October 10, 2018 / 10:03 PM / 2 months ago

World Bank criticises Kenya's approach to cutting fiscal deficit

* World Bank: slashing development spending hurts Kenya’s growth

* Lifts Kenya 2018 growth forecast to 5.7 pct, but below potential

* Criticises cap on commercial lending rates

By Duncan Miriri

NAIROBI, Oct 11 (Reuters) - The World Bank urged Kenya to cut spending on public sector wages and other recurring items to reduce its debt load, instead of slashing development spending as that is restraining economic

growth.

In a bi-annual economic update on the country, released on Thursday, the bank raised its estimate for Kenya’s 2018 economic growth to 5.7 percent, from a previous forecast of 5.5 percent.

While that would be faster than a 4.9 percent expansion in 2017, the Washington-based lender said Kenya was growing below its potential, likening it to a car driving at only 60 kilometres (37 miles) an hour.

“Kenya can be a Ferrari doing 150 kilometres per hour but it has to do certain things,” said Allen Dennis, the World Bank’s senior economist for Kenya.

Kenya’s total debt stands at 57 percent of GDP, the bank said, barely down from 57.5 percent a year ago.

Under pressure from the International Monetary Fund, the Kenyan government reduced its fiscal deficit by two percentage points in the financial year that ended in June, to 7 percent of gross domestic product, and has set a target of 5.8 percent of GDP this fiscal year.

But the World Bank said the spending cuts approved for the period to June this year were heavily skewed towards the development budget, which was slashed by a quarter, at the expense of boosting growth.

“There is a need to recalibrate the balance between development and recurrent expenditures, with the latter bearing a higher share of the expenditure containment,” the report said.

The Kenyan government could cut recurrent spending by reducing state-owned firms’ budgets and by regularly auditing the government’s payroll, the bank said.

It attributed the upgrade to its 2018 economic growth forecast to an improved performance by the farming sector, a steady recovery in manufacturing and resilience in tourism after last year’s long election campaign had raised political risk.

A narrowing current account deficit and a stable exchange rate could also boost growth, the bank said.

Growth would had been faster if the government had removed a cap on commercial lending rates, the bank said, citing the cap’s constraining impact on monetary policy.

The cap has also made commercial banks shy away from lending to higher-risk customers, analysts say.

In June, Finance Minister Henry Rotich sought to repeal the cap, at four percentage points above the central bank rate, but lawmakers blocked that attempt in August.

Private sector credit is growing by just over 4 percent, down from nearly 18 percent in 2015, the year before the cap was introduced, according to central bank data. (Editing by Maggie Fick and Susan Fenton)

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