The government will scale up efforts on policy and structural reforms in the medium-term to navigate the global turbulence, accelerate economic recovery, and address overarching development challenges, Treasury has said.
This comes as Kenya and other East African Community economies remain exposed to geopolitical tensions particularly the Israel-Palestinian and Russia-Ukraine conflicts.
The ongoing vessel attacks in the Red Sea by the Yemen’s Houthi Rebels is also proving to be a major headache for economies, mainly poor countries that heavily depends on imports, among them Kenya.
Shipping lines have had to re-route to the Cape of Good Hope, avoiding the Red and Suez Canal, meaning vessels have to go through the Atlantic Ocean to South Africa, before coming up to the East Africa region, save for those directly coming from Asia.
According to market data, an additional 40 per cent longer route has caused heavy upward pressure in the operating costs, including freight and insurance, having an impact on import costs in Kenya.
The attacks are now exposing countries to inflationary pressures, IMF has warned, with Sub-Saharan Africa among those facing the highest risk.
“Our high-frequency transit estimates indicate that the volume of trade that passed through the Suez Canal dropped by 50 per cent year-over-year in the first two months of the year, and the volume of trade transiting around the Cape of Good Hope surged by an estimated 74 per cent above last year’s level,” IMF said in its Chart of the Week .
Data from its PortWatch platform, used to show trade volume that transits through critical shipping lanes, indicates that in January and February 2024, there was a 6.7 per cent decline year-over-year in port calls to the 70 ports it tracks in sub-Saharan Africa.
“These decreases likely reflect the transitory effects of longer shipping times. If continued, the ripple effects of these disruptions could temporarily hamper some supply chains in affected countries and cause upward pressure on inflation (in part due to higher shipping costs),” IMF said.
While Kenya’s inflation eased to 5.7 per cent in March from 6.3 percent in February, driven by lower food and fuel inflation, Kenya remains exposed to global shocks, according to the Central Bank of Kenya.
“A key risk to inflation is international oil prices, which have trended upwards since January 2024 largely driven by disruptions to shipping through the Red Sea, and production cuts by OPEC+ and other allied oil producers,” CBK governor Kamau Thugge said.
Since assuming office in September 2022, the government has implemented bold policy responses to mitigate the negative global and persistent shocks that have pushed the economy to its lowest vibrant level, and embarked on structural reforms to stabilise government finances and the economy.
These shocks include, global supply chain disruptions due to ongoing conflicts in Eastern Europe and the Middle East; high interest rates limiting access to credit and exacerbating debt servicing costs, significant losses and damages due to frequent extreme weather events; and elevated commodity prices like petroleum products on account of increased geopolitical fragmentation and global oil supply cuts.
The government-to-government petroleum products import deal with the Gulf is among the biggest wins the state has had on taming the rise in fuel prices and easing pressure on the forex reserves, which has also helped stabilize the shilling.
President William Ruto’s administration is also banking on interventions aimed at growing exports, to cut the country’s high import bill.
“We must turn agriculture into a commercial economic activity,” Ruto said in February.
Kenya’s expenditure on merchandise imports rose by 17.5 per cent to Sh2.5 trillion in 2023, as the country’s trade deficit hit a new high despite growing exports volume.
Earnings from exports of goods grew by 17.4 per cent to Sh873.1 billion in 2022, the Economic Survey 2023, indicates. These figures are estimated to have fallen to Sh762 billion last year.
The government’s interventions to increase export earnings include boosting agro-processing and value addiction where Agricultural Transformation and Inclusive Growth is among the five core priority areas for the government.
Others are Micro, Small and Medium Enterprise (MSME) Economy, Housing and Settlement, Healthcare and Digital Superhighway and Creative Industry.
According to Treasury, the government has targeted nine value chains with the largest impact on jobs creation and economic recovery.
These are leather, cotton, dairy, edible oils, tea, rice, blue economy, natural resources including minerals and forestry, and building materials.
“Against this background, the government continues to implement interventions and policies to reduce the cost of living and improving livelihoods, while at the same time fostering a sustainable inclusive economic transformation through the BETA. This is meant to reverse the economic recession and ignite economic recovery,” Treasury CS Njuguna Ndungú said.
Going into the 2024-25 financial year, the government will accelerate investments in human capital development, reforming markets that are in disarray, domestic resource mobilisation and application of those resources to development projects, Ndungú notes.
It will also reform and restructure of institutions and digitisation so as to coordinate all the other four areas.
The economy is projected to expand by 5.5 per cent in both 2023 and 2024 from 4.8 per cent in 2022, before picking to above 5.7 per cent next year.
“This growth outlook will be supported by a broad-based private sector growth, continued robust performance of the services sectors, the rebound in agriculture, and the ongoing implementation of policy measures to boost economic activity in the priority sectors of the BETA.”
The fiscal policy stance for the financial year 2024/25 and the medium-term budget aims to support the Bottom-Up Economic Transformation Agenda (BETA) through a growth friendly fiscal consolidation plan, Treasury said.
The consolidation will be supported by enhanced revenue mobilisation and rationalisation of non-priority expenditure, while protecting essential social and development spending.
The March 2024 Agriculture Sector Survey by CBK also shows respondents expect inflation to decrease in the next three months, on account of lower food prices in line with the expected favorable weather conditions, the appreciation of the exchange rate, and the reduction in fuel prices.
The CEOs Survey and Market Perceptions Survey which were conducted ahead of the MPC meeting revealed increased optimism about business activity and economic growth prospects for the next 12 months.
The stronger optimism was attributed to enhanced agricultural performance on account of favourable weather and government interventions in the sector, easing inflation, strengthening of the Kenya Shilling and a resilient private sector.
Nonetheless, respondents remained concerned about taxation, high interest rates, and geopolitical risks.