Euro crisis threatens growth of Kenya’s exports

Kenya is among the countries likely to bear the brunt of the euro zone crisis through a decline in exports, investment and remittances.

A new report by the Overseas Development Institute (ODI) said Cameroon, Mozambique, Niger, Cape Verde and Paraguay would also be exposed.

“Economies across Africa and the developing world face a serious decline in exports, investment, remittances and aid as a result of the continued crisis affecting Europe,” said ODI in the research.

Europe consumes a quarter of Kenya’s exports and disburses nearly 30 per cent of remittances to Kenya. As a top frontier targeted by foreign investors, any escalation of the crisis would have negative economic consequences.

The developing world is expected to bear a cumulative output loss of $238 billion over 2012-13 the report stated.

The report said a one-per cent drop in export growth could on average hit growth in poor developing countries by up to 0.5 per cent. For Kenya, the government has projected a worst-case scenario of 3.5 per cent GDP growth this year.

“There are three broad ways in which the euro zone crisis will affect developing countries – through financial contagion, as a knock-on effect of fiscal consolidation in Europe to meet austerity needs, and through a drop in the value of currencies pegged to the euro,” said Dr Isabella Massa, the author of the report.

Shock waves

The EU constitutes the largest single export market for poorer countries while the emerging BRIC economies are the main source of imports.
“Poor countries are vulnerable to the euro crisis not only because of their exposure but also because of their weaker resilience compared to 2007, before the onset of the global financial crisis,” said Ms Massa.

Dr Massa said the ability of developing countries to respond to the shock waves emanating from the euro area crisis is likely to be constrained if international finance dries up and global conditions deteriorate sharply.

A similar conclusion was reached by a new report from the International Monetary Fund (IMF) titled Sub-Saharan Africa: Sustaining Growth amid Global Uncertainty.

“The projected impact on low-income countries is sensitive to country circumstances. Kenya’s merchandise exports and tourist receipts rely significantly on European exports, so growth could slow quite significantly — at least 0.5 percentage points — in both 2012 and 2013,” said the IMF.

While launching the report, the IMF resident representative Ragnar Gudmundsson said Kenya — like other Sub-Saharan Africa countries — faced a decline in exports, tourists, capital flows and remittances with the renewed crises in Europe.

Other risks the economies in SSA faced were oil price shocks, adverse climatic conditions, political changes and civil strife.

Mr Gudmundsson said a blanket price subsidy should be avoided as it had the potential to distort the price structure of goods.