Treasury: Euro crisis will not affect donor-funded projects

By James Anyanzwa

The Government has dispelled fears over the possible disruption of its donor-funded programmes in the wake of the deepening economic crisis in the Eurozone and other high-income countries.

Dr Geoffrey Mwau, an Economic Secretary at the Treasury noted that Kenya doesn’t really depend on donors although it could certainly use donor funds to bolster its development spending.

"Kenya is not really dependent on donor funds. We depend more on the World Bank and the African development bank (AfDB)," he said adding that the Government does not expect to see significant drop in donor funding this year.

Mwau pointed out that the absorption capacity of donor funds has also been wanting at 60 per cent.

However, according to AfDB’s country strategy paper for Kenya (2008-2012), aid to Kenya has increased since 2002, as a result of the change in Government and commitments to more democratic governance. The country received about $1 billion in support during 2007, about $27 per capita.

Among multilateral donors, the share in total support included World Bank (41 per cent) European Commission (18 per cent), and the African Development Bank (16 per cent).

Among bilaterals, China’s support was 14 percent, and KfW of Germany and AFD of France, contributed 13 percent each. Other major donors include the members of Kenya Joint Assistance Strategy.

AfDB reckons that although aid to Kenya finances only about six per cent of the total budget, it accounts for more than half of the development budget.

According to the World Bank’s Global Economic Prospects report (2012), the financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries, and capital flows to developing countries have declined by almost half.

Europe appears to have entered recession, and growth in several major developing countries (Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening.

GLOBAL ECONOMY

"Global growth has slowed substantially, said Andrew Burns, Manager for Development Prospects Group, World Bank. As a result, and despite relatively strong activity in the United States and Japan, global growth and world trade have slowed sharply.

The global economy is now expected to expand 2.5 and 3.1 per cent in 2012 and 2013 (3.4 and four per cent when calculated using purchasing power parity weights), versus the 3.6 per cent projected in June for both years.

High-income country growth is now expected to come in at 1.4 per cent in 2012 (-0.3 per cent for Euro Area countries, and 2.1 per cent for the remainder) and two per cent in 2013, versus June forecasts of 2.7 and 2.6 per cent for 2012 and 2013 respectively.

Developing country growth has been revised down to 5.4 and six per cent versus 6.2 and 6.3 per cent in the June projections.

According to the report dated January 2012 the medium-term challenges represented by high deficits and debts in Japan and the United States and slow trend growth in other high-income countries have not been resolved and could trigger sudden adverse shocks.

Additional risks to the outlook include the possibility that political tensions in the Middle-East and North Africa disrupt oil supply, and the possibility of a hard landing in one or more economically important middle-income countries.

Consequently developing countries are expected to increasingly search for growth within the developing world, a transition that has already begun but is likely to bring with it challenges of its own.

World bank reckons that should conditions in high-income countries deteriorate and a second global crisis materialises, developing countries will find themselves operating in a much weaker global economy, with much less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity.

In the second half of 2011, gross capital flows to developing countries plunged to $170 billion. Most of the decline was in bond and equity issuance.

Equity issuance plummeted 80 per cent to $25 billion with exceptionally weak flows to China and Brazil.