Improved rainfall promises better outturn for economy

Kenya’s economy could double the pace of growth this year helped by adequate rainfall that the weatherman expects in the country’s most productive provinces.

Economists said heavy rains should improve output in the key agriculture sector that constitutes the largest segment of the Kenyan economy and employs three in every five workers.

Its performance, however, remains tightly linked to the increasingly erratic rainfall pattern making it the most critical determinant of the country’s economic fortunes.

Official data shows that agricultural output declined by 3.5 per cent in the third quarter of last year, marking the ninth consecutive quarterly contraction that saw the economy post zero growth.

On Tuesday, the meteorological department forecast a reversal of fortunes on the weather front – especially in bread basket regions of Western, Nyanza, Rift Valley and Central provinces.

Adequate rainfall is expected to increase agricultural activity, creating new jobs and smoothening out the acute supply shortage in the foods market where a price rally has become one of the major drivers of inflation in the country.

It also points to stability in the national budget on reduced commitment towards food imports and is a sure bet to put money in peoples’ pockets to get them spending again and shore up the sagging demand in corporate Kenya.

This outlook is egging policy makers and economists to say that the country’s soft economy is on the brink of take off and that the government growth target of 4.5 per cent will be attained.

The economy is estimated to have grown by two per cent in 2009.  

“A strong agriculture not only puts money in the pockets of a vast majority of Kenyans, but also eases inflation and stimulates other sectors,”  Dr Joseph Kieyah, a senior policy analyst at the Kenya Institute for Public Policy Research and Analysis (Kippra) said in an earlier interview.

At least four analysts interviewed by the Business Daily expressed similar views.

“The 4.5 per cent target is possible; the Met update provides a foundation to anticipate economic recovery,” said Robert Bunyi, a financial analyst at Mavuno Capital.

He however warned that the country might fail to reap the full benefits of the improved weather if farmers are not supported with the right inputs. 

John Omiti of KIPPRA reckons that with adequate rainfall, Kenyan farmers can produce more than 70 per cent of the country’s annual food requirements.

Many small scale farmers, who are fully dependent on rain, have however recently become weary of the weatherman’s inaccurate predictions posing the risk of the latest announcement failing to trigger the level of farm activity required to achieve full food production potential.

Analysts also expect the domestic economy to get a boost from ongoing recovery at the global level that is expected to support robust growth in key sectors such as tourism and the agricultural commodities market where Kenya sells tea, coffee and cut flowers. 

Coming against the backdrop of a botched up rollout of Sh22 billion stimulus plan aimed at putting money in peoples’ pockets to get them spending again the latest forecast offers big relief to Treasury mandarins, who have been grappling with the prolonged economic slowdown that left growth at below 2 per cent last year.

Treasury has come under the spotlight in recent months as bureaucracy blocked smooth disbursement of funds stalling the stimulus plan.

The Sh22 billion stimulus cash is earmarked for construction of new schools, health centres as well as repair and maintenance of roads at the constituency level.

Increased rainfall should also leave some room for Central Bank of Kenya (CBK) to start rolling back its long running expansionary monetary policy that saw the Central Bank Rate (CBR) drop from an average of 9 per cent to seven per cent in 12 months and lower its Cash Ratio requirement to about five per cent to increase liquidity in the economy.

In the past 18 months, commercial banks have stepped back from the aggressive lending policy that most pursued at the peak of the economic boom in 2007 as credit to the private sector decelerated from 26.5 per cent in 2008 to 15.5 in 2009.

Diminishing share of household lending has in turn weakened consumer demand leaving in its wake a knock-on effect that has squeezed manufacturers’ profit margins and consumed more than 10,000 formal sector jobs.

Agriculture’s poor performance has significantly depressed household incomes for more than 70 per cent of Kenyans, who derive their livelihood from farming besides leaving millions hungry.

The lower earnings and high inflation, which stood at double digit levels before falling to single digit with the introduction of a new method of computation, has hurt consumer demand.

Late last year, the Kenya National Bureau of Statistics reconstituted the consumer price index (CPI) and significantly reduced the importance of household spending on food setting the stage for reduced volatility in the pricing of goods and services in the economy.

The high cost of living has seen consumers cut back on the purchase of non-basic items, resulting in reduced corporate sales and slower economic growth.

The Kenya Association of Manufacturers (KAM) said in December that its members had recorded a 10 per cent drop in demand for their goods despite the optimism.

This delivered lower profits or losses to corporate Kenya forcing many companies to shed jobs, freeze new employment and cut expansion plans to protect their profit margins in a difficult business environment.

With the unsold stocks piling up and finance hard to come by, local manufacturers have slashed production to avoid tying too much cash in slow moving stocks.

Lower demand for commodities has in part held back expansion plans in corporate Kenya, denying the economy the opportunity to create new wealth and new jobs that it badly needs to avoid a social upheaval.

The agricultural sector offers employment to a significant number of Kenyans, making higher earnings from the farms critical to the reversal of the sagging demand for goods and services.

Agriculture accounts for 20 per cent of the country’s wealth or the gross domestic product (GDP), having dropped from a high of 24 per cent in 2007.

Increased supply of food also culminates in lower inflation since food takes up the largest share of most poor households’ monthly expenditure and a drop in the price of food leaves consumers with higher disposable incomes to spend on other goods such as airtime, clothing and beer.

Agriculture is closely linked with Kenyan’s industrial sector where agro-based manufacturers account for 40 per cent of the country’s entire manufacturing sector.

A poor crop hurts the manufacturing sector in the form of high input costs that blunts industrialist’s competitive edge as well as delivers lower profit margins, which are behind the growing unemployment.