Drought shock adds new twist to Kenya’s economic outlook

The weatherman’s warning of a looming drought in most parts of the country has cast a heavy cloud of uncertainty over Kenya’s economic outlook that got a fresh dose of optimism only five days ago when the National Economic Social Council predicted a doubling of the rate of growth to 5.2 per cent by end of year.

The drought, which the weathermen expect to start in earnest next month and last till mid next year, removes any prospects of a decline in the cost of electricity in the medium term, even as it raises the possibility of a new round of water rationing in major cities like Nairobi – and its negative impact on industrial production.

Low rainfall means that Kenya’s ability to generate electricity from the less expensive hydro sources will diminish, forcing the country to rely more on the expensive thermal power to meet consumer demand.

It also points to a looming replay of the acute water shortages that persisted in most Kenyan towns since late 2008 and only ended with the heavy rains in March and April.

Water consumers pay state-owned suppliers Sh20 per 1000 litres of water supplied, a much lower charge compared to Sh500 that water vendors charge for a similar quantity.

Such levels of pricing mean that utilities will join expensive food in driving up the cost of living measure or inflation — that remains the Achilles heel of Kenya’s recovering economy.

Eastern and Central provinces, where a significant number of the country’s least-cost hydro generation plants are located, are expected to experience dry weather conditions in the quarter to December – a situation that may last till mid next year, according to the weathermen.

That leaves the Kenya Power and Lighting Company (KPLC) with the option of stepping up its uptake of thermal power to meet electricity demand that has been rising in recent months with increased economic activity.

Poor weather means consumers will pay more in the form of high fuel cost charges — an item on the power bills linked to the amount of electricity generated from fossil fuels.

Eddy Njoroge, the managing director of KenGen, on Wednesday said that the power generator will step up supply from the diesel generators in an effort to conserve water in the dams.

“We are balancing the supply from hydro with thermal to ensure that we also meet peak demand that has grown to 1120 megawatts from 1070 in March,” said Mr Njoroge.

Last month, for instance, increased demand for power saw KenGen and the Independent Power Producers (IPPs) such as Aggeko and Tsavo step up their thermal supply by 11 million KWhs to 174 million KWhs.

That forced KPLC to increase the fuel cost adjustment charge for bills settled last month from Sh3.18 in July to Sh3.49.

At Sh3.49 though, the fuel cost charge is still much lower than the record Sh7.83 it clocked in January.

But the Energy Regulatory Commission (ERC) says it expects the prolonged dry weather forecast to push the fuel cost charge to above Sh5 per unit by December.

This will disappoint the 1.2 million consumers who had hoped for further price cuts with the recent reduction in the amount of thermal power supplied by British firm Aggreko under the emergency power contracts signed last year.

The drop in hydro power contribution to the national grid will offer private power producers such as Aggreko and Iberafrica an opportunity to grow their earnings as the move in to plug the generation gap.

The reversal in the direction of power prices is also expected to raise concern among industrialists, who have been complaining about expensive electricity, saying it hurts their competitiveness in the regional market where pricing is the key driver of market share growth.

Peter Kuguru, CEO of the Softa Bottling Company says inadequate water supply would make it difficult for the soft drink and mineral water maker to maintain production at current volumes.

But the biggest damage to household budget is set to emerge from expensive water supplied by private vendors.

More recently, soaring demand for water coupled with under investment on water infrastructure and poor weather has led to perennial water shortages across most urban centres.

Nairobi, for instance, experienced an acute shortage of water in 2009 and quarter one of 2010 brought home by insufficient rain.

This forced the Nairobi Water and Sewerage Company to rollout a water rationing programme where residents got water at least once a week.

As a result, residents had to buy water daily with a 20-litre container going for between Sh5 and Sh10.

The biting shortage has eased because of heavy rains in March and April.

But players in the water sector reckon that the dry spell could prompt another round of water shortages, especially in Nairobi and the outlying districts.

Dry spell

In Nairobi, the dry spell will hurt the performance of Sasumua dam — the main water supply reserve for the city—which is set to be opened in November after a two year upgrade.

The combined impact of high water and power tariffs is expected to pile inflationary pressure in an economy where recently unveiled official data show that households have knocked off some goods and services from their budgets to navigate the turbulent economy.

This comes amid rally in other food items such as milk, potatoes and vegetables, wrecking household budgets that have enjoyed cheap food in recent months on increased supply arising from favourable weather.

But the impact of rising food prices on the official inflation was muted by the significant fall in mobile phone tariffs, which halved because of a price war in the mobile telephony market.
Inflation dropped to 3.2 per cent in August down from 3.6 per cent in July.

Reduced water supply is also poised to hurt the performance of the state owned water companies — which has hoped increased supply will boost their revenues after the government increased water prices early in the year.

It means that the water providers will find it difficult to recover their full operation costs in the medium term and leave a surplus to allow them improve infrastructure.

Performance of the water companies is a national eyesore and according to the water ministry out of the 120 companies formed in 2002 as part of the reforms, only 22 meet their expenditure.