Developing countries especially in Sub-Saharan Africa will be forced to look to internal sources to fund development expenditure programmes as the ongoing slow recovery of wealthier economies from the global recession is expected to affect the flow of grants and donor funding.
The World Bank in its latest Global Economic Prospects 2010 report indicates that the financial crisis will have medium term to long term impact on financing projects in developing countries as developed economies try to limit their engagement in external funding to mitigate against ballooning budget and high levels of unemployment.
“This year’s Global Economic Prospects examines the consequences of the crisis for both the short- and medium-term growth prospects of developing countries and crisis may have lasting impacts on raising borrowing costs, lowering levels of external funding and international capital flows”.
However, the report notes that despite the reduction in external grants, the recovery prospects for developing countries are strong ,with an expected relatively robust growth of 5.2 per cent this year and 5.8 per cent in 2011.
With much of external funds allocated to development projects, the decline will have a direct impact on projects such as education, health, infrastructure and food security.
“A drop in foreign receipts is likely to delay the implementation of donor funded projects”, said Judd Murigi, Head of Research at CFC Stanbic Financial Services.
The report notes that while developing countries probably cannot reverse the expected tightening in international financial conditions, there is considerable scope for reducing domestic borrowing costs, or increasing productivity and thereby regaining the higher growth path that the crisis has derailed.
Mr Murigi says other potential effect of decline in external funding is weakening of the local currency.
Though a weaker currency would be good to local exporters the reduced demand of local produce would erode the expected benefits.
Conversely, a weaker currency will raise the cost of imports making Kenya an expensive investment destination. The Central Bank of Kenya (CBK) Monthly Economic Review (MER) for November indicates that Kenya’s import bill up to October last year amounted to Sh756.1 billion against exports totaling Sh331.6 billion.
The slow recovery path for the developed world will impact on trade, tourism and remittances from the diaspora leading to reduced foreign exchange earnings. For Kenya, its main exports produce such as coffee, tea and horticulture is expected to be hit hard as the main market in Europe is likely to record stunted growth in the next couple of years.
In its first quarter economic and market outlook, CFC Stanbic Financial Services indicated that while tea production is expected to increase, market prices are likely to drop from the 2009 highs while coffee output is expected to decline and horticulture will recover but not to the pre-crisis levels.
The number of tourists is predicted to drop as households conserve cash to see them through the tough times. A decline in number of arrivals will affect the tourism sector earnings and other dependent sectors.
A drop in foreign exchange earnings is expected to strain the government national budget leading to more domestic borrowing to bridge the deficit.
“A reduction in tourist receipts and remittances susceptibility of main exports products to lower global prices and weaker demand would affect the overall earnings thereby constraining expected income”, says Treasury in its latest Medium Term Debt Management Strategy.
The government has been running an expansionary budget for the last five years which has increasingly been funded from domestic sources.
The current fiscal year budget is Sh865 billion constituting of Sh606.7 billion as recurrent expenditure and Sh258.9 billion as development vote. The government expects to receive Sh85.5 billion in grants and net foreign funding .