are likely to conspire to hamper Kenya’s projected healthy growth, experts have warned. FILE PHOTO | SALATON NJAU | NATION MEDIA GROUP

A number of factors are likely to conspire to hamper Kenya’s projected healthy growth, experts have warned.

Analysts’ say low exports volume, weak shilling, and widespread demand for salary increases could undermine the projected growth of between 6.5 and 7 per cent this year.

Experts now say the growth forecast is too ambitious and have instead placed it at about 5 per cent, nearly the same level with what was recorded in 2014.

“There is nothing significant that has happened or seems likely to happen to warrant the growth rate projected by the government. Looking at the average growth for the last three years that is about 5 per cent, such projection is not easy to achieve,” said Mr John Mutua, an officer in charge of budget at the Institute of Economic Affairs.

The National Treasury last week said the economy would pick up the pace to grow at between 6.5 and 7 per cent, but warned that increased wage bill as a result of agitation for higher salaries poses the greatest threat to the achievement of this growth.

The Director General of the Directorate of Budget, Fiscal and Economic Affairs, Geoffrey Mwau last week said the demand for higher salaries has the potential to slow down the economy.

He was speaking during the launch of Budget 2016/2018 sector working groups at the Kenyatta International Convention Centre in Nairobi.
Economic experts also say that high energy costs and the weakening shilling are likely to hurt the manufacturing sector.

“A weak shilling that is subject to international situation is likely to harm industries that rely on imported inputs. Companies like Athi River have already started complaining about the losses they are making,” said Mr Gitau Githogo, an economist.

He said the diversion of development funds to finance recurrent expenditure will also impact negatively on the economy.

“The growth is predicated on the ability to manage expenditures. There is a major risk in meeting these (salary) demands as we have seen this week with the Sh17 billion more required for payment of teachers,” Mr Mwau said.

BORROW MORE

“Demand for wage increases means the government will have to borrow more, cut development expenditures or raise taxes.”
The government is faced with a budget deficit of Sh567 billion and experts have warned this might worsen with teachers increased payment. If teachers’ demands are met, other civil servants may also agitate for pay increase.

The total national debt stands at Sh2.8 trillion and this is expected to go up as government seeks to borrow more to cover the budget deficit.

The debt levels stand at 51.5 per cent of the Gross Domestic Product. Experts say this is still sustainable as it falls below 74 per cent that is regarded as upper limit. The experts, however, aver that a debt below 50 per cent of GDP would enable the economy to withstand external shocks.

Increased recurrent expenditure, analysts say, might result in violation of the Public Finance Management Act that puts the threshold of expenditure on development at 30 per cent of the total budget.

The total wage will stands at Sh568 billion, which is 52 per cent of the national revenue. The government has been unsuccessfully battling to contain this astronomical amount in the last two years.

Experts have warned that the general weakening of China’s economy and the volatility in the international oil markets might hamper the anticipated growth.

“There will be a great challenge if China withdraw or delay their financing commitment for infrastructure projects as it will have a great impact on the growth of the economy. Kenya is very vulnerable to external shocks and even the stand-by facility from IMF will come with stringent conditions,” Mr Githogo said.

The widening current account deficit, he says, is a bad sign for the economy as most of the traditional exports of tea, coffee and horticulture are experiencing various challenges.

“The high budget and current account undermine the confidence in the economy. We have seen some equity investors leaving the country because of the weakening of the currency. The 7 per cent growth projection is too optimistic and it’s not clear how this will come about,” Mr Githogo said.

Mr Mwau also expressed concern over the current account balance saying in the last two years, exports have been performing poorly, while imports have been increasing for manufacturing and infrastructure sectors.

Tourism has also been declining for the last two years.

“Foreign exchange reserves at $7.2 billion can cover 4.4 months of imports which is fairly comfortable but is on the decline,” Mr Githogo said.
“We need to put more effort in growing reserves through increasing our exports.”

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