Treasury remains optimistic despite election jitters

By James Anyanzwa

Even though the chaotic party nominations reflected an increasingly electrifying political environment ahead of the March 4 general elections, Kenya’s monetary authorities have put on a brave face over the poll’s likely impact on the nascent economy.

While Treasury has acknowledged that the party nominations — which sparked off skirmishes in some parts of the country — are of great concern, Finance minister Njeru Githae has told investors not to hesitate in making investment decisions in the country.

“I believe there will be free, fair and peaceful elections and the exchange rate will continue to be stable. Investors should, therefore, continue investing in the country,” said Githae.

“The chaotic party nominations obviously showed some concern, but investors not to shy away from making investment decisions, because elections come and go.”

Mr Githae maintained that foreign direct investments (FDI) would not be affected by the forthcoming elections, but insisted that the government should not stand aloof during political party primaries.

Affect the economy

“FDIs will not be affected by the elections but Government must get involved in party nominations because they are just like the main elections and they affect the economy. Parties are not capable of conducting free and fair nominations and the Government cannot afford to ignore these party nominations,” Githae said.

Kenya’s economy expanded by 4.7 per cent in the third quarter of last year, compared 4.0 per cent growth recorded in the same quarter of 2011, according to the Kenya National Bureau of Statistics (KNBS).

The statistics body also pointed out that the expansion was more robust in comparison to the preceding quarters of last year, primarily due to strong performances of the Agricultural, forestry, fishing, manufacturing, transport and communication sectors, and a turnaround in the performance of the energy industry.

However, construction, hotels and restaurants, and mining and quarrying decelerated over the same period, while wholesale and retail trade registered a strong growth, despite slowing down, compared to the corresponding quarter of 2011.

The Government forecasts a 4.3 per cent growth rate for last year, an estimation that falls short of the 2010 performance when the economy rebounded strongly at 5.6 per cent. On the other hand the World Bank projects a five per cent growth rate for Kenya in 2012, increasing to 5.5 per cent this year.

However to achieve this growth the World Bank reckons that the economic and political situation would need to stabilise, and world markets would need to grow more rapidly, than what is currently forecasted. In addition, moderate inflation, an improved current account, and a small decline in interest rates would push up private investments.

State of the economy

“However, a smooth run up to the elections will be essential for this scenario to materialise,” says World Bank, in a report dubbed “The State of Kenya’s Economy.’

According to the Bank, the country’s economy would register an improved growth rate if the Government effectively manages a stable macroeconomic environment, maintains political stability in the run-up to the elections, and addresses the security challenges arising from the conflict with Somalia.

Public investment in roads and energy will drive growth, while private investment is anticipated to grow moderately due to tighter monetary policy. But investors are likely to remain cautious until a new government is elected.

The 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, triggered the depreciation of the shilling to an all-time low of Sh107 to the dollar.

At the same time, the current account deficit reached a record high between December 2010 and September 2011, growing by almost four percentage points, from 6.7 to 10.5 per cent of GDP.

In the first three quarters of 2011, imports expanded by 22.7 per cent, compared to 15 per cent for exports, increasing the current account deficit by $1.9 billion.

By May 2011, earnings from Kenya’s top exports (tea, horticulture, and manufactured goods), along with international travel, were not sufficient to pay for oil imports alone.