Kenya’s Economy to Contract 1.0% in FY21: World Bank

Kenya's Fiscal Deficit to Widen in FY21 to 8.3%: Fitch Ratings
  • Country’s economic growth to rebound next year

The World Bank expects Kenya’s economy to contract between 1.0 percent and 1.5 percent in 2020 FY21 according to its new country Economic Update, Navigating the Pandemic.

Under baseline assumptions, the economy is projected to rebound quickly in 2021, lifting real GDP by 6.9 percent year on year.

“A major factor in this strong rebound is the impact on the national accounts of measured education sector output normalizing, which is projected to add 2.2 percentage points to real GDP growth next year.”

In contrast, Treasury projects the economy to grow at 0.6 percent this year in revised estimates and not 2.6 percent announced in September.

“The growth outlook for 2020 has been revised downwards following receipt of more recent indicators, the contraction of the economy recorded for the second quarter of 2020 and the global projections released in October 2020,” National Treasury Cabinet Secretary
Ukur Yatani said.

The World Bank noted that with a steep decline in tax revenues due to the weakening in economic activity, and tax relief, and an increase in COVID-related spending needs, the fiscal deficit has widened, and debt vulnerabilities have risen.

The fiscal deficit widened to 8.2 percent of gross domestic product (GDP), up from the pre-COVID budgeted target of 6.0 percent of GDP, and Kenya’s debt to GDP ratio has risen to 65.6 percent of GDP as of June 2020, up from 62.4 percent of GDP in June 2019.

“Real Gross Domestic Product (GDP) contracted by 0.4 percent in H1 2020 year-on-year(y/y), compared to growth of 5.4 percent in H1 of 2019,” said the World Bank in the report.

“As a result, the economy is projected to contract by 1.0 percent in 2020 in the baseline scenario, and by 1.5 percent in a more adverse scenario,” in comparison to projections made in April.

Keith E. Hansen Country Director for Kenya, Rwanda, Somalia, and Uganda emphasized that policymakers should pursue an appropriate and balanced fiscal consolidation over the medium term to reduce mounting debt vulnerabilities and safeguard macroeconomic stability. 

In managing its debt, according to the National Treasury’s economic recovery plan, it plans to refinance its foreign commercial debt with loan interest rates capped at 5 percent and a tenure of 14 years.

“The accumulation of public and public-guaranteed debt and the challenges of servicing it is now recognized as a major constraint to rapid growth,” Treasury Secretary Ukur Yatani said Wednesday.