Missed targets as economy struggles to find bearing

By James Anyanzwa

The Government’s three per cent growth forecast for this year faces a litmus test. The doubts come in the wake of poor performance by key sectors in the first and second quarters.

"The growth of the economy will slow down mainly due to the effects of El Nino rains and destruction of infrastructure," says Ms Linet Oyugi, senior economist at the Institute of Policy Analysis and Research (IPAR).

According to the Kenya National Bureau of Statistics (KNBS), persistent drought and the prevailing global economic downturn restrained the economy from attaining its growth potential.

Drought has impacted on agriculture, forestry, electricity, water as well as manufacturing.

Oyugi contends that, if not checked, El Nino rains predicted by the weathermen could destroy infrastructure, hurt agriculture, slow down construction activities and paralyse transport system. "The Government, it seems, is ill-prepared for the rains," she says

Slow down

According to Oyugi, growth in the third quarter could remain around 2.1 per cent but slow down in the fourth quarter to between 1.5 per cent and 1.8 per cent.

And while banks are awash with liquidity, borrowers are shying away from loans due to uncertainty in the investment scene.

"The opportunities are not available but even if they are, the returns are long term," Oyugi told The Financial Journal.

The Treasury launched a Sh22 billion fiscal stimulus package to kick-start economic recovery, but there are concerns over the pace at which it is being implemented.

"It may not have the desired results," said Oyugi.

The Government expects to spend the money in accelerating economic recovery by injecting the money in labour intensive projects, such as the Kazi kwa Vijana (Jobs for the Youth) initiative and constituency-based projects as way of spreading wealth.

Oyugi, however, believes the diplomatic row between Kenya and the US may not necessarily ruin the relations between the two countries.

After attaining an impressive revised growth of 4.0 per cent in the first quarter of this year, the economy grew by a provisional estimate of 2.1 per cent in the second quarter of this year, remaining almost at the same level during the period last year.

Sectoral performances, however, varied considerably with the hotels and restaurants achieving the highest growth of 24.2 per cent – reflecting a recovery in tourism.

Electricity and water recorded the largest contraction of five per cent due to prolonged drought, which drastically reduced water levels in dams.

Agriculture and forestry, manufacturing, electricity and water, and fishing slowed their growth while construction, transport and communication; taxes on products and financial intermediation were the key drivers of the growth during this quarter.

Notably, agriculture and forestry have been contracting since the third quarter of 2007 while mining and quarrying, and electricity and water have respectively contracted for the last three and two successive quarters.

Agricultural sector continued to decline for the second consecutive year in the second quarter having recorded declines of 1.9 per cent and 2.7 per cent last year and this year respectively.

The unfavourable weather conditions witnessed in the first half of the year continued to adversely affect the sector with production of major crops recording declines except for coffee.

During the Commonwealth Finance Ministers Meeting in Limassol, Cyprus last week, Deputy Prime Minister and Minister for Finance Mr Uhuru Kenyatta, told the developed nations to increase their overseas development assistance(ODA) to mitigate problems that have been occasioned by the economic crisis.

In his presentation, Uhuru stated that the biggest impact has been the effect on the developing nations’ trade, remittances and tourism earnings.

He said Kenya faces the challenge of drought due to climate change resulting in poor harvest, loss of livestock and hunger.

The minister is also scheduled to attend this year’s IMF and World Bank Group annual meeting scheduled for today and tomorrow in Istanbul. Turkey.

Kenya’s strong economic performance in recent years with real GDP growth of six percent on average over 2004–07, has been stalled by a series of exogenous but temporary shocks that hit the economy last year and extended through this year.

These include a drought, steep increases in international food, fuel and fertiliser prices, the global financial crisis and the associated slowdown in external demand.

Economic shocks

Together, the shocks have affected economic activity and resulted in the loss of international reserves, eroding the achievements of the previous five years, threatening macro-economic stability and increasing vulnerability to further shocks.

The IMF has already approved Kenya’s request for $223 million in the form of a Rapid-Access Component of the Exogenous Shock Facility (ESF) to help rebuild her foreign reserves, which have been eroded and weakened the balance of payments position.

The manufacturing sector is estimated to have declined by 0.7 per cent.

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