Tourists arrive at the Moi International Airport in Mombasa on December
17, 2014. Tourists – local and International – have defied terrorist
threats and travel advisories to choose the Kenyan coast for their
holiday this season. Tourism had suffered a blow due to terrorism in the
period prior to the festive season. PHOTO | KEVIN ODIT |
NATION MEDIA GROUP
While our economic growth rate remains respectable, it is
nowhere close to the 10 per cent threshold the Vision 2030 envisages.
This below expectation performance purportedly embodies an
........over-estimation of the strength of our economic base to support an
explosive economic takeoff that our policy makers dreamt of.
Understandably such miscalculation was driven by the zeal of a country
in a hurry to make up for the wasted years of mismanagement of
resources.
Retrospectively, the protracted poor
economic performance has continuously frustrated our aspiration of
achieving a middle income status.
Unexpectedly, but
quite pleasantly, these aspirations have been reaffirmed by the rebasing
statistics. The rebasing of the economy by taking into account
previously under-reported activities like the booming real estate has
increased the size of the economy by 25 per cent. This remarkable
configuration instantly shot Kenya into the middle income status before
2030 as previously envisioned.
However, the exuberance
of achieving the middle income status has been tamed by the reality of
recent economic data of the last three years that shows an economy that
has stagnated.
This stagnation is attributable to
several factors including headwinds of politics of entitlement that was
unforeseeably unleashed by the implementation of the new Constitution.
Unfortunately such politically driven demand for equity distribution has
continued to suffocate public debate on the development agenda.
Furthermore
having been at the epicentre of local and international terrorism,
Kenya, until recently, had been unfairly subjected to travel advisories
from the West, the biggest market source for our tourists. Although
these advisories have been relaxed, their lingering effects had serious
economic ramifications on the tourism industry, which is a major driver
of economic growth. However, the impact of the ban has been mitigated by
a surge in diaspora remittances.
This stagnation cloud
notwithstanding, a rigorous scrutiny of the economic growth statistics
and other indicators reveals a silver lining. Even before rebasing of
the economy, Kenya was shining globally as a prospective financial hub
for international capital in spite of the whirlwind of insecurity
incidents.
While the achievement of the new status
drew local cynicism, it nonetheless vouched global confidence in the
development path we have taken.
This confidence
reflects future expectations of a country on a growth trajectory as
embodied in a series of international activities like the notable
increase of foreign direct investment including the successful debut of a
Eurobond in the international market.
GLOBAL EXUBERANCE
This global exuberance thesis is farther supported by the surging data on foreign direct investment.
The
silver lining thesis is undoubtedly supported by the sound
macro-economic fundamentals the government had been pursuing as
reflected in the three policy pillars fiscal, monetary and governance.
The fiscal policy is dominated by government’s ambitious development
strategy of cutting production costs to enhance its competitiveness.
The government takes cognisance of the overwhelming contribution of energy and transport costs to overall production costs.
With
an ambitious initiative of generating 5,000 Mega Watts (MW), and having
added 280 MW to the national electric power grid, the government
expects to significantly reduce energy costs.
If the
Thika Superhighway is the benchmark, then predictably the implementation
of the regional infrastructure projects like Standard Gauge Railway
(SGR) and the Lamu port project will reduce transport costs and unleash
unprecedented capital along these corridors.
Moreover
local initiative of tarmacking 10,000 kilometres will be a plus. While
the impact of these projects has not fully materialised, there is
evidence of declining production costs as captured by Kenya’s recent
improved competitiveness index.
The country continued its upward trend from last year and moved up by six places to reach the 90th place.
Notably,
private sector borrowing from commercial banks grew significantly
compared to the projected target. By June 2014, borrowing had grown by
26 per cent compared to 9.5 per cent in June 2013 and above the
projected target of 18.3 per cent.
The surge in
private borrowing tends to increase private investment. Private
investment decisions are primarily driven by the expectation of future
economic growth.
This local business optimism, as
reflected in the increased demand for credit, is supported by the
remarkable turnaround of foreign direct investment in 2013.
TAME INFLATION
Kenya’s
monetary policy has consistently managed to tame inflation. However,
the achievement of this policy goal has in the past come with enormous
costs of systematic credit starvation for the private sector. This is
now changing with easing of credit attributable to the government’s well
advised decision to disproportionately borrow more externally.
Good
economic performance is the consequence of a well functioning market
system, which is an embodiment of a game of exchange of goods and
services between buyers and sellers.
Since the game is
contractual, whether implicit or explicit, there must be enforceable
rules of the game to ensure credible exchanges take place. Such rules
emanate from a stable legal foundation that espouses principles of a
free market.
While Kenya’s economy is market based, it
had been, since independence, operating on weak constitutional
structures that she inherited from the colonial government.
Delaying
of constitutional reforms would result in subsequent poor economic
performance. In fact, it is this performance and its ramifications that
would later trigger public protests that gave birth to the new
Constitution. The Constitution has produced legal, political and
socio-economic innovations that will change the country for good.
Some
of these innovations that will likely rejuvenate the future economic
performance are the entrenchment of consumer sovereign doctrine and
devolution promise.
Consumer sovereignty is a
distinguishing and critical pillar of a modern free-market economy,
which combines the principles of consumer protection and competition
laws.
The concept holds that effective consumer choice
solely determines what goods and services an economy will produce and
at what price.
The devolution system decentralises
power to the 47 county governments, to align public policies with local
diverse interests. The concept of devolution was predicated on the
citizens’ belief that the county government would become an incubator
that would hatch great local ideas to drive developmental agenda.
It
was on this basis that a guarantee of minimum vertical allocation of 15
per cent of audited national revenue was enshrined in the Constitution.
Although
devolution remains a popular initiative, its implementation,
unfortunately, has turned out to be a logistical quagmire. However,
despite this shortcoming, devolution is a key pillar of inclusive
growth, which is the ultimate policy goal.
The current
stagnation and incidence of insecurity notwithstanding, the future
prospects of Kenya’s economy are bright because the macro-economic
fundamentals are right.
The constitutional infusion of
the core pillar of a modern free market system provides a solid bedrock
upon which to execute the development agenda. The development policy
strategy of cost cutting on projects like infrastructure will fuel and
sustain economic take-off.
Once the teething
logistical problems of implementing devolution are conquered, it will
become the intended vehicle of ensuring inclusive growth.
Prof Kieyah is a Principal Policy Analyst at KIPPRA
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