Economic gloom as CBK dims 2023 growth outlook

The Central Bank of Kenya (CBK) has downgraded the outlook of Kenya’s economic growth this year even as it warned that things are about to get tougher for Kenyans and businesses.

The CBK projects that Kenya’s gross domestic product (GDP) will grow by 5.8 percent, which is a notable drop from the earlier estimate of economic growth of 6.1 percent which was given by the National Treasury.

This means this year is set to be just as tough as last year for most businesses and households, even if the projected growth is slightly higher than the 5.6 percent growth that the CBK estimates Kenya’s GDP grew by in 2022.

While explaining why it raised the cost of loans during its Monetary Policy Committee (MPC) meeting on March 28, the CBK said indications from businesses, banks, and borrowers who are unable to repay loans show that a high cost of living is negatively impacting economic optimism in the country and could affect investment this year as more businesses and citizens struggle to survive.

CBK Governor Patrick Njoroge, in a post-MPC briefing on Thursday, said the number of banks and businesses painting a gloomy picture of the economy is rising rapidly, at a time when the number of borrowers defaulting on loans jumped sharply.

“The optimism about business activity and economic growth prospects have fallen precipitately. The percentage of Chief Executive Officers (CEOs) who say that things will be worse has increased from 10 percent to 34 percent, that is significant and they ascribe it to inflation that they see, weakening shilling, the drought, cost of credit and shortage of raw materials,” Dr Njoroge said.

The CBK Governor noted that despite improvements in external conditions and global prices, the Kenyan economy- in the eyes of business leaders and market observations- is getting weaker.

“The lower optimism is expected to lead to delays in investment decisions when investors are concerned in some ways. It will also lead to poor operation of markets and consumer confidence will decline,” he said.

The MPC conducted two surveys this month- CEOs and market perceptions- that sought to establish the trend the economy has been taking.

The CEOs survey shows that the rate of CEOs who feel their companies will grow in the next 12 months has reduced from 58 percent to 37 percent since January, while those who feel growth prospects for their companies will be lower has tripled from 9 percent to 26 percent over the same period.

A similar trend was recorded in views by CEOs on growth prospects in their respective sectors.

“Respondents in the March 2023 CEOs survey expressed concern over elevated inflation, weakening shilling, prolonged drought, cost of credit, and shortage of raw materials,” the survey stated.

The market perceptions survey showed that within banks- which CBK maintains remains stable and resilient- pessimism on Kenya’s economic prospects has risen from 8 percent to 23 percent between January and March, even as optimism fell from 89 percent to 77 percent.

Among non-bank businesses, pessimism increased from 14 percent to 27 percent- from January to March as optimism fell, in a trend CBK says could inform delayed investments as investors get more cautious.

“Respondents were concerned about the high cost of living, unpredictable weather conditions, and weakening of local currency against the US Dollar,” the survey stated.

Dr Njoroge indicated that the MPC faced the most surprising findings in the current surveys, which informed its decision to raise Central Bank Rate (CBR)- the benchmark rate for lenders- by 75 basis points from 8.75 percent in January to 9.5 percent in March.

The higher rates are expected to have an impact on the cost of loans in the country, which is in the end also expected to lower inflation, as it discourages borrowing and encourages saving in the economy.

The CBK also observes that the surveys were conducted in the first half of March, before rains started and before ongoing opposition protests which have disrupted economic activities also started.

But the financial services sector regulator notes that after meeting Meteorological Department (MET) experts just a day before the MPC meeting, Kenyans should also expect more troubles in Agriculture production.

“They gave us reasonable assurances that March rains were normal and they expect April and May rains to also be normal across the country. They also spoke to us about short rains and the expectation is that this year we may have el-nino effect and of course, with el-nino, all bets are off in terms of how much rain and crop damage,” Dr Njoroge said.

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