News Analysis: Positive IMF Kenya Review Contrasts with Latest Inflation, GDP Data
Thursday, 03 October 2013
The IMF’s statement on its sixth and last review under the three-year Extended Credit Facility (ECF) arrangement from January 2011 is upbeat as usual: Reforms introduced over the past three years are paying off, Kenya’s economy has been resilient to external shocks like the drought and stagnating demand in traditional exports as well as tourism, and monetary policy has successfully brought inflation down. The recent upswing in consumer price inflation – from 6.67% year on year on August to 8.29% in September 2013 – was largely driven by the changes in the VAT regime, so this is expected to level off.

Perhaps a little more surprising is the Fund’s comment on Kenya’s public finances and fiscal discipline. No mention of the country’s rising public sector wage bill, a large chunk of which will go to its MPs who are busy trying to change their classification as public officers so that they can, again, and legally, determine their income themselves. That leaves limited funds for teachers, healthcare workers and similar public employees, but several strikes have also pushed up the wage bill in these areas.

And then there is, surprisingly, this statement: 'Structural reforms have made progress to prepare for the devolution process, notably through a strengthened regulatory environment for public financial management at both national and county level.' Most of the news since the establishment of county governments has been disastrous: pie-in-the-sky with massive deficits, shopping for cars, houses and spending on foreign trips, little to no evidence that the bulk of county governments have the capacity to plan and manage their finances.

Just released GDP Q2 figures show a slowdown from 5.2% in Q1 to 4.3%, most likely related to uncertainties around the elections. From Bloomberg: 'Agriculture, which accounts for a fifth of GDP, grew by 5 percent in the second quarter from 8.1 percent in the first quarter, while construction slowed to 6.7 percent from 13.3 percent. The leisure industry, including restaurants and hotels, contracted 11.4 percent after shrinking 15.8 percent. Tourist arrivals to Kenya dropped 12 percent to 495,978 in the first half from a year earlier, according to government figures.'

Tourism figures are worrying, not the least because the health of this sector affects other sectors such as food production, transport and overall employment. If we factor in the impact of the Westgate attack, then the GDP growth rate for the remainder of the year will be similar. This can still be affected by the impact of adverse weather on agriculture, and the VAT increases will affect consumer spending. However, Westgate is a short-term issue, and 4-4.5% GDP growth, similar to last year’s 4.6%, is quite decent, even if it falls short of the Kenyan government’s forecast of 5.5-6%.



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