Although Kenyan economy is gradually recovering from last year’s shocks and expected to grow at five per cent in 2012, the economy remains vulnerable to domestic and global shocks that may reduce the growth to 4.1%.

According to a report from the World Bank, the economy stabilized following the actions by the government at the end of the third quarter of 2011, which saw the government raise interest rates to bring inflation down.

Speaking during the 6th edition of the Kenyan economic update at Hotel Intercontinental, World Bank Country Director for Kenya Mr Johannes Zutt noted that although the economy can grow by 5% this year, it looks susceptible to forces such as food and fuel crises as well as drought.

“The return of macroeconomic stability gives hope for 2012 and 2013. However, Kenya still needs to address external forces that can destabilize the economy push it to a downward 4.1%,” said Mr Zutt.

The economic report, the 6th in a series published by the Bank in Kenya, focuses on the fine line between economic stability and maintaining the growth momentum, paying keen interest on the opportunities that the East African Community present to Kenya to mitigate its external vulnerability.

“Kenya’s per capita income has exceeded US$800 for the first time, and Kenyans have an opportunity to enjoy better standards of living as the economy progresses towards that of middle income status in the coming years,” says Zutt.

Zutt challenges the Kenyan government to support the private sector to spur economic growth and remove bottlenecks to regional trade to keep the growth path smooth.

“The challenge for the government, particularly in this election year, is to continue to run the economy well, support private sector efforts to increase manufacturing and exports, and to remove bumps to regional trade, so that Kenya stays on the higher growth path,” adds Zutt.

The economic report projects that inflation will remain below 10% during the second half of 2012, from a high of nearly 20% early in the year, with interest rates expected to fall.

According to Jane Kiringai, the Bank’s Senior Economist for Kenya, Kenya is currently living beyond its means and therefore it is the time to diversify the savings and exports.

“Kenya is living beyond its means and it’s time to use policy tools to increase savings and exports. Structural weaknesses, including a widening current account deficit, pose a significant risk to Kenya’s economic stability,” said Jane, adding that another oil price turmoil, poor harvest or even contagion in the Euro zone could easily create renewed economic turbulence and reverse the recent gains. Notwithstanding these challenges, strong growth of EAC creates opportunities for Kenya to reduce its vulnerability from external shocks.

“Deepening Kenya intra- EAC trade would help reduce its widening current account deficit, cushion it against global turbulence and open the economy to more Foreign Direct Investment,” says Wolfgang Fengler, the Lead Economist for Kenya.

“Increased trade in the region will contribute to food security, develop regional production chains in food and manufacturing and open up new markets in services,” adds Fengler.

The report highlights the rapid growth of EAC, the second largest growing regions in the world after South East Asia, noting an average of 5.8% in the past decade.

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