World Bank Headquarters
The World Bank has cut Kenya's economic growth forecast for this year to 4.3 percent from its earlier forecast of 4.8 percent due to a sharp jump in prices and instability in the exchange rate among other economic shocks, it said on Thursday.
"This will be higher than Kenya's long-term growth rate of 3.7 percent but still a full percentage point below the average projected for Sub-Sahara Africa," the bank said in its latest twice-a-year report on east Africa's biggest economy.
The bank also said growth could rise to 5 percent next year and 5.5 percent in 2013, but this would depend on whether Kenya can navigate this year's economic crisis caused by inflation and a weaker shilling, as well as have peaceful elections in 2012, according to Reuters report.
"Kenya has been navigating through rough economic waters in2011. A combination of external shocks and domestic policy challenges raised inflation to around 20 percent, and widened the current account deficit to above 10 percent of GDP," the bank said.
"For 2012, the Word Bank projects a 5.0 percent growth rate, if the government is able to effectively manage the current crisis, maintain political stability in the run-up to the elections and address the security challenges arising from the conflict in Somalia," it said in the report.
Economists say that macroeconomic fundamentals were thrust into extremely volatility this year by high food and fuel prices, the drought in the Horn of Africa, and the and the debt crisis in the euro zone, which have weakened the country's already fragile external position.
The higher import prices, which started with food and fuel, sent the economy into a vicious inflationary cycle as it weakened the shilling and put further pressure on prices, amid slow action by the central bank against the threats.
The shilling has recovered 16.4 percent from a record low of 107 to the dollar hit on October 11 after the central bank adopted an aggressive monetary tightening stance, hiking its key lending rate 11 percentage points in four sittings to 18 percent.
Kenya, which is due to hold general elections next year, sent its troops to battle al Shabaab rebels in neighbouring Somalia, who it accuses of threatening its citizens and the tourism sector, a top foreign currency earner.
"Over the past three decades, Kenya has had its lowest growth periods - on average about one percentage point below the long-term average - in or just following election years," the World Bank said in the report.