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‘Flying On One Engine’

Published 9 years ago
By Forbes Africa

Nothing signifies the unbridled optimism in this East African nation more than the well-known Swahili phrase Kenya hakuna matata: there are no troubles in Kenya, which is bandied around in tourism circles; printed on T-shirts and repeated in blockbuster movies like Out of Africa and The Constant Gardener. But its economy has known more trouble than relief.

When inflation reached 100%, in 1993, President Daniel Moi printed money to fund his re-election campaign for the country’s first multi-party elections.

Before President Mwai Kibaki was elected in late 2002, Kenya’s economy was in bad shape. Its growth averaged 1.1% for two consecutive years and shrank to minus 0.2% in 2000. Key sectors were stagnant; agriculture and tourism recorded marginal growth of 0.7% and 0.8% respectively.

To resuscitate the economy, government formulated the Economic Recovery for Wealth and Employment Creation Strategy in 2003, which hinged growth on the overhaul of infrastructure as well as political and economic reforms that would unshackle the economy. The most notable result was the investment of billions of dollars on infrastructure—from roads and railways to electricity. Since 2004 growth has averaged 5% and peaked at 7% in 2007.

Kenya’s economy is dominated by agriculture; the sector employs more than 70% of the population and accounts for 24% of the GDP. More than a third of Kenya’s agricultural produce is exported, which accounts for around 60% of the country’s exports. This, despite the fact that its arable land is a paltry 15%, the rest is either too dry or infertile

Irrigation systems could double this percentage. The country’s cash crops—tea, coffee and horticulture—have led to an increase in earnings due to high commodity prices.

Last year, the country exported 48% of its goods to African countries, mostly in the East African Community (EAC) trading bloc, which is not severely affected by the Eurozone debt crisis. During the last decade, however, Kenya’s imports have surpassed its exports. Despite a surge due to high global crop prices, earnings from its top four exports have been insufficient to pay for oil imports.

The services sector follows closely behind, with tourism leading the pack. Tourism earnings rose by 32.8% in 2011, bringing more than $1 billion to the country. Other sectors like wholesale and retail, transport, communications and education are following suit.

Kenya is a hub for the ICT sector with the largest fiber optic network in the region. M-Pesa—the mobile money transfer service operated by Vodafone’s subsidiary Safaricom—transfers $27 million a day and has more than 25 million mobile subscribers.

By the end of the year, the economy is expected to have grown between 3.5 and 4.5%, according to government projections; while World Bank estimates stand at  5%. Inflation, driven by high oil prices and inadequate rainfall which lead to high food prices, has fallen from 14% last year to around 5% this year.

The 2008 post-election violence saw more than 1,000 fatalities and led to a decline in economic growth from 7% in 2007 to 1.5% in 2008. Kenya’s new constitution, enacted in 2010, is expected to herald good governance and reforms. Yet the economy still faces structural challenges. According to the World Bank, its economy has become even more vulnerable as the country’s current account deficit could reach 15% of GDP this year. This is among the worst external balances in the world and poses a significant risk to Kenya’s economic stability. A sharp rise in oil prices could trigger severe inflation and economic downturn. Its debt levels of 45% are in decline from 65% at the turn of the century and are below the global benchmark of 60%.

Like many other African countries, Kenya  faces an energy shortage, which allows for investment from the private sector. The peak power demand, estimated at 1,191MW, is projected to grow at 7% annually over the next decade. To meet this  demand, the generating capacity will have to be raised from 1,534 MW to 2,263 MW by 2018.

State-owned Kenya Electricity Generating Company (KenGen) is set on providing geothermal power in the future. Investors are establishing wind farms in Northern Kenya as part of the Lake Turkana Wind Power Project. The government is looking to partner with the private sector to generate coal power, after deposits were discovered in the eastern region. Hydro and thermal power accounts for 80% of the country’s total generation, making its energy price susceptible to high oil prices and power rationing when rains fail.

On the social and political end, half of the population is younger than 35 and unemployment is at around 40% of the country’s 42 million. Experts says that job creation, especially among the youth, is necessary for long-term stability. Two of the leading candidates in the upcoming March elections—Uhuru Kenyatta and William Ruto—face crimes against humanity charges at the International Criminal Court at The Hague over their role in the 2008 post-election violence.

Vision 2030—which aims to make Kenya a medium income country by 2030—is hinged on economic growth of 10% per annum through governance reforms and a focus on infrastructure, energy and science. By that time, the population is expected to reach 60 million.

The recent discovery of commercially viable oil will welcome new investments and save the country on its huge monthly oil bill. Tullow, a London-based oil and gas company, discovered 143 meters of net pay oil deposits in northern Kenya. More than 23 companies have exploration licenses.

Mining—which contributes 1% to the economy and is confined to the extraction of soda ash—may receive a boost after Tiomin Resources, of Canada, was allowed to mine titanium deposits along Kenya’s southern coastline.

Infrastructure, needed to foster more trade, is also set to improve. The $23 billion Lamu Port-South Sudan-Ethiopia Transport Corridor (LAPPSET) project is being touted as one of the biggest in Africa. It will entail the construction of a port, standard gauge railway, pipeline and highways connecting Kenya, South Sudan and Ethiopia. Throw in a resort city at Isiolo, in Northern Kenya, and they are betting it will be a winner.

As the World Bank aptly put it in 2010, if Kenya is an airplane, it’s flying on one engine. If the second is turned on, the  economy will ascend at supersonic speed, like a fighter jet.

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Related Topics: #December 2012, #East African Community, #Elections, #Hakuna Matata, #Infrastructure, #Kenya, #movies, #Mwai Kibaki.