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| 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%.
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| 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.
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| 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.
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| 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.
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