Nairobi — The regional economic outlook remains strong for the second quarter of 2011 although political tension, a weakening currency and inflation looks set to hurt growth in Kenya, Pine Bridge Investment firm experts said during the release of their revised economic projections for 2011.
While the Uganda, Tanzania and Rwanda economies are expected to grow by above six per cent, analysts at Pine Bridge have downgraded projections for East Africa’s biggest economy to five per cent from an earlier six per cent.
An array of issues from drought and food scarcity to escalating oil prices continue to pile pressure on household expenditure both in Kenya and other EAC countries like Uganda, Tanzania, Burundi and Rwanda.
Political crises in North Africa and the Middle East have caused fuel prices to shoot up, raising inflation in the past few weeks.
With the cost of energy expected to come under intense pressure in coming months as the political crisis in oil-producing Libya and the Arab world persists, and dry weather piles pressure on food prices, inflation too is expected to remain on an upward trend, to become the biggest threat to EAC’s fragile economies.
Uganda’s growth would ride on its improving food security, and current inflow of investments in the oil industry to maintain an upward economic growth despite an upward surge in inflation to 11.1 per cent in March 2011.
GDP outlook for the rest of the year remains positive given the early rains that are likely to offset the rising inflation and an expected boost from the successful election with investors showing improved interest in the region’s third largest economy.
For example, mid last month, Tullow Oil signed an agreement with the government of Uganda, to pay $590 million in capital gains tax and pay $469 million before it buys assets from Heritage Oil and brings in new partners, China’s National Off-shore Oil Company and France’s Total.
This will be in addition to $121 million already deposited in Bank of Uganda.
Stanbic Investments East Africa Ltd has also raised Uganda’s economic outlook, citing recent confidence in investors as a catalyst.
Planned investment worth $604 million was licensed in the first quarter of 2011.
“We forecast a GDP growth of six per cent to 6.4 per cent in 2011 as infrastructure projects kick off,” said Stanbic Investments in an economic report released recently
However, the IMF warned that even if Uganda’s economic performance remains strong after a nine per cent expansion in the first half of this fiscal year, some significant policy changes would be required in coming months.
The IMF said the East African nation needed to broaden its tax base by eliminating exemptions, as its revenues, at about 12.5 per cent of GDP, were insufficient for infrastructure investment.
The Kenya National Bureau of Statistics said inflation climbed to 9.19 per cent in March — the highest since the new method of calculating price changes was introduced in November 2009 — and 2.65 percentage points higher than February’s rate of 6.64 per cent.
In Kampala, Uganda’s year-on-year inflation rate jumped into double digits in March, driven by surging food costs.
Food prices, which carry a 27.2 per cent weighting in the consumer price index jumped 11.9 per cent month-on-month to push the headline rate up for a fifth straight month to 11.1 per cent from a revised 6.4 per cent in February.
Tanzania, riding on coal exports to maintain an upward growth maintained its inflation rates in March with its currency likely to stabilise in the coming weeks.
The Kenya shilling hit a record low of 86.1 to the dollar in the first quarter of 2011 with experts predicting a weaker shilling in coming months.
The shilling is currently selling at 83 according to Central Bank statistics.
“Should the oil price move higher and political outlook deteriorate, the shilling could slide to 90 against the dollar,” explained David Achungo, Investment manager in charge of currency at Pine Bridge.
Rwanda’s growing service sector and diversification in the rural economy is expected to drive growth upwards, experts at Pine Bridge said.
The weather is predicted to be unfavourable with inadequate rainfall likely to continue pushing up food prices.
Mr Achungo said Kenya’s inflation could rise to 15 per cent this month on the back of rising fuel and food prices.
Although Uganda boasts of food reserves, officials at the Uganda Bureau of Statistics warned alarm that 23.7 per cent surge in the annual food inflation rate for the year ending March was one of the drivers of inflation.
For Kenya, the slow growth would be coming on the back of increased government expenditure with experts raising concern about the government’s ability to fund its budget after a 2.2 per cent shortfall in tax revenue which could see the government borrow more from the domestic market.
Out of $1.4 billion of the new debt the government had programmed to raise in the current fiscal year, only $952 million had been raised by March.
The national debt, however, jumped to $15 billion in the first half of the financial year amid lower-than-targeted revenue collections and increased costs incurred in dealing with the drought and implementing the new Constitution.