Country Report Kenya June 2009

Outlook for 2009-10

• Kenya's coalition government between the president, Mwai Kibaki, and his main rival, the prime minister, Raila Odinga, is likely to remain intact but will continue to face serious strains because of in-fighting and competition.
• Economic policymaking will be challenging during the forecast period, given the global slump and weak domestic growth. The government will push ahead with reforms but political feuding may hamper implementation.
• Real GDP growth is expected to stagnate at 1.8% in 2009 owing to dry weather, weak commodity prices and the global recession. Growth is expected to recover to 2.7% in 2010 as the global economy improves.
• Inflation is forecast to remain high in 2009, at 21.3% (as dry weather keeps food prices high), before subsiding to 6.5% in 2010, assuming no exogenous shocks and the maintenance of political normality.
• The current-account deficit is expected to fall from 8% of GDP in 2008 to 5.1% of GDP in 2009, owing to lower imports. A recovery in exports and other capital inflows will help to cut the deficit to 4.6% of GDP in 2010.

Monthly review

• The government will make a second attempt to pass laws establishing a special tribunal to investigate post-election violence. If there is no progress by the end of August, Kofi Annan plans to involve the ICC.
• The first budget of the finance minister, Uhuru Kenyatta, proposes a steep rise in the deficit to 6.6% of GDP in 2009/10, to stimulate the sluggish economy. Domestic borrowing is set to double but debt indicators will remain tolerable.
• Spending on infrastructure is projected to rise sharply, although plans will not be realised in full because of perennial capacity constraints. The budget offers some tax concessions to struggling and priority sectors.
• The IMF awarded Kenya US$209m in late May under the rapid access component of the exogenous shocks facility, to help to combat balance-of-payments strains arising from the global downturn this year.
• Real GDP growth slumped to 1.7% in 2008 (from 7.1% in 2007) as post-election dislocation was followed by global economic retreat. Agriculture (the largest sector) and tourism contracted, and most other sectors grew more slowly.
• Inflation eased to 19.5% year on year in May as food prices declined, although 12-month average inflation remained high, at 26.1%.