The ushering in of a New Year has traditionally been regarded as a period that should be characterized with certain changes; changes that are positive. With pristine hindsight, 2015 was a year that our economy as a country performed averagely. The economy faced several challenges but also the positives are noted to have taken place.
The performance of any economy, a political economy for that matter, is pegged largely on the political leadership of a country. Looking back in the last electioneering period 2012-2013, the current administration promised that it would do all it can to make sure that the economic growth rate would be in double-digits. I am still waiting like an anxious bridegroom to see this happen and with my intellect and instincts this can never happen this year through to 2017.
One of the major reasons that this won’t happen any time soon is simply some common sense economics. If for the last three years the economic growth has been oscillating around the 5% mark then catapulting a 10% plus growth rate will be an illusion.
So, what are the expectations of the general state of the economy in 2016? Firstly, the total and overall rate of economic growth rate will be around 4.5 to 5.3% due to an expected increase in political temperatures and activities as we edge closer to 2017. The slackened economic growth would be due to the pre-cautious approach that would be taken by the investors.
Secondly, the interest rates are expected to go up because of an increase in domestic borrowing by the central government. One of the major objectives of the Eurobond was to ease the rate of government borrowing in the domestic market so as to reduce the cases of crowding-out by the private sector. But because of the Executive’s affirmation and confirmation that the finances accrued from the sovereign bond were wired down to the ministries, state departments and agencies then we should expect to witness more and more borrowing by the government.
In any case, the Treasury experienced a cash crunch at a time when the Eurobond proceeds had just streamed in and it was forced to borrow some funds. This really implies that in fact borrowing is expected to be on the increase primarily to finance the current ambitious budget of close to Kshs.2.2 trillion whose deficit is explicitly massive. What will chiefly push up the interest rates would be the willingness by the lenders to easily lend finances to the government. Note that when the government intends to borrow funds it does so irrespective of the interest rates that are offered by the lenders and so the latter would be much willing to loan funds to the government in anticipation of some handsome returns.
Thirdly, the exchange rate is expected to be relatively the same and the current situation won’t fade any time sooner. At the moment, US $1 exchanges at Kshs.102. There is a reason as to why I am foreseeing the current exchange rate being the norm for the next couple of months or years. Looking way back in 2011 when the shilling’s value deteriorated to an all-time low of Kshs.107 against the US dollar, it eventually came down to a region of between Kshs.88-89 versus the dollar for over three months. The worry here is that the present exchange rate of Kshs.102 against US $1 has been in existence for over three months. The Kshs.102 versus the dollar has not been a temporary situation unlike the Kshs.107 against US $1 which occurred for very few days.
It is not 2011 alone that can be used to judge and make conclusions about the value of the Ksh against the US $ basing on the three-month period. In the first Mwai Kibaki’s administration, the Ksh really gained against the dollar and it even exchanged at an average of Kshs.67 to US $1. When this exchange rate surpassed the three-month period, it became the norm until the post-election violence happenstance. The reality is that we are going to experience the current exchange rate for quite a number of months. In fact to complicate matters, the US Federal Reserve raised the interest rates by 0.25% and this is likely to weaken the shilling further by the mere virtue of having the foreign transactions done in dollars.
Fourthly, inflation will increase relatively, though marginally. One of the major factors that has enabled inflation to remain below 10% for the last three years are the low oil prices. As a country we are very lucky that the local currency has depreciated but the rates of inflation have been modest. Recalling the economic situation in 2011, the shilling fell to an all-time low of Kshs.107 for US $1 and the rate of inflation spiraled to around 19%. What if the oil prices were high? I bet the current inflation rate could hit the roof. The low oil prices are not a local phenomenon that the government can use as a chest-thumping opportunity to toot its political horn because it is a global economic phenomenon.
One may wonder what is really driving the oil prices south. There are two main circumstances but all can be summarized under the classical theoretical and practical aspect of demand and supply. The first circumstance that has resulted in the lower world oil prices is the production and consumption pattern of oil by the United States of America. Currently, the USA is producing a lot oil internally and has hence lowered significantly the quantities that it purchases from the leading oil producing countries in the world. This has freed the amounts that were being purchased and consumed by the US economy and as a result, there is a lot of supply of the oil produced by the OPEC countries. In addition to this, most of the European, Asian and African countries haven’t experienced a surge in demand for oil. Hence, simplistically, the increased supply in oil coupled with a relatively depressed demand by the US has meant that oil prices are relatively low.
The second aspect is the low demand of oil by China owing to its sluggish rate of economic growth rate. The fact that China is the world’s second largest economy implies that its consumption of oil is usually relatively high. For two years or so, the economic growth rate in China has slowed down and as a consequence, its demand for oil has fizzled hence its importation of significantly lower quantities of oil. Her lower demand and consumption for oil has led to a relatively increased supply of oil as the initial amount she consumed was considerably higher and has hardly found alternative markets elsewhere. Back to inflation, however, I tend to hold the view that marginal increases will take place as we draw closer to the general election. Since August of last year, inflation has been on the increase from 5.84% to 8.01% in the month of December.
Fifthly, the 40% rate of unemployment is expected to increase as the one million jobs per annum promise by the Jubilee administration has remained a pipe-dream. I read some mind-puzzling statistics last year that in 2014 about 750,000 jobs were created in the formal and informal sectors. This is some sort of delusion going by the current state of economic affairs. After all the government can doctor statistics in its favor. Every year, the number of job seekers that are released into the job market outnumber by far the employment opportunities created. Entrepreneurship is the ultimate answer and easier access to the finances incentivized by the government purposefully to lend the youth ought to be actualized.
Finally, the balance of payment deficits of the Kenyan economy will worsen. This means that the amount to be spent on the imports will highly and largely superimpose that realized from the exporting activities. The reasons that will increase the BoP deficit are intertwined to a weakened shilling and/or a strong dollar and the perennial exportation of primary commodities to the global market.
In 2016 therefore, we should not expect a heightened increase and intensification of economic activities. We may possibly witness a lower rate of economic growth rate compared to the last three years much to the chagrin of the citizenry. But our hands are tied; the investors are usually circumspect and speculative in nature especially when elections are beckoning and the exogenous/external shocks can hardly be avoided by a developing economy like ours. That’s the manacle.