Kenyas economy is back on track after a growth plunge,
sparked by the global economic crisis and the violence that
followed December 2007s disputed presidential election.
But concerns remain that a slow global recovery and further
political strife could limit the pace of growth.
GDP growth plummeted from 7.1% in 2007 to 1.7% in 2008 on
the back of the post-election violence, which brought the
country to a standstill for months, and the global crisis,
which hit exports, foreign inflows and remittances. Provisional
estimates from the ministry of finance put 2009 growth at
This year, however, the recovery is expected to gather
Kenyas economy is beginning to emerge from
the challenges of the last quarter of 2007 and the first
quarter of 2008, finance minister and deputy prime
minister Uhuru Kenyatta tells Emerging Markets.
Kenya has the potential to grow at 4% in
The IMF and analysts agree 4% is a realistic estimate, as
prospects for growth improve in two key sectors: good rains
after a two-year drought have improved the outlook for
agriculture, which accounts for about a quarter of GDP, and
tourism is expected to pick up.
There is potential for both these sectors to
exceed expectations this year, as the global recovery
strengthens and the return of rains improves the prospects for
agriculture, Stuart Culverhouse, chief economist at the
London-based Exotix, tells Emerging Markets. We
expect growth of 4.2% this year.
So far, the signs are good. Tea production in the
worlds largest exporter of black tea jumped 48% in
January after falling by 4.8% the previous month, while coffee
production jumped by 31.4%. The Kenya Tourism Board could not
provide figures on how much it expects the sector to grow in
2010, but the consensus is that tourists are returning in
However, these sectors depend on factors outside
The threat to economic recovery would be caused if the
anticipated global recovery does not materialize, which would
result in muted demand for Kenyas exports of goods and
services, particularly tourism, Kenyatta says.
The volcanic ash cloud that closed European airspace in
April makes just this point. According to the Kenya Flower
Council, the flight ban cost Kenyan flower growers who
provide Europe with over 30% of its flowers up to $2
million a day as thousands of tonnes of fresh blooms went to
The prospect of a good harvest has also helped lower
inflationary pressures, allowing the central bank room to cut
interest rates in March and try to address another impediment
to growth: private-sector credit uptake. Inflation fell to 4%
in March from 5.2% in February, according to the Kenya National
Bureau of Statistics.
The central bank said it expected inflationary pressures to
remain low as it cut the base interest rate by a quarter of a
percentage point to 6.75%. The decline of any inflation
threat meant that this policy stance should stimulate the
supply of credit and anchor inflation expectations while
supporting economic growth, central bank governor Njuguna
Ndungu said accompanying the interest rate decision.
The central bank had shaved two percentage points off the
benchmark rate since December 2008 before the cut, but banks
have been slow to follow suit. The central bank said gross
loans increased from Ksh771.7 billion ($9.96 million) in
December 2009 to Ksh783.8 billion in February 2009, but that
this fell short of perceived private-sector demand.
While private-sector credit has grown both in volume
and the number of loan accounts, the Monetary Policy Committee
(MPC) observed that the cost of credit was still constraining
adequate expansion of private-sector loans, says
Analysts say growth could be held back if banks do not
follow the MPCs lead. Perhaps the main barrier to
stimulating growth is the reluctance of banks to lower lending
rates to match the fall in the official bank rate, says
Commercial bank lending rates averaged 15% in February, but
some banks are beginning to fall in line. The Co-operative Bank
of Kenya cut its base lending rate from 15% to 14% on May 1,
while Barclays Bank is cutting its rate from 15.75% to
Analysts say the private sector is ready to expand after a
period of belt-tightening. The Nairobi Stock Exchange grew
quickly in the first quarter of the year, with the NSE-20 share
index up 25% at the end of March, while a study by market
research firm Synovate the same month found business confidence
had risen to 69%. On top of this, some 74 out of 100 chief
executives and managing directors in Kenya, Uganda and Tanzania
said they saw Kenya as an attractive investment
The Kenyan capital Nairobi has long been a regional
business and finance centre, and this has held true. One
reason Kenya rode out the last crisis is that multinational
companies decided to make Kenya their regional hub despite the
violence, David Cowan, African economist at Citigroup,
tells Emerging Markets.
But the Synovate study found most business leaders still say
political uncertainty is the main threat to the economy.
The formation of Kenyas coalition government in April
2008 ended tribal violence that had claimed over 1,500 lives
and displaced over 300,000 people. But the government has since
been characterized by infighting between prime minister Raila
Odingas Orange Democratic Movement (ODM) and president
Mwai Kibakis Party of National Unity (PNU). On several
occasions, power struggles have brought the coalition to the
brink of apparent collapse.
The latest worries revolve around Kenyas long-overdue
new constitution. A draft goes to a referendum in July, but
business leaders are concerned the document could lead to the
coalition partners turning on each other.
We have the momentum and need to make sure we
dont have political instability over the next year or
so, Michael Joseph, chief executive of Kenyan
telecommunications giant Safaricom, says. If parties
start to fight about the referendum, more unrest is possible.
But I think it would only be a temporary step back.
However, Kenyatta believes fears over short-term political
problems are ill-founded. Considering what happened after
the elections of 2007, this concern is not unusual, he
says. However, the political environment is stable, and
it is unlikely to have significant impact on the economic
Longer term, the ministry of finance predicts growth will
hit 2007 levels again by mid-2014. Before then, however, Kenya
must navigate a presidential election, in 2012, which brings
the risk of further violence and the attendant economic
More violence at the elections could set the country
back 10 years, or at least Kenya will lose ground to countries
in East Africa and beyond that are seen as more stable,
The coalition agreed to address economic disparity and land
issues; overhaul the police, judiciary and discredited
electoral system; and deliver a new constitution all
reforms considered crucial to avoid more violence. Most of the
processes are underway, but the squabbling has introduced
delays, and time is short.
According to former UN secretary-general Kofi Annan, who
brokered the deal that ended the violence, the government has
until the end of this year to finish its reforms before
politicking for 2012 begins in earnest and brings the process
to a halt.
REASONS FOR CONFIDENCE
However, Kenyatta insists these concerns are just as
unfounded. We have made significant progress in the
implementation of reforms, he says. We are
confident therefore, that Kenyans are regaining their
confidence in the government and its institutions, and
therefore it is highly unlikely that there will be further
violence in 2012.
Also considered crucial to peaceful elections is the
prosecution of key political and business figures accused of
directing the violence. The International Criminal Court (ICC)
in The Hague has launched an investigation that could see
several high-ranking politicians in the dock. This, along with
Kibaki standing aside at the end of his second term, means that
the risk of violence is reduced, says Cowan.
We will have a bunch of candidates, none of whom is
the incumbent, he says. Obviously what happens at
ICC going forward, taking out key players, will have a big
Joseph, however, believes the key to Kenyas future
lies not with an external judicial system, but with its own.
Safaricom has gone from strength to strength despite the global
and domestic challenges, but its chief executive believes
Kenyas hopelessly corrupt and inefficient courts are
holding his firm back.
The biggest challenge that people like myself have is
impunity, he says. We are always fighting against
people doing things incorrectly, stealing from the company.
This happens every day. There is no way we can stop it, the
judicial system is a mess.
Kenya is regularly flagged as the most corrupt nation in
East Africa. Graft permeates every level of society and there
have been several scandals where ministers have been accused of
helping to steal millions of dollars of public funds. Yet not a
single high-level person accused of corruption has been
Corruption is alive and well and doing very well in
Kenya, Joseph says. The judicial system should have
the courage to prosecute individuals.
Yet despite all the problems and challenges, Joseph believes
Kenyas economy will flourish. Here is a tremendous
economy, he says. But the big thing is that the
average Kenyan is very entrepreneurial and doesnt just
sit back and do nothing. We have tremendous