Nairobi - The World Bank cut its growth forecast for Kenya for 2013 and 2014 to around 5 percent, citing low levels of government spending and high interest rates charged by commercial banks.
The cuts suggest growth rates in east Africa's biggest economy will lag those of its neighbours.
Gross domestic product (GDP) will rise 5.0 percent this year and an estimated 5.1 percent next year, said the bank, undercutting the government's forecasts.
In June the bank had predicted the $37 billion economy would grow 5.7 percent in 2013 and 6.0 percent in 2014.
“The growth momentum generated ... was lost in the second and third quarters of 2013, held down by lack of government spending and inadequate transmission of the monetary policy stance to the real economy.” the World Bank said.
The Kenyan shilling weakened slightly, quoted at 86.70/86.90 at 10:30 SA time compared with Monday's close of 86.50/86.60.
But traders said this was due to corporate demand for dollars rather than the World Bank data.
The slower pace of growth reflected a weakening investment climate and what the World Bank called an unsupportive fiscal environment, referring to funding demands placed on Treasury by a new devolved system of government.
Kenya announced earlier this month that it was likely to borrow an additional 20-30 billion shillings ($230 million-$345 million) this fiscal year to meet those demands.
The World Bank said the high cost of credit was curbing the growth of small and medium sized businesses (SMEs).
At an average 11 percentage points, the spread between commercial bank deposit and lending rates was still high despite improved economic conditions and lower political risk, it added.
Kenya's central bank has left its key lending rate at 8.5 percent since cutting it in May.
LESS VULNERABLE
The bank said a drop in the current account deficit from more than 10 percent of GDP in 2012 to 7.5 percent in September had reduced Kenya's vulnerability to external shocks.
Some economists said the medium term outlook remained satisfactory after a peaceful election in March, helped by a stabilisation of inflation, interest rates and the exchange rate in the past 18 months.
“Growth was less than 5.0 percent in each of the last two years, so it will still represent an acceleration,” said Phumelele Mbiyo, head of macroeconomic research at CFC Stanbic Bank.
In its latest forecast, the government projected the economy, of which agriculture accounts for nearly a quarter, would grow 5.6 percent in 2013 and 6.1 percent in 2014.
That would leave it lagging others in the region.
Tanzania targets growth of 7 percent this year and Rwanda 6.6 percent. - Reuters