April 8, 2019 / 9:36 PM / 13 days ago

Drought to drag down Kenya's 2019 economic growth, World Bank says

NAIROBI (Reuters) - Dry weather across much of Kenya is likely to curb its economic growth this year, the World Bank said on Tuesday, cutting its forecast to 5.7 percent growth.

Kenya’s economy expanded by an estimated 5.8 percent last year, the bank said in its latest report on the country, as the country recovered from a slowdown the year before caused by another drought and election jitters.

“The medium-term growth outlook is stable but recent threats of drought could drag down growth,” the World Bank said.

The latest forecast is down from a 5.8 percent projection in October.

“Risks include drought conditions that could curtail agricultural output, especially if the country’s grain-growing counties are affected,” the bank said.

The so-called long rains season from March till May hasn’t started in most of the country. Agriculture accounts for close to a third of Kenya’s annual economic output.

If the government fails to meet its revenue collection targets, the economy could face more risk from macroeconomic instability, the bank said in the report.

Externally, Kenya faces risks from global trade tensions, which could cut its exports and the funds sent home by Kenyans abroad.

“An unanticipated spike in oil prices, and tighter global financial market conditions ... could lead to a disorderly adjustment of capital outflows from Kenya,” the report said.

Kenya’s current account deficit narrowed to 4.9 percent of gross domestic product in 2018 from 6.3 percent in 2017, the bank said. The deficit was financed by both government and capital inflows, it said, increasing the central bank’s hard currency reserves.

“This continues to provide a comfortable buffer against external short-term shocks,” it said.

The World Bank, which is one of Kenya’s biggest development financiers, urged the government to curb tax exemptions to boost revenue and to inject a dose of realism when forecasting revenue collection.

Critics have accused the government of overly optimistic revenue forecasts in recent years, to justify increased spending. The government has regularly failed to meet those targets.

There was no immediate comment from the ministry of finance.

The government should also end caps on commercial lending rates imposed in 2016, which continue to compromise the effectiveness of monetary policy, the World Bank said.

“There is need to repeal interest rate caps and restore the potency of monetary policy, which is essential in responding to shocks,” it said in the report.

Reporting by Duncan Miriri, editing by Larry King

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