Monday, January 21, 2008

Kenya Crisis Evidence of Fragility of African Economies

Kenya’s sparkle is waning fast and furious. The country’s image as haven of peace and a regional economic powerhouse is now unraveling.

The political impasse and the on going turmoil in Kenya is a powerful indictment of the fragility of an African economic renaissance that was exemplified by GDP growth of 6.1% in 2007.

Uneasy observers are now watching South Africa's shaky power transition. However, one hopes that South Africa, the continent's biggest economy, is in a different club from the rest of Sub-Saharan African countries.

The turmoil, insecurity and political unrest following Mr. Kibaki’s re-election will only serve to further undermine Kenya’s poor record in attracting foreign direct investment (FDI). According to the 2007 World Investment Report of UN Conference on Trade and Investment, Kenya’s FDI inflows totalled a modest US$118m in 2004-2006. This is in stark contrast to Uganda’s US$786m and Tanzania’s US$1.16bn.

With 2007 earnings estimated at nearly US$ 950m, tourism is the country’s main foreign exchange earner. But all the major tourist supply countries around the world have issued travel warnings. Tourist arrivals are expected to decline sharply over the next three to six months. Kenya Association of Tour Operators estimates that the tourism industry will loose about US$300m in the first quarter of 2008. There is no telling how long this downturn will last.

The violence in the Rift Valley has seen many flee their homes and farms. Disruption in transportation and widespread unrest in major towns and cities have had disastrous effects on food supplies and agricultural commodity markets. Farmers in Kisii, Keroka, Molo, Burnt Forest and most of greater Kiambu are sitting on a pile of agricultural produce which they cannot get to the market.

The expected decline in agricultural production in the Rift Valley will not be short lived. The grim reality is that aftermath of the poll has unpacked deep-seated ethnic odium. A political truce or coalition government will not defuse ethnic tensions and restore sufficient confidence to convince those who were displaced to return to their land. Given that agriculture is directly responsible for one-quarter of GDP, there will be a significant downturn in 2008 directly attributable to the political turmoil.

The Central Organization of Trade Unions (COTU) warned that over 500,000 workers risked loosing their jobs following post election unrest. It is difficult to ascertain the validity of these numbers. However, any layoffs in this magnitude will have a devastating knock on effect on the economy. Poverty will increase because of loss of income for a majority of unskilled workers. Low consumer spending will further affect an already fragile agricultural sector.

There are deep concerns about donor funding. The EU has moved to cut further financial support to the country. Although this is powerful in its symbolism, the Kenyan government is likely to dismiss it as inconsequential. The US had earlier warned that it will not be “business as usual” unless the political crisis is settled. With this kind of mood, even the government efforts to borrow in the capital markets are under threat. Foreign borrowing will certainly be infeasible in the first half of 2008.

Mr. Kibaki may find an ally, a counter weight to the West, in China. In an apparent reference to the crisis in Kenya, China claimed recently that Western style democracy was not appropriate for Africa. Seeking natural resources to bring dramatic growth, China has become a big investor in Africa with less concern over issues like stability or democracy.

This ominous halo of political turmoil does not bode well for Kenya. This imbroglio serves to aggravate a low income and resource-poor economy that is mired in official corruption. Kenya already falls below the Sub-Saharan average in just about very respect. Exports, mainly from agriculture, which constitute 24.5% of GDP is well behind the Sub-Saharan average of 40%; investment is 20% of GDP against a regional average of 22%; external debt at 16.9% of GDP is above the regional average of 11%. Similarly, inflation at 12% in December 2007 was significantly above the regional average of 7.5%.

The World Bank’s January forecast for Kenya’s GDP is 5.3% in 2008, a substantial decline from an impressive 6.3% last year. So far the plunder and disruption following the plunder and disruption of the post election turmoil is estimated by the Treasury at US$1bn. Achieving a GDP greater 4 % in 2008 will be a herculean task. However, some analysts regard the events as merely a blip in a country with a long record of political and economic stability.

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