Kenya: After Stormy Year, Fair Winds Ahead

2011 was a difficult year for Kenya’s economy, with high inflation and interest rates and a decline in growth from the previous three years. But the outlook for 2012, is bright despite the nervousness about the elections due for later this year.

In 2011 the Kenyan economy was significantly distressed by high food and fuel prices, currency depreciation, interest rate rises and inflation all painting gloomy projections.

In January 2011, inflation was 5.42%. Eleven months later it had risen to 19.2%. After a strenuous 2011, the Kenyan shilling experienced a historic slide. In May it exchanged at KSh85 to $1 and in July it hit the KSh90 mark before sinking to Ksh107 in September. The euro crisis was also felt deeply in the Kenyan economy.

The Quarterly Economic and Budgetary Review released in late February 2012 by the Ministry of Finance reveals that Kenya’s external payments position was severely weakened in 2011 due to an increase in imports at the expense of exports. According to the Finance Ministry’s report on the period under review, the country imported goods and services worth $12bn while its exports stood at $6bn.

“The trade account balance worsened by 26.3% to $9.056m last year from $7.169m the previous year, reflecting a faster growth in imports relative to exports,” says the report  and further points out that as a result of this, the current account deficit widened from $2.5bn in December 2010 to $4.5bn in December 2011. The report discloses that in the third quarter of 2011, economic growth declined to 3.6%, which was lower compared to 5.6% in the same period in 2010.

The review blames Kenya’s economic slowdown to the difficulties experienced by her traditional trading partners. “This slowdown was mainly caused by sluggish global recovery on account of the sovereign debt crisis in the Eurozone, weak growth in the US and a general slowdown in output growth for most of its trading partners.”

Notwithstanding, the main players in the Kenyan economy are sending out a positive message. “The economy has managed to sustain a growth rate of about 4%. That is a very decent growth rate anywhere in the world. It is one of the fastest growing economies of the world,” says Dr James Mwangi, Equity Bank CEO. “Economies take between three and four months to adjust. As the year progresses, inflation will be fairly well managed and as soon as that happens we will start seeing good signals on interest rates.”

Mwangi, who is also the Kenya Vision 2030 Delivery Board chairman, seems to have accurately gauged the pulse of the Kenyan economy. The Kenyan shilling has indeed appreciated and gained ground against the dollar. This is expected to pull inflation down significantly.
    
Better prospects ahead

The World Bank (WB) too is predicting better economic prospects for 2012. It says that if Kenya manages to suppress inflation and debt growth, its economy will grow from 4.3% to 5.0% in 2012. “There is an urgent need for Kenya to contain macro-economic pressures by reining in inflation and suppressing growth in debt,” Jane Karingai, senior economist at the WB, says. “Tight monetary policies and fiscal prudence will be necessary in economic management over the short term.”

For a long time Kenya has relied heavily on tea, horticulture, coffee, and tourism as its source of foreign exchange and economic mainstay. The depreciation of the shilling has had a positive impact on exports. Tea earnings improved from $1.13bn in 2010 to $1.27bn in 2011. A similar trend was also recorded in the horticulture sector which grew by 18%, earning Kenya some $1.1bn. The tourism sector also raked in a similar amount of revenue, accounting for 1.26m arrivals. While the tourism and agriculture sectors have been key pillars to the country’s economic growth, lately the telecommunications, transport, real estate and construction sectors have also boosted the economy.

Technocrats at the World Bank say that Kenya needs to diversify its export base so as to boost its growth prospects.  Automotive parts, textiles and chemicals are areas which the WB is asking the Kenyan government to consider. “Kenya is still running on one engine with high imports and weak exports.” Johannes Zutt, the World Bank’s Kenya country director says. “Kenya will succeed economically and be less vulnerable to shocks only if it balances its economy through stronger exports.”

From past experience during an election year, the private sector normally adopts a wait-and-see attitude. The government has been keen to erase the memories of the 2007 General Election, which saw the country’s 7% economic growth grinding to a halt due to a compromised presidential poll and the subsequent violence that followed.

That 2012 will be a watershed year for Kenya is well known to most investors, as it marks a transition year. Interestingly, the changeover is not just limited to the election of a new President to succeed President Mwai Kibaki, who is retiring, it also characterises a new paradigm in the country’s soon-to-be-adopted devolved system of government.  This time around, the government, which is implementing a new constitution is assuring investors that any recurrence of violence during the general election later in the year, will not happen.

“Kenyans have another opportunity to turn political and economic challenges into the foundations of a better future. The government has managed past economic challenges well and can do again,” Zutt says. “The key challenge of 2012 will be managing the political transition well, to avoid the repeat of the post-election violence seen in 2007 and to ensure continued growth in investment and job creation.”

Mwangi shares the same sentiments: “What has been holding us back is our politics and not our economy. We are very well located geographically,” he says. “We have great entrepreneurial people, a well-trained workforce, a big market within which to play but our politics and our leadership has been letting us down.”

Wealth spread more equal

Indeed, self-serving politicians have been largely blamed for fuelling inter-communal violence and fostering an unfriendly climate to the business community. This time around, politicians in the Kibaki administration are touting the implementation of a new constitution which lays great emphasis on institutions as a cushion to a free and fair poll.

The political class has been keen to let the world know that a repeat of the 2007–2008 debacle won’t recur. They cite the promulgation of a new constitution, which places great emphasis on a devolved government and an independent judiciary as some of the key planks that will steer the Kenyan ship away from the political rough waters it has surfed all over the years. Under the devolved system of governance, Kenya’s mode of investment is bound to change, with emphasis being placed on a county system as the envisaged 47 counties gain some financial autonomy on matters of economic management.

“The greatest challenge of the devolution system is to ensure fair distribution of the national resources in response to the peculiar needs of the counties and to balance national interests,” Aurelien Kruse, a World Bank economist, says. “The objective will be to equalise opportunities for all Kenyans while appreciating that economic growth will be concentrated in certain areas.”

The advent of the new constitution and the fast tracking of operational legislation on the functions of the 47 new administrative counties is already being viewed by much enthusiasm by the general public as this promises to spread the national wealth more equally.

Indeed, over the last three years, heavy subsidies and investments have been put in agricultural projects and infrastructure development and bottlenecks in the investment climate have been cleared to nurture public-private partnership associations. It is these economic strides that seem to have persuaded World Bank technocrats to take a bright view of Kenya’s prospects.