Go to the Globe and Mail homepage

Jump to main navigationJump to main content

A fuel attendant handles Kenyan shilling notes at a petrol station in the capital Nairobi March 15, 2011. (NOOR KHAMIS/Reuters/NOOR KHAMIS/Reuters)
A fuel attendant handles Kenyan shilling notes at a petrol station in the capital Nairobi March 15, 2011. (NOOR KHAMIS/Reuters/NOOR KHAMIS/Reuters)

Kenya cuts growth forecast on high lending rates, fuel costs Add to ...

Kenya cut its economic growth forecast for 2012 on Tuesday, saying high interest rates, soaring fuel costs and lower investment ahead of a general election would slow expansion in East Africa’s biggest economy.

Kenya’s 2012 Economic Survey gave a 3.5- to 4.5-per-cent range for growth, downgrading the growth forecast from a 5.2-per-cent projection in a budget policy statement released in April.

More related to this story

“The high interest rates, that’s a major issue. And of course as we move towards elections, most of the investors shy away, so this is likely to affect, and of course oil prices,” Planning Minister Wycliffe Oparanya said.

Mr. Oparanya said in addition to these factors, the economy would be hurt by erratic weather conditions, including both drought and too much rainfall, during the year.

Economic growth in 2011 fell to 4.4 per cent from 5.8 per cent in 2010, he said.

Last year, a volatile shilling slid 25 per cent to a record low on Oct. 11, but has since recovered, after the central bank sharply raised its key lending rate to 18 per cent in December from 7 per cent in September.

“The ... growth forecast for 2012 indicates a willingness from the government’s side to tolerate a lower economic growth rate as a price to bring inflation back into single digits, but words will have to be followed by action here,” Mark Bohlund, senior economist for sub-Saharan Africa at IHS Global Insight.

“While monetary tightening should contribute to bringing down inflation, a higher degree of government spending going to infrastructure investment rather than the recurrent expenditure envelope would also be beneficial over the medium term.”

The International Monetary Fund said in its latest forecasts for sub-Saharan Africa that Kenya’s economy is expected to grow by 5.2 per cent in 2012, and 5.7 per cent in 2013.

Mr. Oparanya said high oil prices and interest rates, that could lead to defaults on loans, may persist this year, and coupled with slowing investments, would lead to lower the 2012 growth.

At a separate function, Finance Minister Robins on Githae said slowing food prices would counterbalance fuel price rises.

“Fuel prices have gone up again and we are hoping that when we get the inflation figures for this month that it will be overly compensated by a drop in food prices ... particularly cabbages and short-term cereals,” he told reporters.

Inflation stood at 13 per cent in April.

Kenya’s economy largely relies on agriculture, which slowed to a 2.4-per-cent growth last year from 6.4 per cent in 2010, on account of erratic weather and the high cost of fertilizer.

Tourism continued its recovery with revenue up 33 per cent to 98 billion shillings ($1.17-billion U.S.) versus 2010.

The sector is however expected to slow down on the euro zone crisis, travel alerts from foreign governments over the threat from al Qaeda-linked militants in neighbouring Somalia, and the elections due in March next year.

Over the past three decades, Kenya has had its lowest growth periods in or just after election years, the World Bank says.

Mr. Oparanya said he expected increased spending by the government on elections and on a new administrative structure under a new constitution would also drain resources.

“The government has the appetite to take more because of the commitments of implementation of the new constitution and the elections,” Mr. Oparanya said.

Follow us on Twitter: @GlobeBusiness

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular