Political spat sparks jitters over Kenya’s growth outlook

Rising hostility between Kenya’s coalition partners is relegating economic agenda from the national platform and eroding the prospects of recovery at a time when conditions are ripe for growth, business leaders warned on Wednesday even as politicians hardened their positions.

Foreign investors, manufacturers, bankers and private equity specialists who talked to Business Daily said the quick turn of events since Friday last week has elevated Kenya’s political risk profile to a new high raising the prospect of pulling back the pace of economic activity.

Michael Turner, a partner and regional chief executive of private equity group Actis, said political wrangles were causing jitters among prospective international investors who could strike Kenya off their investment priority lists.

It could slow down growth in the short term by forcing investors to put their investment plans on hold, rendering the economy incapable of creating jobs for millions of unemployed youth.
“Investors like certainty, without that they will sit on the fence,” said Mr Turner.

The latest Citigroup Global Markets report describes Kenya as a country that “offers vast growth potential but is beset by political uncertainty in the near-term, a lack of infrastructure and vulnerability to volatile food inflation.”

Kenya’s fragile Grand Coalition government has had many hiccups since it was formed two years ago but the latest crisis – triggered by the prime minister’s attempt to suspend two cabinet ministers over alleged corruption – has raised hostilities to a level that most analysts described as worrying.

National grid

“We are watching the situation closely. It is unfortunate that it is happening when we are so close to breaking the ground for our project,” said Carlo Van Wageningen, the chairman of Lake Turkana Wind Power Project.

If completed by June 2012 as planned, the Lake Turkana Wind Project will bring in up to Sh55 billion in foreign direct investments and add 300 mega watts of desperately needed renewable and affordable energy to the national power grid.

Political analysts said Prime Minister Raila Odinga’s Orange Democratic Movement (ODM) party threat to boycott Cabinet meetings and possible political supremacy wars in parliament (which re-opens next Tuesday) could effectively paralyse government and delay the passing of the Supplementary Budget that traditionally goes to the house in March.

Central Bank of Kenya (CBK) statistics show that harsh economic conditions in the last two years have forced government to step up its spending on infrastructure projects to stimulate economic activity, and any slowdown in State expenditure could drag down overall growth.

CBK says in its latest monthly economic review that an estimated Sh21.9 billion remained locked up in government coffers as at the end of December owing to “administrative constraints to government spending.”

There are concerns that delayed release of the funds, some of which requires parliamentary approval, will further slow down economic activity.

Importers of essential goods such as oil and other consumer items are already feeling the pressure of having to pay more after the shilling slid to an eight-month low weighed down by political sentiments.

Investors at the Nairobi Stock Exchange are also suffering erosion of their wealth as foreigners scale down their participation in the bourse, cutting down volumes.

Kenya’s five year economic growth rally that peaked at an annual rate of 7.1 per cent in 2007 slumped following the early 2008 election violence and the ensuing global financial crisis.

ODM contested results of the presidential poll but later entered into an uneasy coalition partnership with President Kibaki’s Party of National Unity (PNU) after mediation efforts by an African Union team led by former United Nations secretary general Koffi Annan.

The agreement led to an amendment of the Constitution to create the post of an executive Prime Minister that has had only fractious relationship with the President.

The latest row began after the Mr Kibaki ruled out Mr Odinga’s legal authority to sack ministers implicated in what has come to be called the maize and free primary education scandals.

Mr Kibaki speedily ‘reinstated’ Agriculture minister William Ruto and Education minister Prof Sam Ongeri claiming that Mr Odinga had overstepped his constitutional mandate.

ODM is now calling on Mr Annan to come and mediate over the stalemate, but in the meantime there are fears that momentum could be lost on the ongoing constitutional and other reform efforts while political tension is rising in Mr Ruto’s Rift Valley stronghold.

Gross domestic product (GDP) slowed to 1.7 per cent in 2008 and is estimated to have improved to about 2.5 per cent last year on the back of a sustained government stimulus plan that has seen treasury boost the amount of funds spent on infrastructure development.

The government has over the two years become the sole driver of economic growth as private investors put on hold any long term investment plans fearing the country could slide back to political violence.

Banks have also shied away from advancing credit to the private sector, denying the economy growth impetus as private investors are known to allocate capital most efficiently.

The share of total commercial bank lending to government relative to loans advanced to the private sector increased by 2.2 percentage points to Sh205.1 billion, which was 21.5 per cent of total loans (955.3 billions) lent out by all banks last year.

Mr Turner said bigger government involvement in economic activity may not necessarily be a bad thing as long as the money is spent on growth enabling infrastructure projects and domestic borrowing is confined within sustainable limits.

“Kenya’s economic fundamentals could be right but no investor will be willing to borrow, nor will banks be comfortable to lend in an uncertain political environment,” said Adan Mohammed, the Barclays Bank east and western Africa managing director.

The manufacturing sector, mining and quarrying and business services recorded negative growth in the amount of loans that they borrowed last year.

Chairman of the Kenya Association of manufacturers Vimal Shah said “the political class should find a way of solving their differences in the boardrooms.”

Mr Shah said manufacturers shied away from the high lending rates and strict collateral requirements that came after lenders felt unsettled by the global financial crisis and Kenya’s volatile political situation.