NAIROBI, Nov 4 (Reuters) - Kenya's government should tackle corruption to boost economic growth and raise incomes, the World Bank said on Wednesday, as it raised its growth forecast for this year after a stronger-than-expected first half.
The East African nation became a lower-middle-income country in 2014 under the Washington-based lender's classification, but has lagged its peers on widely used measures of governance.
"Governance challenges are increasingly limiting Kenya's prospects for faster and
more broadly shared growth, with corruption as the key binding constraint," the lender said in the latest edition of its biannual Kenya Economic Update report.
Corruption and collusion cost the country an estimated 2% of GDP a year through higher fiscal deficits, the World Bank said.
"This translates into substantial additional borrowing needs accumulating over time," it said in the report.
The International Monetary Fund said in June it had shared a draft report designed to flag governance weaknesses and corruption vulnerabilities with the Kenyan government, following a request from Nairobi to look into the issue.
The government is also rolling out an electronic procurement platform, which it says will cut graft avenues and wastage, and it has signed a conflict of interest bill.
Kenya has been struggling with heavy annual debt repayments in recent years after ramping up borrowing from 2013 to finance infrastructure. It has also been missing its fiscal deficit targets in recent years.
"Corruption risks contribute to a higher cost of borrowing," the World Bank said in the report, citing a "governance premium" on sovereign borrowing.
The lender lifted Kenya's economic growth forecast for this year to 4.6%, from an earlier forecast of 4.3%, citing faster-than-projected growth in the first six months of this year.
It however warned of risks, including fiscal slippage that could drive up debt. Kenya will also hold a general election in August next year, which could increase uncertainty, curb investment and tourism and add to spending pressures, the bank said.
(Reporting by Duncan Miriri;Editing by Alexandra Hudson)
