Friday, 27 January 2017

What is in Store for Kenya’s Economy in 2017?

Kenya's capital Nairobi.
Photo: Courtesy
At the beginning of this year, many analysts and journalists as expected delved into making predictions about the possibilities and eventuality of Kenya’s economy. The overriding theme in the forecasts has oscillated on how the country’s economy will react to the increasing political temperatures in this electioneering period. Historically, Kenya’s economy has always been negatively affected by the exogenous shocks occasioned by political events/activities in the years in which the general elections have been held.

In 2016, Kenya’s economy is believed to have grown by 5.9% as compared to 2015 in which the country’s Gross Domestic Product (GDP) expanded by 5.6%. The 5.9% GDP growth is impressive with respect to the growth rates registered by peer economies, the Sub-Saharan region and the global average. In 2016, Sub-Saharan Africa (SSA) registered a growth rate of 1.4% which is the lowest ever for the region in two decades. This slump in SSA’s growth rate is attributed to the decrease in the global commodity prices such as oil and other minerals which are key export commodities for most of the country’s in this region. Kenya’s economy, being not so dependent on such commodities, was able to register a GDP growth rate of 5.9%.

Earlier projections by The National Treasury and the Word Bank have pointed out that the country’s economy is expected to grow by at least 6% in 2017. A growth rate of 6% for 2017 is pegged on various factors; endogenous and exogenous.

Fast forward, various economic phenomena are expected to shape the country’s economic trajectory in 2017. One of the activities that will definitely alter Kenya’s economic architecture is the Standard Gauge Railway (SGR) whose first phase, linking Mombasa and Nairobi, is expected to commence operations in June 2017. According to the Ministry of Transport and Infrastructure and The National Treasury, the SGR once fully operational will expand the country’s economy by 2.5%.

An image showing a section of the SGR.
Photo: Courtesy
For the SGR to contribute significantly to the country’s economic growth and development then some tough decisions must be made by the government including imposing bans on the transportation of commodities via the road using the trucks. However, the possibility of such an action being taken by the government is low considering that most of the trucks are owned by politicians and individuals who are well connected politically. In any case, the SGR is not only confined for the transportation of cargo but passengers as well. But to generate significant amounts of revenue then the operations of the SGR must be near full capacity and this will have massive implication on the privately-owned long-distance trucks. If at all the government is not going to impose tough restrictions on the long-distance trucks, then the SGR will largely be used to transport passengers and its expected returns on investments may just turn out to be lower.

In June 2017, Kenya is expected to start exporting crude oil against the possibilities that such a move in view of the energy infrastructure that is in place may totally fail to generate significant revenue, create meaningful jobs and create viable linkages with the other sectors of the economy. The exploration of oil backed up by sound systems and structures is an economic activity that is bound to spur growth and development unless there are prevailing exogenous shocks such as low crude oil prices around the world.

Ngamia 1 oil well in Turkana County.
Photo: Courtesy
It is expected, for the start, that only 2,000 (318,000 litres) barrels of oil will be drilled daily from the oilfields awaiting transportation to Mombasa. This amount of oil is certainly insignificant as far as the doctrine of economies of scale is concerned. This is the first misstep that the government is making. From the oilfields, the oil will be transported by road to Eldoret from where it will be transported via the railway line to Mombasa.

The 2,000 barrels of oil will have to be transported by at least 20 trucks daily from Turkana to Eldoret which is not economical at all. The trucks and trains that will be used to transport this crude oil need to be fitted with heating systems to maintain the suitable temperature recommended for crude oil and it will take at least more than one day for the crude oil to be hauled on the trains from the trucks. We should also not forget to factor in the risks associated with transporting crude oil on the road.

With reference to the early oil pilot scheme, the crude oil will be transported by train from Eldoret to the Kenya Petroleum Refineries Limited in Changamwe for specialized heating. Experts estimate that it may take not less than two months before the capacity of one shipping tank is attained and this implies further costs. After the capacity for a shipping tank is attained, the crude oil will be transported for a further 13.5km to the Kilindini Harbor for shipment. The early oil pilot scheme is uneconomical and inefficient and patience should have been duly exercised by first waiting for the construction of the proposed 865 km pipeline which has the capacity of transporting 80,000 to 120,000 barrels of oil per day.

This pilot phase is a move meant to benefit the multi-national corporations that are drilling oil in Kenya. Kenya’s economy is not expected to highly benefit from this early oil pilot scheme and the country will lose billions of money and only a handful of employment opportunities will be created.

The performance of the stock exchange market (Share index value) is another economic phenomenon that keen attention must be paid to. From my vantage point of view, the performance of the Nairobi Securities Exchange could be headed to the dogs if its recent performance is anything to go by. In the first 17 days of this year the Kenyan stock exchange market lost Kshs.153.5 billion. This is a clear pointer that Kenya’s economy has relatively large amounts of hot speculative money. There is no doubt that this wave of the hot speculative money leaving the economy has been triggered by the uncertainty surrounding the general election. Unless the situation normalizes, the rushing out of this hot speculative money from the economy may increase and in turn worsen the situation at the bourse as the general election fast approaches.

As for the electoral cycle, 2017 is a critical juncture in which very serious evaluations of the second Medium-Term Plan (MTP) should be done. The MTPs are cyclical phases detailing the structural and systematic implementation of Kenya’s development blueprint, Vision 2030, in accordance with successive governments that are instituted after each general election.

Considering the state of economic affairs in the country with the goals of Vision 2030 and with respect to the second MTP then clearly the economy is off the mark. The challenges which the second MTP was supposed to address include: the low level of domestic savings which is currently 14% of the total national GDP estimates, high dependence of the country on rain-fed agriculture, high levels of unemployment and poverty, the narrow range of exports, socio-economic inequality among others.

Objectively, the government has done little as far as the targets of the second MTP are concerned. The nexus of this is rooted in the flawed implementation of the existing policies. The implementation process of the Vision 2030 (second MTP) and other supporting policies has been overtaken by cases of grand theft (Corruption) and the prioritization of politics over policy implementation.

Perhaps the most anticipated event that will ultimately shape the country’s economic trajectory going forward is the 2017/2018 Budget Policy Statement which is expected to be read in April this year just four months to the general election. The 2017/2018 Budget Policy Statement, which has already been drafted by The National Treasury, amounts to Kshs.2.288 trillion. The fiscal deficit for the 2017/2018 budget is projected at Kshs.582.4 billion (Excluding grants) with the government expected to plug this deficit by netting in Kshs.221.1 billion from external sources and by sourcing for Kshs.320.7 billion domestically.

CS Henry Rotich at a past budget presentation event.
Photo: Courtesy
From the above, it is evident that the public/national debt will continue rising. According to reports by The National Treasury the public debt is approximately Kshs.3.7 trillion and with an impending budgetary deficit the figure is bound to increase to around Kshs.4 trillion by the end of the 2017/2018 financial year. This will dent the state of the economy especially if the general election occasions a slump in the economic growth rate. Borrowing by the government is not bad but the amount borrowed must be seriously invested in viable infrastructural projects and in the manufacturing sector which have a very high potential of sustaining long-term economic growth as well as structural transformation.

2017 will certainly be a defining moment for the banking industry following the capping of the interests rates. The essence of Economics disputes the enactment of the usury laws unless such capping is meant to promote funding for specific sectors/segments of the economy or if it is instituted only for the short-term. A number of banks have been forced to lay off some of their employees following the operationalization of the law. It will be interesting to see the profit margins recorded by the banks as they will be announcing their financial performance in a few weeks time. The reality on the ground is that most of the banks have instituted tighter conditions for advancing loans to prospective customers. A larger proportion of high risk borrowers have been highly affected and banks prefer to lend to the government.

On a general scale, however, the political activities leading to the general election in August this year is the primary factor that will influence negatively or positively the performance of the country’s economy. Major investments in the private sector will be based on speculation and there is no doubt that the country’s economic growth rate may reduce in 2017.

No comments:

Post a Comment