A slow 2013 and cautious optimism for growth in 2014

While handing over to his successor, Uhuru Kenyatta, President Mwai Kibaki noted with optimism that the country was on the verge of an economic takeoff. PHOTO/FILE 

In Summary

• The installation of the new regime was expected to unlock the economic growth momentum held back by the wait-and-see attitude adopted by investors pending the outcome of the General Election. It was to usher in accelerated economic growth.
• Data released by the Kenya National Bureau of Statistics shows an economy that is losing growth momentum. In the third and second quarters, the economy recorded a growth of 4.4 and 4.3 per cent respectively, weaker than the 5.1 per cent posted in President Kibaki’s last three months in office. 

By CHARLES WOKABI
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Handing over the instruments of power to his successor, Uhuru Kenyatta, in April, President Mwai Kibaki noted with optimism that the country was on the verge of an economic takeoff.

“We are on the path to achieving not just the political freedom that our founding fathers dreamt of, but the economic independence that has been made possible because of the taxes you pay,” Mr Kibaki said during the swearing-in ceremony at Kasarani, Nairobi.

The installation of the new regime was expected to unlock the economic growth momentum held back by the wait-and-see attitude adopted by investors pending the outcome of the General Election. It was to usher in accelerated economic growth.

This has, however, not been the case.

Data released by the Kenya National Bureau of Statistics shows an economy that is losing growth momentum. In the third and second quarters, the economy recorded a growth of 4.4 and 4.3 per cent respectively, weaker than the 5.1 per cent posted in President Kibaki’s last three months in office. 

“Despite the peaceful presidential election and smooth transfer of power in March 2013, the growth momentum generated in the last quarter of 2012 was lost in the second and third quarters of 2013, held down by lack of government spending and inadequate transmission of the monetary policy stance to the real economy,” a World Bank report on the country’s wellbeing states.

In both quarters — April to June and July to September — growth momentum was slower than the corresponding period of 2012.

Economist Robert Bunyi said the country’s economy suffers from over-dependence on agriculture, which means that a slump in the sector will bring down the entire economy.

“We would want to blame the government but its policies have yet to start impacting the economy. What we need to do is as simple as develop other sectors to a level where they can support the economy even when agriculture underperforms,” Mr Bunyi said. 

Overall, the figures fall below what was required to put the country on a path to hit the projected annual growth target of between 5.6 per cent and 6 per cent.

LOWER THAN EXPECTED

In an economic review, the International Monetary Fund in October said the country had to record economic growth rates of between 6 per cent and 6.5 per cent in the last two quarters of the year to hit the initial target.

The World Bank said to achieve its estimated 5 per cent growth in 2013, the fourth quarter would have to return a 6.2 per cent growth.

Leading economic indicators for October and November, however, point to an equally moderate growth in the fourth quarter.

“Domestic factors played a role in the lower-than-expected growth, reflecting a weakening investment climate, unsupportive fiscal environment at both the national and county level, and slow transmission of accommodative monetary policy stance into lower lending rates,” said the World Bank.


A study released by TNS last week on the prospects of the Kenyan economy in 2014 says the situation was worsened by the country’s confrontation with the International Criminal Court where the president and his deputy face charges of crimes against humanity.

“Investors, especially in the Western countries, held back investments and this affects direct inflows in the country. The situation remains to a large extent as the ICC cases are still underway,” TNS said.

This, according to the report, poses a major risk since having few foreign investments and over-relying on the Orient for development partnership would constrain growth, given that the Kenya Revenue Authority may not meet the budget deficit locally.

On the other hand, introduction of VAT on a number of basic goods has been classified as one of the main deterrents of consumer spending.

Introduction of the 16 per cent levy has increased inflationary pressure on consumers, eating into their spending power.

Interest rates have also remained unreasonably high, precipitating a financing crisis for small and medium enterprises, which are the core drivers of the economy.

Mr Bunyi said the country’s biggest worry now should be the situation in South Sudan because the country is a developing export market for Kenya and many local companies have subsidiaries there.

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WHAT WILL DETERMINE DEVELOPMENT GOING FORWARD

DEVOLUTION

How the devolution process pans out will have an extensive impact on the country’s economic growth next year.

The process has been largely advocated as a good response to economic stagnation affecting remote parts of the country.

However, its benefits are squarely dependent on how well the process is conducted.

The ability of the county governments to prioritise development projects and plan their expenditure better to increase absorption rates will play a key role in determining their growth, hence national development.

In a research paper, the Institute of Economic Affairs (IEA) calls for broad-based support and political good for the successful implementation of devolution.

“Building infrastructure and institutional capacities for the devolved units will be important to the devolution process,” the IEA said.

In its report, TNS says differences in interpretation of the Constitution in regard to devolution is likely to slow down certain decisions at the county level.

“It is expected that county governments will be fully operational and will have embarked on full service to the public. This will come with an initiation of development projects in the counties that will need to be serviced by local investors.

EAST AFRICAN COMMUNITY

Kenya has recently led a number of efforts geared at improving its business relations with members of the East African Community.

The aim is to open up the regional markets to each other and to the rest of the world through investments in some key infrastructure projects.

Under the Integration Summit, which brings together Uganda, Rwanda, Burundi, South Sudan, and Kenya, a number of projects have been commissioned that, if successfully executed, would greatly contribute to the country’s economy in the near future.

They spread across the tourism, infrastructure, immigration, and telecommunication sectors, the latest being the joint effort to lower international calling and roaming charges within the bloc.  

“With Kenya’s economic standing in the region, the East Africa Community is a powerful tool that will catalyse economic growth for Kenya.

A number of factors, however, have taken time to be resolved and this affects the way countries do business with each other,” said TNS.

The developing security situation in Southern Sudan may have a negative impact on the regional economic growth if it is not contained in good time.

BUSINESS CLIMATE

Businesses operating in Kenya have over the past few years complained about the high cost of manufacturing.

Of particular concern has been high cost of energy and skewed taxation policies that place Kenya at a disadvantage while competing for investors.

TNS said the cost of manufacturing locally compares unfavourably to that of importation and would, therefore, affect the rate of growth of the local manufacturing sector.

“With recent increase in electricity cost, manufacturing is directly affected which, in turn, raises the price of products, making them potentially uncompetitive compared to imported products. An external factor that is closely related to the cost of manufacturing is the global oil prices,” the report said.

Policy interventions are needed to address delays in resolving contract disputes and protracted cross-border trade procedures which have previously eroded the country’s attractiveness as an investment destination.

The World Bank’s Ease of Doing Business report released in March ranked Kenya the 121st most competitive country this year, down from position 109 in 2012.

The government will also need to find a lasting solution to the high interest rates in the country that make it impossible for business to access credit.

NATIONAL SECURITY

The four-day terrorism ordeal at the Westgate Shopping Mall in September is still stuck in many people’s minds.

Retailers say business at the malls is yet to fully recover as many people still hold back from such places in fear.

For the country to achieve significant improvement in economic growth, investors and consumers will need to be assured of safety from terrorism risks.

While consumer frequency of mall visits did not totally end following the Westgate siege, TNS said, the amount spent in the malls was reduced, which directly impacts on the amount spent by shoppers.

“At a macro level, the Westgate attack had a big impact in terms of the shopping behaviour of customers.

We started to see sales really go down; we are talking about double digit decline year over year as customers are afraid to go to the malls.

If they have to, they go in and get out in a short time,” a retail company that was affected by the Westgate attack said.

Increase in terror attacks has also had an effect on businesses having to pay higher premiums due to high exposure associated with the country.

POLITICAL CLIMATE

After a peaceful political transition in March, the country has no major political action lined up for 2014.

The TNS report conducted this month said business leaders are optimistic that the economy is on track to grow next year as the events blamed for slow growth in 2013 will have subsided.

After nine months in office, the induction period is over for the government and it is expected that the economy will benefit from huge public spending as development projects get underway.

“In the months that the new government has been in place, business leaders are optimistic that the environment created is conducive for growth,” the report says.

The biggest political event for the year will be the determination of the ICC cases, which may heavily impact on the investment climate in the country given the role they played in the not-so-good performance recorded in 2013.

“Recent developments indicating that the ICC case against the president may not have sufficient evidence may impact positively on the economy if the president’s name is cleared,” the report said.