Climate change: Prolonged drought to dim East Africa’s growth

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The confidence in the region’s three largest economies — Kenya, Tanzania and Uganda — will be determined by how they dust off the effects of two years of elections that brought about uncertainties and inflationary pressures.
Citi economists say the region’s growth this year will lag that of Southern and West Africa’s, mostly because of the inflationary pressures and stiff competition for investment.

“While the macroeconomic numbers in the sub-region remain positive, business sentiment is curtailed by two years of political uncertainty, strong competition and robust inflationary pressure, and there remain concerns about the fiscal and current account deficits,” said David Cowan, Citi Africa economist.

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However, he noted that this should improve this year, given that there will be no elections in the region. However, concerns about the weather and food price inflation and its impact on low income households and consumption still linger.
The slow implementation of government infrastructure projects in the three countries is also going to be a concern this year, putting into focus the absorption of development funds, says the report titled Sub-Saharan Africa into 2018: Is a wider economic recovery starting to gain some traction?

Already, Kenya’s Treasury Cabinet Secretary Henry Rotich has directed ministries and agencies to prioritise the completion of multi-million dollar infrastructure and development projects around the country before embarking on others.
“State corporations should ensure that adequate funding is provided to priority projects and aligned with emerging government priority areas. In preparing the capital budget, priority should be given to the funding of ongoing capital projects.
“In this regard, state corporations are required to take into account all ongoing multiyear funding requirements of capital projects up to their completion before initiating new projects,” Mr Rotich said last week in a circular to ministries and department heads.

According to Mr Cowan, the key growth outlook in Kenya is how quickly the country can deal with tensions surrounding the 2017 presidential elections and embark on consolidating its policies and actualising its development projects.
Current account deficit
“We think the election has already slowed growth and led to policy weakening in 2017. Despite this political and policy uncertainty, with robust foreign exchange reserves, a narrowing current account deficit and strong capital flows into Kenya, notably from the region, the Kenyan shilling has shown significant stability.
This is unlikely to change in 2018 unless there was a more aggressive pick-up in inflation and deterioration in the fiscal position,” he said.

Kenya’s growth this year is also expected to be at around 5 per cent, having decelerated to 4.4 per cent due to prolonged electoral politics and drought.
This was the country’s lowest growth in five years and was mainly as a result of suppressed performance of key sectors of the economy — manufacturing, mining and finance.
In Tanzania, President John Magufuli continues to shake up the country in 2018, but it is still not clear whether he can reconcile his desire to tackle corruption and control the economy with an approach that is sufficiently friendly to business to attract a substantial increase in investment.

“There are concerns from the business community that he is engaging too much in gesture politics and could become an ineffective one-man band, rather than pushing ahead with a more sustained reform effort following due process. But overall, some of his actions are popular and the new focus on getting things done has created an impression that things could potentially start moving forward again,” Mr Cowan said.
In terms of headline macroeconomic data, Tanzania has been one of the star performing economies in Africa in the past three years in which President Magufuli has been in charge.

“The real GDP growth of 7 per cent, low inflation and a fall in the current account deficit in the past three years all highlight this. But scratch a little deeper and it is still far from clear how much growth is trickling down and to what extent planned increases in government spending will materialise and whether they will spill over negatively,” Mr Cowan said.
He added that the current account dynamics should help to support considerable Tanzanian shilling stability into this year.

Medium-term economic growth
Early this month, Tanzanian Finance Minister Philip Mpango said they expected a medium-term economic growth of around 7.4 per cent in 2018 backed by massive public investments in its roads, railways, aviation and extractives sectors.
“We have faced criticism of our handling of the economy over the past two years but in the region we still remain with the highest growth numbers. The projected 7 per cent GDP growth in 2017 will actually see Tanzania amongst the world’s 10 fastest-growing economies,” Dr Mpango said.

For Uganda, where business confidence and growth were subdued last year the Citi analysts say that there are some signs of a slow pick up and the economy will start a more sustained recovery in 2018. The Citi economist believes that inflationary pressures will limit the scope for further rate cuts in Uganda.

Uganda’s budget deficit is also expected to remain around 4 per cent of GDP, largely driven by rising capital spending which is largely financed from external borrowing on partially concessional terms.
But if these were to dry up, rising domestic debt issuance could potentially spill over into Uganda shilling weakness as has been witnessed in recent years.

Bank of Uganda’s Deputy Governor Louis Kasekende while releasing the current monetary statement late last month said that there were risks facing Uganda’s economy from the domestic and international environment.

////The East African

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