Kenya Election May Pose Risk to Economy, Raise Tension, IMF Says

NAIROBI (Capital Markets in Africa) – Kenyan elections may hamper the government’s plans to reduce spending in line with requirements under an International Monetary Fund program, the Washington-based lender said.

The vote in East Africa’s biggest economy that’s slated for Aug. 8 could “erode program ownership, delay fiscal consolidation plans, and potentially lead to heightened political instability,” the Washington-based lender said in a statement in its first review of the economy under a $1.5 billion precautionary loan arrangement.

“In addition, strains in relations between the central government and counties could weaken fiscal discipline, and weaker-than-expected improvements in revenue administration could lead to fiscal slippages,” it said on its website.

Kenya’s gross domestic product, a total measure of goods and services, is projected at 5.3 percent this year from an estimated 6 percent in 2016, the IMF said. The Central Bank of Kenya Governor Patrick Njoroge said Tuesday the $69.2 billion economy will grow by an estimated 5.7 percent in 2017.

Rate Controls
The IMF urged the “immediate removal” of a rate-control law that caps interest at 400 basis points above the prevailing central bank rate. If retained, the law may shave 2 percentage points off output in 2017 and 2018, it warned.

The legislation was introduced in August in fulfillment of a 2013 election pledge by President Uhuru Kenyatta. It has failed to rejuvenate private-sector credit growth, which fell to 4.3 percent in December, the lowest in 16 months, according to data from the regulator. The 56-year-old leader is seeking re-election.

The rate limits may lead to increased dollarization in the economy as it doesn’t touch on foreign-currency deposits, increasing exchange-rate risks, the IMF said. Kenya must also be prepared to maintain a flexible exchange rate and tighten monetary policy to shield the economy from external shocks, it said.

While Kenya still expects robust growth, riding on lower fiscal deficits, inflation remaining within the target and a sustainable external current account, the amendments to the banking law will probably weigh on growth, Treasury Secretary Henry Rotich said in a letter to the IMF.

“Although we believe growth will remain broadly unchanged at about 6 percent next year, to be prudent we will base the fiscal program for 2016-17 on a growth rate of 5.25 percent in 2017,” he said.

The Treasury targets a budget shortfall equal to 5.9 percent of GDP in the coming fiscal year from an estimated 6.9 percent in 2016-17, he said.