Cypriot crisis, a poser for Kenya’s financial system

The antenna for Kenya’s financial system must be hovering high up in the sky by now. This follows the unfolding financial crisis in Cyprus, a member of the European Union (EU) – a key trading partner for Kenya.

A $13 billion bailout has already been agreed between Cyprus and the EU and International Monetary Fund (IMF) as the country faces perhaps in worst crisis since the 1974 Turkish invasion.

While effects of the Greek and Italian financial crisis, in what is now called the Eurozone crisis, is still being felt, the addition of Cyprus could not have come at a worse time. Kenya relies heavily on the EU for its horticulture, tourist numbers and other exports. This means a crisis in this region has repercussions on Kenya.

Cyprus and Europe’s economic woes have created additional challenges for Kenya’s economy. This is because Kenya’s economic prospects are connected to economic performance of Europe.

There are several transmission mechanisms, including uncertainty in global capital markets, which has contributed to the volatility of the Kenyan Shilling.  But the key link is trade.

Kenya has a structural weakness in exports, especially in manufacturing, which is mainly due to infrastructure constraints, notably the poor performance of the port of Mombasa. This weakness could hurt Kenya during times of global crisis because it still depends too much on traditional exports such as the ‘Big Three’: Tea, Tourism, and Horticulture.

Together they make up more than a third of Kenya’s total exports, and generate around $ 3 billion in foreign exchange. They are also an important source of employment. But while Kenya has started to look East to sell its products, it still depends on the North to a large extent.

About one-third of Kenya’s exports are sold in Europe. Trouble in Europe should be a wake-up call to Kenya’s economic managers to diversify their trading partners from heavy dependence on Europe.

While ripple effects of the Greek and Italian crisis are yet to become pronounced, more financial trouble for Europe should warn local banks that they should reduce exposure to any toxic assets.