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Kenya is on course to post a more significant economic recovery in 2012-2013, barring exogenous and political shocks. The GDP growth accelerated from 4.5 % in 2010 to 5.8 % in 2011 underpinned by higher infrastructure development and rising confidence among local households and firms. The economy however, grew by 4.4 % in 2012.

Financing constraints will ease thus encouraging investment, while deregulation and privatization will facilitate business activity. The spread of banking, especially tele-banking, to the unbanked will help to underpin household spending. However, infrastructure bottlenecks, skills shortages and political uncertain may persist. This growth will accelerate to in the next few years as the global recovery gains traction, led by strong commodity demand in fast-growing Asian economies. If no political or other shocks occur, the World Bank predicts a 6.0 % growth, but cautions that this could be affected by the prolonged drought and political factors.

Economists also indicate that failure of the April/June 2011 long rains affected exports of both tea and horticulture, two of the country’s most important sources of hard currency. However, another view is that a fall in production could also be compensated by a slight increase in price, as happened in 2009 when Kenya’s tea revenues hit kshs. 69 billion compared to Ksh. 62 billion a year earlier, due to a global deficit that was caused by dry weather.

Overall, in the 2012-2015 period inflation will remain in the 5.5% to 6 % range. In 2011, inflation edged up to 5.7 % from 3.9 % in 2010, owing to rising food and fuel prices, although a sharp fall in telecoms tariffs following price wars is offering some relief.

In 2011-2012, the government maintained an expansion fiscal policy to boost economic growth, but will embrace gradual consolidation in 2013-15 to help keep debts in check. Kenya’s current budget for fiscal year July 2012 - June 2013 proposes another large deficit equivalent to about 9.93 % of GDP at current prices as the government persists with fiscal stimulus, geared mainly towards capital spending, to encourage growth. The current-account deficit will shrunk from 5.5 % of GDP in 2010 to 5 % of GPD in 2011. The gap will narrow further in 2012-15 owing to faster growth in export earnings and services inflows. Domestic borrowing will remain the main source of finance in the FY 2012/2013 as was in 2010/11 (and throughout the forecast period), although the government will launch a long-delayed debut sovereign bond when the global financial climate improves and seek additional concessional lending from donors. If donor funds are not forthcoming, earnings from privatization, which are not factored in to the current budget, may provide some relief.

Economists predict that the government will retain a loose stance in 2012/13 in order to support growth and development and to run a budget deficit of about 7 % of GDP. This will lift the public debt above 50 per cent of GDP, although that level is not excessive in a global context. The government will thereafter embrace gradual consolidation, helped by stronger revenue growth, which will trim the budget deficit to less 5 % of GDP by the forecast period.

The Central Bank of Kenya continues with its policy of monetary loosening by cutting the central bank rate in a bid to promote economic activity and reduce borrowing costs. The reduction was a response to the overhaul of the consumer price index (CPI) by the Kenya National Bureau of Statistics (KNBS). This include the introduction of new weightings and a new basket in February 2010 which showed that prices have not been rising as quickly as feared and that inflation was subdued. Lower inflation has also facilitated a decline in other key interest rates such as the benchmark 91-day Treasury-bill rated which slipped below 2 per cent in July 2010, its lower lever level for several years.

Commercial bank’s lending rates have been slower to respond because of the high-cost environment and relatively weak transmission mechanisms for monetary signals, but they dipped to 14 % in September 2010 and will continue to ease. It is expected that lending rates will continues to subside gently throughout the forecast period, subsequently retreating to 10.5 % by 2015 as the lower-inflation environment becomes established and monetary policy becomes more sophisticated, provided that the government keeps domestic borrowing under control.

In December 2010, the government imposed fuel price control in a bid to stem rising prices by setting maximum mark-ups at the retail and wholesale level.

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