By Njiraini Muchira and Jackson Okoth

All kinds of horse trading and backroom deals are being cut behind closed doors, either in broad daylight or in some secret night meetings. This heightened activity on the political arena provides a glimpse into the uncertainty facing Kenya as it prepares for the March 2013 polls.

With the current heated political debate taking centre stage, Kenya’s economy risk losing two years of treasured growth, 2012-2013, subdued by the prevailing uncertain environment that has left businesses guessing.

Fear of below par growth is already emerging backed by key economic indicators that point south in the fourth quarter of 2012. And unlike previous elections, this time round the election fever will spill over to March 2013 and beyond with the possibility of a run-off, which may see Kenya lose out most of 2013 calendar period to the charged political environment. Already, this uncertain environment has affected 2012, especial the last two quarters.

Official data showed a slump in most of the key economic indicators. The Shilling is once again showing signs of weakening as the 2013 elections calendar rolls out. Recent data indicates that the Shilling has been exchanging at Sh84 to the US dollar to an average of Sh 85.2 to the US dollar by October 12, 2012 despite intervention measures by the Central Bank.

Historically, the Shilling has been volatile during election cycles. While the Central Bank of Kenya (CBK) has been consistently pumping dollars into the system, the Shilling has remained under pressure.

Forex analysts maintain that the Shilling could suffer if political campaigns turn violent or the presidential polls drags on into a run-off, sometime in the first quarter of next year.

Already, a slowing economy has also seen Kenya Revenue Authority’s (KRA) struggle to meet revenue collection targets. For instance, Kenya’s 2011/12 tax revenues rose 11.4 per cent versus the previous year but still missed its collection target due to inflation, high oil prices, a weaker shilling and. Not forgetting charged political environment KRA collected tax amounting to Sh707.4 billion for the 2011/12 fiscal year against a revised target of Sh716.9 billion.

KRA has also failed to meet tax collection targets for the 2011/2012 financial year, owing to tough economic conditions and pro-poor tax interventions.

The authority collected Sh707.3 billion against a revised target of Sh719 billion for the financial year ended June. However, as the country enters the electioneering period that will spills over to 2013, analysts fear that KRA may find it even trickier to meet its target.

On the political front, the big concern is whether two leading presidential hopefuls due to face trial in April at the International Criminal Court (ICC) on charges of crimes against humanity, will honour their summons a month after the general elections scheduled for next year. The Hague-based ICC will put leading presidential contenders Uhuru Kenyatta and William Ruto, on trial for their alleged role in the violence which followed the 2007 poll.

Rights Groups

Political uncertainty is also heightened further by demands by the rights groups to the Kenyan High Court to stop the duo from running for the presidency on the grounds that the ICC charges should make them ineligible for public office.

Questions are being asked on how Kenya will fair in the event of a run-off in the presidential race, putting the country on election frenzy for longer than March 2013.

“Nearly all markets and typically any economy typically the world over dislike uncertainty. Therefore, per se, a run off should not unsettle things. What will is if we have an ambiguous or very close run situation without a decisive winner. This would certainly bring complexity and uncertainty,” said Aly-Khan Satchu, an independent financial analyst.

In the run-up to the March 2013 elections, the economy appears to be already on a slowdown and taking a beating.

But Satchu blames this state of affairs on tightening of monetary policy by the Central Bank of Kenya (CBK) to bring down inflation and salvage the Shilling from further beating.

“It is the runaway Inflation (now firmly under control) and the endemic weakness last year of the shilling (now reversed) that put the brakes on the economy more than the run up to the elections,” explained Satchu.

All those who thought that Kenya’s economy had finally delinked from the politics were given a very rude shock in 2007/2008 when violence broke out after and elections, pulling down all gains made.

It is no wonder; therefore, that Kenya’s economy has been unable to attain the seven per cent growth rate after the 2007 polls, largely due to incessant political rivalry and squabbles within the coalition government.

“If we encounter a situation of the same Intensity similar to 2007, then all bets are off. If we can get through the election with a semblance of efficiency, the economy will take off,” said Satchu.

It is essentially impossible for Kenya to insulate itself from the political risks and blowbacks of the 2013 polls. But if no outright winner emerges after the March polls, forcing the country into a run-off, the economic consequences of this scenario will be devastating.

“The biggest risk to the economy is not a run off. It is as Kofi Annan outlined— ‘If we elect a President whose first International appearance is at the Hague, we are headed in the direction of Khartoum,” warns Satchu.

The presidential and parliamentary polls, set for March 4, 2013, have raised a host of concerns, including new corruption scams, tribe-based political parties and a possible slowdown in tourism, an important foreign exchange earner, which could stifle economic growth.

 Former UN chief Kofi Annan during a visit to the country last week said he is worried about rising violence months ahead of the vote, five years after more than 1,200 people were killed in election fighting.

Deadly riots in the port city of Mombasa and inter-tribal fighting further north on the coast have cast doubt on whether the vote in Kenya will be peaceful.

The run-up to general elections does not always bode well for the Kenyan economy. Historically, the economy has always tended to slow down as we head into an election period.

The elections in 2013 will be conducted in the first-half of the calendar year and more importantly in the second-half of the fiscal year.

This is a critical period in the Government’s fiscal calendar as it is usually marked by increased activity as most ministries rush to implement their budgeted projects before the end of the fiscal year in June.

However, this time around, the Government machinery will be focused on ensuring a smooth transition in the face of a changing administrative structure under the new constitution.

This is likely to slow down economic activity, as the Government is a major consumer of goods and services.

Interest rate

“The Kenyan economy in 2012 has been sluggish with first-half economic growth falling below 3.5 per cent, hampered by the high interest rate regime. Although the macro indicators are improving, the uncertainty associated with the forthcoming general elections may dampen growth prospects.

“We forecast that the economy could grow by 3.8per cent - 4.2per cent in 2012. Prospects for 2013 would appear brighter assuming that we have a smooth political transition with a clear presidential winner in round one,” said a September 30th, 2012 report by Pine Bridge Investments.

 Under this scenario, the firm estimates that this economy could grow by 5.2per cent in 2013. Should there be a runoff; economic growth is likely to be below this projection.

On the economic front, things have not been easy for bureaucrats at the Treasury and CBK. For instance, failure by commercial banks to bring down interest rates despite continuous prodding by the CBK is expected to have devastating impacts on the economy this year.

As commercial banks report astronomical profits, analysts now contend that high interest rates being charged in the country are hurting other sectors of the economy, something that could see gross domestic product (GDP) growth shrink compared to last year.

A research by Renaissance Capital paints a bleak picture on the economy with projections that growth will decelerate to 3.7 per cent this year compared to 4.4 per cent recorded last year.

The projected growth shows the economy is going through a rough time largely due to high interest rates even as the government maintains an optimistic stance with a growth projection of between 3.5 per cent and 4.5 per cent.

“Real GDP growth will strengthen to 3.9 per cent in the second half of 2012 from 3.4 per cent in the first half, which implies a growth projection of 3.7 per cent for 2012,” states the research note.

Key indicators

It adds that the slowdown in economic growth during the first-half of this year that’s compares badly to the 4.3 per cent realised during the corresponding period in 2011 was largely due to weaker growth in wholesale and retail trade, financial intermediation, real estate and business services and construction because of credit squeeze.

“High interest rates that subdued credit growth partly explain the weakening of the sectors’ growth,” states the research, adding that credit growth slowed sharply to 18 per cent year on year in June compared to 32 per cent a year earlier.

According to analysts, the economy is feeling the impact of high interest rates as commercial banks refuse to listen or respond to the government’s interventions, pleads and threats in their quest for more profitability.

While the CBK has in recent months drastically reduced the Central Bank Rate (CBR) from a high of 18 per cent in March to 13 per cent currently, commercial banks have only adjusted their rates marginally with the spread averaging 15 per cent, which is extremely high compared to other countries where it ranges between four and six per cent.

Last month, CBK’s Monetary Policy Committee (MPC) stunned the market after cutting the CBR by 350 basis points to 13 per cent from July’s rate of 16.5 per cent.

The MPC cited tamed inflation that stood at 6.09 per cent in August and a stable exchange rate in effecting the drastic reduction. Inflation continues to ease, declining to 5.32 per cent in September.

Despite the CBK interventions and pleading by not only governor Njuguna Ndung’u but also President Kibaki himself, commercial banks have largely refused to pass the benefit to consumers, something that is making it difficult for the private sector to procure credit.

President Kibaki has repeatedly pleaded with commercial banks to bring down the interest rates but his imploring has landed on deaf ears.

“There is urgent need for commercial banks to reduce interest rates. Presently, interest rate spreads in Kenya are among the highest in the region. This has resulted in high cost of credit, which has put access to finance beyond the reach of many needy Kenyans. This trend will not help towards the realization of our development agenda,” said the President in one of the many occasions he has asked commercial banks to reduce interest rates.

According to Renaissance Capital, the decision by CBK to reduce its rate will not have any impact in the money market this year because Kenya’s lending rates tend to be sticky.

“We do not expect the policy rate cut to have a material impact on credit growth until the first quarter of 2013. Though it will moderate following September’s cut, we only anticipate the effect on lending to be realized in 2013,” states the firm.

Challenges

The high interest rates are impacting negatively on key sectors of the economy, which are already facing numerous challenges.

The agricultural sector failed to deliver a recovery from the effects of drought-like conditions experience in 2011, recording a modest rate of 1.9 per cent during the first half of this year compared to two per cent same period last year.

The muted performance of the sector was largely attributed to severe frost that negatively affected the production of tea and other vulnerable crops, coming late of the long rains and declining demand for horticultural products by the European Union market.

In the manufacturing sector, the significant improvement in electricity generation failed to translate into heightened activity. The sector managed a growth of 3.4 per cent during the first half of the year compared to 3.3 per cent last year.

Transport and communications sector, however, recorded improved growth of 5.4 per cent from 4.1 per cent last year.