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Slow recovery overseas to hurt Kenya’s growth

Workers pack roses for export at a flower farm in Naivasha. Slow recovery of Kenya’s main export markets in Europe and US is expected to affect the country’s growth. Photo/FILE
Workers pack roses for export at a flower farm in Naivasha. Slow recovery of Kenya’s main export markets in Europe and US is expected to affect the country’s growth. Photo/FILE 

Kenya’s economic growth will be more sluggish than in the last five years because of the slow recovery of its main export markets in Europe and US.

Besides low demands in commodity markets, there will be lower consumption levels brought about by an impoverished population, limited international financing and the end of the stimulus programmes in many developed and developing countries.

Kenya is not projected to recover to the growth of year 2005 until after two years with expectation that gross domestic product will be 3.7 per cent in this year and 4.8 per cent in 2011, according to World Bank’s Global Economic Prospects 2010.

The projected growth for next year is closer to the 2004 growth of 4.3 per cent, which rose to 5.9 per cent in 2005 and a high of 7.1 per cent in 2007.

The report says Africa will experience on average a slowdown in the next five years compared to the growth of the past five years as a result of the after-effects of the global economic crisis.

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Africa will be slowed down by the failure of commodity prices to recover to their pre-crisis levels this year or the next although they will be higher than in 2009.

A second factor is that consumption is projected to remain weak following the fall of some 15 million people in Africa into abject poverty compared to 64 million for the entire world – where this poverty is defined as those living on less than $1.25 (Sh95) a day.

A third factor is the drop in stimulus programmes later this year by the developed countries which have helped in arresting the most sinister effects of the crisis and created the stage for recovery – however fragile.

A fourth factor dampening growth will be more expensive finance because financiers will be more risk-averse in the next five to 10 years as regulators tighten rules and lending practices become more conservative.

In fact, for developing countries as a group, Global Economic Prospects 2010 estimates that the average growth rate will be 0.2 to 0.7 per cent lower than the average for the last five years on account of financing alone.

Lead author of the report Andrew Burns said during a breakfast meeting with journalists on Thursday.

“As international financial conditions tighten, firms in developing countries will face higher borrowing costs, lower levels of credit, and reduced international capital flows. As a result, over the next five to seven years, trend growth rates in developing countries may be 0.2 to 0.7 per cent lower than they would have been had finance remained as abundant and inexpensive as in the boom period (2003-07).”

The report said that lower borrowing costs caused both international capital flows and domestic bank lending to expand which contributed to a 30 per cent increase in investment rates in developing countries.

Key markets

“The resulting rapid expansion of the capital stock explained more than half of the 1.5 percentage point increase in the rate of growth of potential output among developing countries.”

It said that in the still weak environment, oil prices are expected to remain broadly stable, averaging about $76 a barrel; and other commodity prices should rise by only three per cent per year on average during 2010 and 2011.

“The overall regional (sub-Saharan Africa) outlook remains uncertain and the strength of the recovery will largely depend on demand from key export markets,” the report said.

Exports, which are mainly commodities, are expected to rise by only three per cent on average in 2010 and 2011, thereby dampening prospects for a stronger recovery.

“Unfortunately, we cannot expect an overnight recovery from this deep and painful crisis because it will take many years for economies and jobs to rebuild. The toll on the poor will be very real,” said Justin Lin, World Bank chief economist and senior vice-president for development economics.

He said that the poorest countries, those that rely on grants or subsidised lending, may require an additional $35-50 billion (Sh2.7 trillion- Sh3.8 trillion) in funding just to sustain pre-crisis social programmes.

These include all countries in East Africa except Kenya.

The report noted that Sub-Saharan Africa initially felt the crisis through trade, foreign direct investment, tourism, remittances, and official assistance channels.

Regional GDP is estimated to have increased by only 1.1 per cent last year.

“Oil exporters and middle income countries were hit more severely than low-income, fragile and less integrated countries – at least initially,” said a statement on the report.

In 2010, GDP is expected to grow by 4.8 per cent in SSA countries excluding South Africa.

South Africa is expected to grow by two per cent this year after having contracted by 1.8 per cent in 2009, while middle-income countries growth will accelerate to 3.5 per cent.

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