Country Report Kenya July 2008

Outlook for 2008-09

• Kenya's new broad-based coalition government is now in place, with Mwai Kibaki as president and his main rival, Raila Odinga, as prime minister, but a new bout of in-fighting cannot be discounted.
• The new government is expected to refocus on structural reforms, including privatisation and deregulation. However, political feuding could hamper policy implementation over the forecast period.
• Real GDP growth is expected to subside to 4.1% in 2008, owing to post-election disruption in the first two months of the year and a sharp fall in tourism, before rebounding to 5.5% in 2009.
• Inflation is expected to soar to 26.8% in 2008 owing to the sustained rise in food prices and world oil prices, but will subside to 7% in 2009 assuming no new oil- or food-price shocks and the maintenance of political normality.
• The current-account deficit is expected to widen to 5.3% of GDP in 2008, owing to disruption to trade and a sharp fall in tourism receipts, before easing to 4.3% of GDP in 2009.

Monthly review

• The five by-elections passed off without serious incident on June 11th, with the PNU winning two seats and the ODM winning three. The ODM lost two MPs, including the new roads minister, in a plane crash during campaigning.
• The 2008/09 budget proposes a relatively large deficit of 5.3% of GDP, although the government hopes to keep down domestic borrowing by issuing new infrastructure bonds, including a debut sovereign bond worth US$520m.
• The budget heralds significant financial sector reforms, including a fourfold rise in the minimum capital requirement for commercial banks and the part-privatisation of the National Bank of Kenya.
• The new Monetary Policy Committee (which is no longer advisory) raised the Central Bank rate by 25 basis points, to 9%, in June (the first change for ten months), owing to upward pressure on underlying inflation.
• The president formally unveiled Kenya's new development strategy—Vision 2030—in June, which aims to lift real GDP growth to 10% by 2012 via investment of US$25bn in key sectors.
• Headline inflation soared to 31.5% year on year in May, the highest since the early 1990s, owing to steep rises in food and fuel prices. Adding to the pressure, electricity tariffs were raised by 21% on July 1st.
• The state will not take up its allocation in the KSh5.5bn rights issue by Kenya Commercial Bank, effectively cutting its stake in the bank from 26.2% to 23.5%.

Source: Country Report