Kenya fiscal stimulus may still be needed

There are signs the global is rebounding but Kenya should keep assessing its economic performance before reducing or removing its fiscal stimulus, the World Bank's country director said recently.

Kenya put in about one percent of its GDP as fiscal stimulus in its 2009/10 budget after suffering the triple shocks of post-election violence, drought and global economic slowdown.

“In terms of reducing and removing the fiscal stimulus altogether it may actually be premature, although there are signs that the global economy is recovering, but we are not in a full fledged recovery yet,” Johannes Zutt told reporters.

“There is still a possibility that we are going to see a further dip. It's just going to be a question of the government monitoring macroeconomic indicators, and particularly inflation levels, to see what action is appropriate going forward.”

Zutt said the World Bank felt the fiscal stimulus was appropriate because the government's macroeconomic performance between 2002 and 2007, particularly its reduction of Kenya's debt burden, had created enough space for the fiscal stimulus.

The debt to GDP ratio fell to 40 percent in 2008 from 60 percent in 2000, Zutt said.

Inflation in east Africa's biggest economy also plummeted into single digits in the third quarter after the government started using a geometric mean to calculate inflation from an arithmetic mean previously.

The World Bank estimates that Kenya's economy grew by 2.5 percent in 2009 from 1.7 percent the previous year and forecasts expansion of 3.5 percent this year.

Zutt said the bank hopes to pay out $200m for Kenyan projects this fiscal year from $150m over 2008/09, although it has the commitment authority of up to $400m annually. It had disbursed some $95m by December.

It is also looking into a $300m electricity expansion project, a $100m municipal development programme and a $60m youth empowerment plan.

The World Bank's Kenyan portfolio is $1.7bn and only 26 percent of that has been disbursed. The uptake of funds has been low because of long procurement procedures for the often massive projects.

Zutt said the country has to spend $2.1bn annually on infrastructure such as energy, roads and water if it is to meet its goal of attaining the status of a middle income country.

The infrastructure projects will have to be done with the help of the private sector as they are too big, too many and too expensive for the government to carry out on its own.

Zutt said the World Bank would help the government come up with the regulatory framework to encourage the private sector to put in that kind of infrastructure.

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