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Kenya’s standoff with US bad for economy

By | Updated Tue, October 6th 2009 at 00:00 GMT +3

By Morris Aron

Roman author Pliny once wrote: 'Experience is the best teacher of all things." This silent rule probably holds true most of the time except, for some strange reason, when applied to Kenya’s economic managers.

Uhuru’s begging mission — on behalf of Treasury— to the World Bank is also clearly at odds with the war drums aimed at America by President Kibaki’s administration over President Barack Obama’s threat to ban 15 ministers from his country. While most in Treasury publicly deny the gravity of Kenya’s sudden dependence on donors, behind the scenes they do admit that in the face of the drought, energy shortages and famine, the Government’s budget is severely stretched.

The country receives billions of dollars a year as support from donor countries that accounts for a substantial part of the budget for vital areas of the economy.

Finance minister Uhuru Kenyatta at a past press conference. The minister has led a delegation to the 2009 IMF and World Bank Group meeting in Turkey with an agenda that includes asking for more financial help. Picture: File/Standard

The country also needs the support of the international community even much more now after three failed rainy seasons that saw the country plunged into one of its worst droughts seen in recent years.

Inflation has consistently remained at a high 17.9 per cent, 10 million Kenyans are facing starvation, Gross Domestic Product is forecast at below three per cent, and the thinning tax revenue is having its toll on Government spending. It is becoming increasingly clear that political wrangles within the ruling coalition have put the country on a collision course with key donors.

Much of it can be traced to the strained relations between Kenya and the international community over the slow pace of crucial political reforms.

Though the squabbling is at its infancy stage, economic and political observers, however, warn that it is threatening economic growth, as donors hold back on their level of commitment to the country. In the dark 1990s, donors froze aid to Kenya under the despotic Kanu regime, due to well documented and justified concerns about the direction of political and economic governance.

Today, some experts warn the economy could become a prisoner of the fragile political truce, and that Kenya’s credit rating could dip further in the face of the row with America over political reform.

But Ms Linet Oyugi, a senior economist at the Institute of Policy Analysis and Research (IPAR), believes the diplomatic row between Kenya and the US may not necessarily ruin the relations between the two countries.

Dark economic times

Rather, she reckons that the country’s once strong economic performance has been stalled by a series of exogenous, but temporary, shocks that hit the Kenya last year, and extended through this year. The country, she says, can recover from these setbacks.

During the dark economic times of the 90s, the economy grounded to a halt, at one point registering a 0.5 per cent growth, while inflation rose to a historic 46 per cent.

Over a decade later, the country is still smarting from the impact of donors cutting of the aid taps to the Kanu government, which only ended with the exit of former President and the entry of the Narc Government in 2002.

Experts warn the diplomatic spat could drag down confidence in the Government’s ability to ward off job losses, reduce poverty and build the infrastructure necessary for growth.

But as Kenyans seek divine intervention, the economy is already in the ‘pause’ mode, with several companies quietly retrenching workers, while a number of foreign firms are withholding new investments.

Reform agenda

Economists warn that the growing disquiet over crucial reforms is sending the wrong signals to the international community, and magnifying political risk element in doing business in the country — and as such strangling prospects of economic growth.

"Kenya has made tremendous progress in the last couple of years," reckons Penelope Brook, World Bank acting Vice President in charge of financial and private sector development, during the launch of the bank’s Doing Business Report, last week.

"However, ... research has shown that Kenya has slipped in its reform agenda," she pointed out. Coming at a time when the Finance Minister Uhuru Kenyatta has led a delegation to the 2009 IMF and World Bank Group meeting in Turkey with an agenda that includes asking for more financial help from the Bretton Woods institutions, the reform agenda may be one of the issues that stand in the way of any pledges in aid.

Though the World Bank has not indicated that it will be downsizing its level of support, America has major say in disbursement of its funds and the writing appears to be on the wall.

"We have a number of finance proposals that we have received, and they are being handled on a case by case basis" said Mr Peter Warutere, the Communications Officer at the World Bank’s Kenya office.

"As to whether the proposals will get approval or not, we will have to wait to see." The growing impatience by the international community over the slow pace of reforms recently played out in the open.

In the last couple of weeks, a diplomatic row erupted between Kenya and the US over the lack of action in some of the key areas proposed under the power sharing agreement brokered by former United Nation’s Secretary-General Kofi Annan.

The US has threatened to impose sanctions against Kenya over non-implementation of the reform agenda, as outlined in the Annan-brokered national accord that ended the country’s post-election violence early last year.

The US has already sent letters to 15 ministers threatening to impose travel bans on them if they fail to support the reform agenda.

It also warned that future relationship with Kenya would not be ‘business as usual’ unless the country tows the reform line. The hard-line position taken by the US has also gained currency with the country’s leading trading partner — the European Union.

travel ban

Washington is also scrutinising any proposals for Kenya in international financial institutions, as part of the measures.

"We are deeply concerned by the lack of implementation on key elements of the reform agenda and that while we want to support the process of reform, we will not do business as usual with those who do not support reform or who support violence to achieve political aims," said Michael Ranneberger, US Ambassador to Kenya.

Other development partners have followed suit, with the UK and a number of European countries threatening to follow the same route as the US, if Kenya does not tow the reform line.

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