Kenyan economy hangs on outcome of General Election
Voters wait their turn to cast the ballot at the Manyatta Primary School polling station in Kisumu on Monday. Experts say a smooth transition will see accelerated economic growth, helping the next government to deal with problems like unemployment. Photo/Tom Otieno
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The vote, the first since the tumultuous one of 2007, was held as the country enters the sixth year of sluggish recovery.
Kenya’s economy has in recent months defied a tense political environment to remain on the growth path.
Kenyans on Monday cast their votes in a closely contested poll whose outcome is expected to determine the fate of their country’s bristle economy.
The vote, the first since the tumultuous one of 2007, was held as the country enters the sixth year of sluggish recovery whose survival depends on a smooth transition and the restoration of investor confidence.
East Africa’s biggest economy is hoping to avoid a repeat of the violence that followed the 2007 poll and slashed growth to a low of 1.5 per cent in 2008 from a robust 7.1 per cent the previously year.
Analysts saw the poll as posing high-level political risk, but expected a smooth transition that would improve business confidence and unlock the inflow of investment to power the economy.
“We expect ongoing economic recovery to continue unless something drastic happens after the polls,” said Dickson Khainga, an analyst with the Kenya Institute of Public Policy Research and Analysis (Kippra).
“We have had strong growth from the third quarter of 2012 and conditions for growth have not changed much.”
Kenya’s economy has in recent months defied a tense political environment to remain on the growth path.
A smooth transition is expected to accelerate expansion, helping the country to deal with some of its most pressing challenges, including mass unemployment.
The country’s Gross Domestic Product (GDP) — the sum of all goods and services produced in a year — grew at the rate of 4.7 per cent in the third quarter of 2012 having risen from the rate of 4 per cent in the same period of 2011.
The Kenya National Bureau Statistics (KNBS) said agriculture and mining were the main drivers of the growth in the last quarter of 2012.
Kenya opened the year 2012 on a slow growth pace of 3.4 per cent and 3.3 per cent in the first two quarters, saddled by a high interest rate regime that reduced activity in the key construction sector.
“The build-up has been good throughout 2012 and we expect the momentum to carry through this year,” said Dr Khainga.
“Investment inflows to emerging sectors such as mineral resource have been good and that should be tapped to support growth in the long term,” he said.
Kenya has in the past five years attracted a steady stream of investments into oil and mineral exploration, drawing in valuable dollars at a time when growth has been less robust in key foreign exchange earners like tourism and horticulture exports.
The sluggish performance of the economy in the first half of 2012 was mainly the result of a steep rise in inflationary pressure in 2011 as the Central Bank of Kenya (CBK) tightened its grip on the circulation of money to shield the shilling from a battering that began in the middle of that year.
Pressures from runaway inflation and a weak shilling have since eased out, leaving enough room for the economy to get growing again. But analysts say the performance is still way below its optimal level.
“The signs of growth are all alive but what happens when we go to the polls holds the magic,” said Robert Shaw, an independent analyst, in an interview last week.
Signs that the economic fundamentals remain strong were visible on Friday when the shilling rose to its highest level this year. Traders quoted the shilling at 85.60 to the dollar, a level it last touched on December 27, 2012.
Inflation has also dropped to within the CBK’s target of five per cent after touching a high of 19.7 per cent in 2011. Newly released data showed that consumer prices rose 0.71 per cent in February, pushing the year-on-year inflation rate slightly up for a second consecutive month to 4.45 per cent.
Inflation dropped for 13 straight months to December 2012 before reversing direction in January and analysts expect the trend to continue in the short term because of increased campaign spending.
This combination of low inflation and relative exchange rate stability is seen as the major that is supporting high level investor confidence even as Kenya went to the polls.
Analysts expect a successful poll and a smooth transition to translate into strong investor sentiment that could propel the economy into the next level of growth in the second half of the year.
“A smooth poll will clear the wait-and-see attitude that many investors have adopted in recent months,” Mr Shaw said.
The Treasury expects the economy to grow by up to six per cent this year, aided by robust growth in agriculture sector that has benefited from favourable weather in the past year. Transport and energy are expected to form the second-tier sectors that will support growth.
Researchers at Old Mutual Securities reckon that a mix of economic strengths and challenges will result in a steady, though not vigorous expansion in the near term.
The researchers say the country could also benefit from growing exports to neighbouring countries whose economies are growing at a robust and steady pace. Consumer demand is also expected to rise in the near term, fuelled by low inflation and stable lending rates.
Some analysts, however, warned that high cost of transition to a devolved system of government could pollute the macro-economic environment and pose a challenge to growth.
Kenya has adopted a devolved system of governance that will give birth to 47 counties that are entitled to a minimum of 15 per cent of the national revenues.
“The transition to the county system is particularly worrying because of the budgetary obligations it is likely to add to a national debt burden that is already overwhelming,” Mr Shaw said.
Establishment of county governments is also expected to further strain the national budget by adding new employees' pay to a public wage bill that is already bloated.
The Treasury last month raised the red flag on the build-up of financial strain and warned of possible public service job cuts and a review of salaries starting July to help manage the wage bill that rose substantially in 2012 with the award of salary increments to teachers, lecturers and doctors.
The country has also experienced a major slowdown in revenue collection that has seen the taxman miss his target by a massive Sh44 billion forcing the Treasury to suspend some spending plans.
