Three threats to the Kenyan economy

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This article first appeared in my weekly column with the Business Daily on April 30, 2017


Kenya registered relatively healthy GDP growth in 2016 at 5.8 percent. This is an important figure as the average rate of growth for Africa in 2016 was 1.3 percent. It has been noted that in Africa’s current multispeed growth phase, East Africa will be important in pulling up the economic growth of the continent due to limited exposure to the commodities and fairly diversified economies. In this context, Kenya is important for the continent’s growth as East Africa’s largest economy.

That said, it should be noted that there are clear threats to robust economic growth this year. While there are external factors that may mute growth such as Brexit and new policies by the Trump administration, the focus of the analysis in this article will be on domestic threats to growth in 2017.

The first threat is the drought; the Central Bank of Kenya (CBK) has already warned that the economic growth will be negatively affected in 2017 due to the drought. The production of Kenya’s key export, tea has been ravaged; production is expected to drop by 12 to 30 percent. And it cannot be guaranteed that any loss in forex due to lower volumes will be mitigated by higher tea prices. Livestock production has also been devastated. It is estimated that the drought has led to losses of 40 to 60 percent, particularly in the North East and Coast. Secondly, the drought has pushed up inflation which stood at 10.28 percent in March, far above the government ceiling of 7.5 percent. The cost of food has been particularly affected, forcing low income families to put more money aside for basic food needs. Finally, the drought has led to higher electricity prices due to Kenya’s reliance on hydropower; about 39 percent of installed capacity is hydro. Increases in the cost of electricity inflates the price of manufactured goods for the end consumer.

Image result for Kenya drought

(source: thetropixs.com/wp-content/uploads/2017/03/Kenyans-drought-1.jpg)

The second threat to Kenya’s economy is the interest rate cap which is linked to a contraction in lending. As this paper reported, Treasury stated that lending to businesses and homes grew just 4.3 percent in the year to December, down from 20.6 percent in a similar period in 2015. The 4.3 percent credit increase is well below what the CBK says is ideal loan growth of 12 to 15 percent which is required to support economic growth and job creation. Muted lending, particularly to SMEs due to the interest rate cap, will put a damper on the country’s growth engine.

The final threat to Kenya’s economy this year is the general election. Business mogul Aliko Dangote made the point that in Africa many investors often choose to wait for an election outcome before making further investments. Wary local and foreign investors pull back investment in a country and adopt a ‘wait and see’ attitude until elections are finished and the stability of the incoming administration has been established. The IMF echoes this concern stating that the elections in Kenya this year may contain growth momentum.

Image result for Kenya election

(source: https://www.standardmedia.co.ke/ureport-uploads/file-56948d06e60f9.jpg)

The reality is that economic growth ought not be affected by any of the factors above; they could be avoided or better managed. And while the economy is resilient and will continue to grow, the economic impact of the factors detailed above is already being felt by millions of Kenyans.

Anzetse Were is a development economist; anzetsew@gmail.com

 

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