Economic Review: Kenya's economy is out of balance

By NJIRAINI MUCHIRA

Review: Kenya’s economy has been out of balance for a long time but in 2011 a number of external shocks exposed Kenya’s unsustainable external position. The rapid rise of oil prices in the first half of 2011, and the Euro crisis in the second half of the year, as well as the drought in the Horn of Africa, experienced their own economic pressures. Finally, increasing international prices for fuel and food created inflationary pressures domestically, while also increasing the cost of the import bill. The resulting imbalances were reflected in a widening current account deficit, and a depreciating shilling.

The deficit in the current account is largely financed via short term financial flows, which consist of money invested in the equity and money markets, often referred to as footloose capital. These inflows can quickly reverse into net outflows. Yet Kenya’s imports consist mainly of oil, capital machinery and intermediate inputs, which are all essential for growth, and are difficult to scale back. Although Kenya’s balance of payments has previously been in surplus (the tip of the iceberg), it remains vulnerable to external shocks and outflows of footloose capital.

The 2013 elections will not only usher in a new national government, but also a new system of devolved government. Businesses and investors will need to adjust to new institutional arrangements at the local level, that are yet to be fully developed, and to the possibility that a new government may come in with new policies. The result is likely to be a wait- and-see attitude from the private sector. But there is also an upside dividend if the election is handled well. The election period presents an opportunity for the Government to restore public confidence in the legitimacy and power of institutions, and its ability to ensure justice, equity, and an enabling environment for development. The new government will need to manage these expectations, and the outgoing government will have to ensure a peaceful, flawless transition. Presently, there is every indication that the current government is aware of these challenges.