In the course of last week, this question was put forward to me; “there were forecasts for the Kenyan economic growth of around 8% for this year, is that still possible?”
Given the “peaceful demonstrations” then, I would have been quick to answer in the negative and give a pessimistic outlook. However, we are bound to be objective.
What drives our economy?
Kenya is largely an agri-based economy- horticulture (flowers and vegetables), tea and coffee, dairy products. The tourism sector has also played a vital role in our economy. Our manufacturing sector is not well developed, and mainly depends on imports be it of raw materials or equipments (plant and machinery). The commercial and services sector is slowly coming up with the telecommunications and IT sectors leading the way on a very optimistic growth path.
The general global outlook too has an impact on the economy too. Most analysts are of the opinion that the global economic growth will slacken in the year 2008. This, they support through a number of arguments. Demand for fuel is building up and its price is at an all time high of $100 per barrel, and with the possibility of soaring higher. Gold and commodity prices are also very high with gold prices at over $900 per ounce. China and India who are the major contributors of the global economy are poised to record low growth rates. Their increasing economic growth rates have led to an increase in their disposable incomes and by extension their demand for commodities, fuel inclusive. This poses the threat of a looming inflation. To avoid a situation of inflation biting on their economic growth, there is thus need for them to regulate their growth rates.
Our industries depend so much on fuel to run them save for a few innovative ones- e.g. Mumias sugar that uses biofuel to run its machinery. Rising fuel costs will thus mean an increase in the cost of production. Whether these costs will be passed on to the consumer depends on the competition in the specific industry. This may dampen our economic growth rate.
The loss at the beginning of the year occasioned by the post electoral violence quantified at above 100B will also dampen our growth rate. It will take us time to recover fully from the loss. Investor confidence, and more so the Foreign Direct Investments (FDI) that we had started experiencing, might take longer time for us to rebuild them.
A look at the African economies may also shed some light. Zimbabwe has seen it, as regards biting inflations, black market and constant mass actions called for by the opposition. I choose on this country since in the short term, we are more or less experiencing the same political situation as of now. The increased mass protests have led to decreased investor confidence, with sanctioned donor aid, low if any FDI and ever increasing inflation levels and the thriving black market. While these may not be what we may be experiencing, it will however give us a glimpse of what to expect if the current political situation persists- think of the queues experienced in Kisumu as the locals shop in groups of five in the supermarket or the cost of fuel in western Kenya going at triple the rates in Nairobi.
In the recent past, the greatest contributor to the real GDP of the country has been Tea, Coffee, cut flowers and vegetables. Dairy exports have also played a role. With continued violence a number of things will happen. The transport sector will be affected and thus the said commodities cannot make it to the market. Labor too will be affected on both key skills and labor intensity. This may in turn lead to low productions and by consequence low exports of the same thus low GDP.
Locally, the currency market has been on the receiving end. It has been depreciating and closing the week on 66.70 levels. This has majorly been contributed by the reduced dollar inflows from tourism, tea and coffee auctions.
The bond market has not been very active. Caution is being taken with inflation looming. Food prices are a major contributor to the inflation and have been rising owing to shortages. The government expenditure has also increased away from the normal domestic debt clearances and into the cost of supporting internally displaced. This is on the back drop of reduced income from low tax collections. Thus, there is the possibility of a competition between the government and the private sector for funds in the domestic market which will lead to an increase in interest rates and further fuelling inflation.
Increased cost of borrowing- high interest rates, default risk premium, political risk premium- will lead to a reduction in accessibility to the loans and other financial products consequently hampering development.
The property market has recorded remarkable growth in the recent past. However, owing to the political uncertainty, the last quarter of 2007 and the first quarter of 2008 has seen substantial drop. The pace of growth in this sector will be affected much by the level of disposable income.
With reduced tourism activities, affected transport activities, increased cost of borrowing, a weakening shilling against the dollar, increasing fuel costs, increased net imports, looming inflation levels and anticipated slower global economic growth, an 8% growth rate may not be possible.
