Written Assignment Unit4: Government and fiscal policy

BUS 1104_04 : Macroeconomics

Mitral Farkhani , instructor

March, 2 , 2022.

HOW POLICY COULD CHANGE THE NATIONAL ECONOMY

The Kenya Economic Update (KEU) is a World Bank report series produced twice a year that assesses
recent economic and social developments and prospects in Kenya, and places these in a longer-term and
global context. Through special topics, the KEU also examines selected policy issues and medium-term
development challenges in Kenya. It is intended for a wide audience, including policymakers, business
leaders, financial market participants, and the community of analysts and professionals engaged in
Kenya’s changing economy.

The pandemic has dealt a major blow to the economy, but the government’s quick policy responses
have helped to cushion the impact, and a partial recovery is underway. In response to the improving
conditions, many of the tax and regulatory relief measures extended at the onset of the crisis have been
discontinued. The economy is expected to continue to recover and gradually return to growth of above
5 percent. The near-term economic outlook for Kenya, as elsewhere, remains unusually uncertain and
contingent on the course of the pandemic.

Kenya continues to experience steady economic growth, with real GDP expanding on average by about
5.6 percent over the last five years (2014-2018). In 2019, however, economic activity has softened
primarily due to lower agricultural output and weak private sector investment. As a result, the World
Bank projects Kenya’s growth at 5.8 percent and settling at around 5.9 percent over the medium term.
The weakening of private investment partly reflects crowding out from widening fiscal deficits and
relatedly limited access to credit by the private sector

The Kenyan economy rebounded and economic activity in the first quarter of 2019 was healthy,
although emerging drought conditions could curtail GDP growth for the remainder of the year… A strong
pick-up in economic activity was reflected by real growth in consumer spending and stronger investor
sentiment, in addition, ongoing emergency intervention to address food shortages in several counties
could impose fiscal pressure constraining capital spending Further. Core inflation has remained below 5
percent, suggesting benign underlying demand pressures. With low inflation, monetary policy could be
more accommodative to support growth if needed, but with interest rate caps tied to the policy rate,
further loosening would be constrained. The low inflationary pressure has also been supported by a
stable local currency.