Political spat sparks jitters over Kenya’s growth outlook

Kenya’s five year economic growth rally that peaked at an annual rate of 7.1 per cent in 2007 slumped following the early 2008 election violence and the ensuing global financial crisis.

ODM contested results of the presidential poll but later entered into an uneasy coalition partnership with President Kibaki’s Party of National Unity (PNU) after mediation efforts by an African Union team led by former United Nations secretary general Koffi Annan.

The agreement led to an amendment of the Constitution to create the post of an executive Prime Minister that has had only fractious relationship with the President.

The latest row began after the Mr Kibaki ruled out Mr Odinga’s legal authority to sack ministers implicated in what has come to be called the maize and free primary education scandals.

Mr Kibaki speedily ‘reinstated’ Agriculture minister William Ruto and Education minister Prof Sam Ongeri claiming that Mr Odinga had overstepped his constitutional mandate.

ODM is now calling on Mr Annan to come and mediate over the stalemate, but in the meantime there are fears that momentum could be lost on the ongoing constitutional and other reform efforts while political tension is rising in Mr Ruto’s Rift Valley stronghold.

Gross domestic product (GDP) slowed to 1.7 per cent in 2008 and is estimated to have improved to about 2.5 per cent last year on the back of a sustained government stimulus plan that has seen treasury boost the amount of funds spent on infrastructure development.

The government has over the two years become the sole driver of economic growth as private investors put on hold any long term investment plans fearing the country could slide back to political violence.

Banks have also shied away from advancing credit to the private sector, denying the economy growth impetus as private investors are known to allocate capital most efficiently.

The share of total commercial bank lending to government relative to loans advanced to the private sector increased by 2.2 percentage points to Sh205.1 billion, which was 21.5 per cent of total loans (955.3 billions) lent out by all banks last year.

Mr Turner said bigger government involvement in economic activity may not necessarily be a bad thing as long as the money is spent on growth enabling infrastructure projects and domestic borrowing is confined within sustainable limits.

“Kenya’s economic fundamentals could be right but no investor will be willing to borrow, nor will banks be comfortable to lend in an uncertain political environment,” said Adan Mohammed, the Barclays Bank east and western Africa managing director.

The manufacturing sector, mining and quarrying and business services recorded negative growth in the amount of loans that they borrowed last year.

Chairman of the Kenya Association of manufacturers Vimal Shah said “the political class should find a way of solving their differences in the boardrooms.”

Mr Shah said manufacturers shied away from the high lending rates and strict collateral requirements that came after lenders felt unsettled by the global financial crisis and Kenya’s volatile political situation.