Many times when economists say Kenya’s economy is on a trajectory of collapse, the response we always get is that the Kenyan economy is too big to collapse.
I think non-economists imagine an economic collapse to be something close to an Armageddon — a dramatic and catastrophic demolition of the economy. Here comes Sri Lanka, espousing all the characters of a collapsing economy amd we can see through what we mean by Kenya’s heading towards that direction.
Sri Lanka has been one of the recent success stories of an economy transitioning a big pool of its working population from agricultural sector into the wage economy, which is always evidence of an industrialising economy. Just before the pandemic in 2020, Sri Lanka had officially achieved its upper-middle-income status.
But today millions are struggling to purchase food, medicine and fuel, in a country with a higher economic status than that of Kenya, which is lower-middle-income status.
Sri Lanka is in a crisis where inflation has soared over 50 percent, food prices have risen by more than 80 percent, and the currency has collapsed, making it very expensive for the country to import supplies. Its debt unsustainability position has forced it to default on its debt obligations in order for it to hold revenues to buy essential supplies.
Such a country is generally declared bankrupt. This is what an economic collapse means to those who think that the Kenyan economy is too big to collapse.
While what crystallised the impending collapse of Sri Lanka economy may be different, the big lesson is that we are one wrong policy away from being Sri Lanka.
In 2019 when President Rajapaska as elected in office, he found it posh to sell the policy that he will transition farmers from conventional farming of using agro-chemicals to organic farming. In 2021, the government banned the import of chemical fertilisers.
Sri Lanka was known to be self-sufficient in rice production but within six months, production fell by 20 percent. And it was forced to import while at the same time domestic prices kept rising.
The tea sector, which accounts for 70 percent of the country’s agricultural exports, and fourth tea exporter in the world faced a huge slump, shrinking the country’s foreign exchange.
When the pandemic happened, that was the last nail. Tourism, which accounted for close to half of the country’s foreign exchange, plunged the country into a crisis. Sri Lanka found itself in a position where it could no longer service its foreign debt because it had limited foreign earnings.
The foreign exchange problem is worse. The situation is so dire that Sri Lanka doesn’t have enough foreign exchange to even import food to meet its demand.
In 2019, Sri Lankans elected Gotabaya Rajapaksa. Four years later, more than half a million have fallen into poverty and the economy is in tatters. A lesson for Kenyans is that they better interrogate policies of presidential candidates because we are just one wrong policy away from economic chaos being experienced in Sri Lanka.
Kenya already has a competitiveness problem — we are not exporting as much as we should whilst imports are increasing. We are already debt-vulnerable going by the amount of revenue we use to service debt.
It is also clear to everyone now that we are experiencing an exchange rate problem — dollar shortage. We are also experiencing high cost of living, soaring food price and inflation. This economy is slowly running out of wheels.
No Kenyan president has inherited an economy in an economic crisis like the one he will be handed in August. A re-run of the election would make it worse because the incoming government would be settling in November.
More than six months on this trajectory — high cost of living together with an exchange rate crisis — would be a nightmare for the next president.
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Note: The results are not exact but very close to the actual.
