Kenya Poised to Reap Rewards of Prudent Policies

Growth spurs include foreign investor interest, information technology

Economy vulnerable to risks affecting external and fiscal positions

Oil and gas industry’s regulatory, fiscal regime requires modernization

In a regular review of Kenya’s economy, the IMF staff noted a surge in public investment in infrastructure, renewed interest of foreign investors, and lower transaction costs thanks to information technology.

The IMF staff report projected higher growth in the Kenyan economy for a third straight year, at 5.8 percent in 2014/15 after an estimated 5 percent in 2013/14. Inflation remains moderate, but rising food prices and rapid credit growth may fuel inflation expectations. Foreign reserves have increased steadily and are broadly adequate (see Chart 1).

Kenya is taking steps to adapt its policies to middle income country–type challenges, the report said, noting the country’s market-friendly business environment. The country’s successful debut Eurobond issuance suggests a promising outlook for Kenya to further integrate with global financial markets and to reach, in time, emerging market status.

The staff report noted, however, that manufacturing, transport, and communications were the main supports of growth in early 2014, while the agricultural sector was relatively subdued due mainly to poor rains. In addition, security concerns following terrorist attacks and threats hit the tourism industry.

Oil discoveries

Promising commercial prospects of oil discoveries could potentially provide significant foreign exchange and fiscal resources, the report said. Kenya’s relatively high current account deficit, at 7.7 percent of GDP in 2013/14, reflects strong capital goods imports—in particular of equipment for oil exploration.

The Kenyan government has embarked on large-scale projects with sizable impact on domestic value added, the report said, citing construction of a railway between the capital, Nairobi, and the port city of Mombasa; geothermal power generation plants; irrigation projects; and new oil pipelines.

Drivers of growth

The report said there are five principal drivers of growth in Kenya that support positive projections of economic expansion.

• Improved business conditions arising from the removal of bottlenecks by increased infrastructure investment in energy and transportation;

• Expansion of the East African Community market thanks to decisive steps toward regional integration with neighboring Burundi, Rwanda, Tanzania...