Kenyans face slowdown in economic growth ahead of polls

Treasury Cabinet Secretary Henry Rotich (left) with his Transport counterpart James Macharia during the Kenya Public Private Partnership Roads Investor Conference at Safari Park Hotel on November 15, 2016. The government says it has put in place measures to shield the country from negative effects of election politics. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

In Summary

• The government maintains it has put in place measures to shield the country from the negative effects of election politics.
• With seven months to the polls, the cyclic effect that elections have on Kenya’s economy have begun to show.
• Job losses, salary freezes, high cost of credit and increased adoption of technology turned it into a year the business sector and Kenyans would like to forget. 
• The bitter standoff over whether the General Election will be manually or electronically conducted is one of the examples Mr Satchu gives on how politics hurts the economy.

By VINCENT ACHUKA
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Kenyans should be worried about a slowdown in economic growth this year as we head to the General Election, experts have warned.

This is even as the government maintains it has put in place enough contingencies to shield the country from the negative effects of election politics.

With just seven months to the polls, the cyclic effect that elections have on Kenya’s economy have begun to show judging by the developments in 2016.

Job losses, salary freezes, high cost of credit and increased adoption of technology turned it into a year the business sector and Kenyans would like to forget. 

Paul Gachanja, the Chairman, Department of Economic Theory at Kenyatta University (KU), says unless the government figures out how to revitalise the stagnant agricultural sector in 2017, it can only get worse because fewer jobs can be created in the current environment.

“When we still depend on rain-fed agriculture and export most of our products without any value addition, then import the finished products, it tells you we are not serious about a sector that employs a majority of the country’s population,” he says.

And with an impending highly contested election and drought in parts of the country, he says, it is going to be a rough ride singling out low credit growth as one of the factors that could slow down the economy.

A move by the government to regulate interest rates appears to have led to a slowdown in credit growth as banks became “choosy” on who to give a loan to which is denying businesses capital. Latest data from Central Bank of Kenya (CBK) shows credit to the private sector grew 4.6 per cent in October,  the slowest pace since June 2008.

The government, however, maintains that it is on top of things and there is nothing to worry about.

“The country’s growth is much higher than the average for the sub-Saharan African region of 1.4 per cent and global growth of 3.1 per cent,” Treasury Cabinet Secretary Henry Rotich told the Nation.

RESILIENT DOMESTIC DEMAND

“This is supported by investments in infrastructural development, private sector investments, resilient domestic demand, recovery in the tourism sector and growth in exports to the region,” he said.

Different economic growth projections had been made for 2016 but the World Bank’s forecast of 5.9 per cent might be most accurate when the final results are given by the Kenya National Bureau of Statistics (KNBS) come May.

This, however, depends on whether the results for the fourth quarter of 2016 shows Kenya’s economy grew by at least 5.9 per cent. During the first three quarters it grew by 5.9, 6.2 and 5.7 percentage points respectively averaging 5.9 per cent which is within the World Bank’s projections.

The International Monetary Fund (IMF) had initially predicted a 7.2 per cent growth before revising it to 6.8 per cent in October while the government had projected growth to be at 6.5 per cent. The Central Bank of Kenya made a 6 per cent growth projection.

This year, the World Bank has projected East Africa’s largest economy would grow by 6.0 per cent, a feat Mr Aly Khan Satchu, chief executive of investment advisory firm Rich Management, says will be hard to achieve.

“History shows that the Kenyan economy slows down in an election year by about 1.2-1.4 per cent. Typically, folks become cautious and adopt a wait-and-see attitude but as long as the political rhetoric stays below the radar, then we should be ok,” he told the Nation.

“However, what has been noticeable in 2016 and has been measured by the London School of Economics is that the traditional incumbent re-election bias is at a historic low and the ground is fast shifting beneath the feet of the political establishment,” he explains as one of the reasons why investors will probably hold on to their money in 2017.

The bitter standoff over whether the General Election will be manually or electronically conducted is one of the examples Mr Satchu gives on how politics hurts the economy.

In addition, data shows that in three out of the five multi-party elections Kenya has held since 1992, the economy either slowed or failed to grow. In 1992 the economy shrunk by 0.8 per cent and only grew by a paltry 0.5 per cent in 2002.

PREDICT HIGHER GROWTH

During the run-up to the 2007 election, it grew by an impressive 7 per cent (the highest in the last 20 years) before tumbling to a measly 0.25 per cent in 2008 as a result of the post-election violence. In 2013, economic growth remained at a steady 5.7 per cent although economists had predicted higher growth.

Mathematically, this shows there is a 60 per cent chance the economy will slow down this year given the aftershocks the business environment has been feeling following the prolonged period of intense political activity.

By close of business on Friday, investors had lost Sh398 billion at the Nairobi Securities Exchange (NSE) following a second consecutive year of a prolonged bear run at the market characterised by mass selloffs of shares as most listed companies recorded drops in profit or losses.

During this period, market capitalisation, which is the aggregate value of all the listed companies, has shrunk by 14 per cent from Sh2.3 trillion to Sh1.9 trillion by the close of trading on Friday.

As a result companies have resorted to shrinking their staff or shutting down some of their operations.

East African Portland Cement, Sameer Africa, Yana Tyres, Airtel, Kenya Airways, Kenya Flourspar, Eveready East Africa, Karuturi Flowers, Nestle, Tata and the Nation Media Group are some of the companies that have either shrunk operations or downsized.

Despite these warning signs Mr Rotich says there is no cause for alarm.

“We expect growth to remain stable on the back of continued investment spending in infrastructure and strong consumer spending during electioneering period. We have made plans to ensure the budget for 2017/18 is approved by March to pave the way for smooth government operations during July, August and September 2017 which is around the election date,” he says.

FOREIGN EXCHANGE RESERVES

“Other contingencies in place include the level of official foreign exchange reserves, which is at an all time high of more than  $8.5 billion or 5.5 months of import cover; this will cushion us from exchange rate pressures should there be any incipient import pressure associated with election consumption.

We also have a precautionary facility with the IMF to the tune of $1.5bn should there be a balance of payment shocks in 2017,” he explains.

But while narrowing the current account balance may help to keep the local currency stable, aggressive borrowing by government risks widening the country’s fiscal deficit, which could expose the economy to systemic risks. This is because the government is spending a huge chunk of its money (a good percentage of it borrowed) to repay debts.

Both the World Bank and the IMF have time and again warned that although Kenya’s debt is still manageable, the pace at which it is increasing is worrying.

The debt has increased from 42.1 per cent of GDP in 2012-13 to 55.1 per cent of GDP in 2015-16, on the back of a massive increase in development spending.

Transport Cabinet Secretary James Macharia, whose ministry has taken up most of the loans, insists the debts are offering value for money.

“The economic benefits for roads are immediate. When a farmer takes his milk or maize to the market without worrying about bad roads, that’s an instant return or when patients reach the hospital in time and better still if traders move from town to another in time,” he told the Nation.

In order to spur economic growth in 2017, the government is in the process of widening its tax base especially in the informal sector to finance ongoing infrastructural development. 

Among its latest initiatives which take effect today (January 1) are sections of the Finance Act 2016.

The law, which was signed into law in October last year by President Uhuru Kenyatta, seeks to, among other things, increase the amount of revenue the government gets from the multi-billion-shilling betting industry while motivating investment in sectors like housing by making rental income of less than Sh12,000 exempt from the Rental Income Tax.