The highs and lows of 2011

Published on 24/12/2011

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By Jevans Nyabiage

Just a week to the close of 2011, reflecting back, the year goes down the memory lane as one of the most dreaded.

Since January, Kenya has faced both external and domestic shocks that have left many sectors of the economy heavily bleeding.

From the depreciation of the shilling, high cost of living or inflation, to worst drought in 60 years, has raised fears over Kenya’s cyclical economic prospects.

In November, inflation, spurred by the worst drought and higher fuel prices defied Central Bank of Kenya previous interventions to increase for the 13th straight month to a new high of 19.72 per cent.

The cost of living has risen uncontrollably opening the year at 5.4 per cent and edging up month-on-month sending prices of goods and services to the roof.

High inflation tends to hurt the poor disproportionately. This, the World Bank says is especially so when inflation is driven by high food and fuel prices, as the poor spend a significant proportion of their income precisely on food and transport.

A breakdown of Kenya’s inflation by urban income groups shows that low-income households have been hit hardest by inflation in 2011.

In October, inflation experienced by low-income households was 19.6 per cent, compared to the previous year, by contrast to 14.5 per cent for high-income households.

With Europe being the biggest market for Kenya’s main exports such as tea, coffee and horticultural products, there has been spill over effects from the euro zone crisis.

Since the crisis began, the sales of these products have significantly dropped. Exports have failed to even earn enough to pay for the country’s imports.

High crude oil prices have not helped the situation either. In the first nine months of 2011, international oil prices increased by 37.4 per cent. The volume and process increase resulted in a 42.2 per cent growth in Kenya’s oil import bill, during the same period.

In December, the Central Bank raised its benchmark interest rate for a fourth consecutive time by 1.5 percentage points to 18 per cent to curb inflation that’s more than double the Government’s target.

The increase has seen far-reaching effects on the cost of borrowing as banks move to increaseinterest rates in line with CBK’s move.

Tight liquidity, caused by CBK’s recent decision to increase its base lending rate and the rise in cash ration has seen banks raise their minimum lending rates to cluster at 24 per cent.

The increase in interest rates has brought fears of mass loan defaults with banks stating that they will be willing to restructure loans for existing borrowers to ensure the burden they had to carry was bearable.

The shilling seems to be benefiting from the CBK’s move, although many sectors of the economy will be starved of cash.

In the past week, the shilling has been trading in the 83.00-84.00 to the US dollar, extending its gains in as many months.

In 2010, the East African economic giant had shown optimism for recovery from the effects of the 2007/08 post-election violence.

However, this year Kenya has been navigating through an economic storm. For instance, the stock market has been hit, investors losing about Sh300 billion in value at the Nairobi Securities Exchange.

The World Bank in its December 2011 update forecasts the economy to grow by 4.3 per cent, falling short of its 2010 performance when the economy rebounded strongly to hit 5.6 per cent growth rate.

"The ongoing economic crisis underscores Kenya’s structural challenges, especially weak exports, which are the primary cause of Kenya’s recent macroeconomic instability, and contributor to the sharp decline in the shilling," says the Breton Woods institution.

In 2012, the Word Bank projects a five per cent growth rate, if the Government is able to effectively manage the current crisis, maintain political stability in the run-up to the elections, and address the security challenges arising from the conflict with Somalia.

Real danger

Kenya has a gaping current account deficit. The current account deficit reached a record high, between December 2010 and September 2011. It grew by almost four percentage points, from 6.7 to 10.5 per cent of GDP, which is even higher than in Greece.

"Our real danger lies in a ballooning current account budget thus putting pressure on public sector investment at a time when the Government and the IMF are committed to reducing the budget deficit," Prof Michael Chege, an economic advisor at the Ministry of Planning says.

In the first three quarters of 2011, imports expanded by 22.7 per cent, compared to 15 per cent for exports, increasing the current account deficit by $1.9 Billion.

By May 2011, earnings from Kenya’s top exports—tea, horticulture, and manufactured goods, along with international travel, were not sufficient to pay for oil imports alone.

Another worrying trend—total public debt has ballooned to a high of Sh1.5 trillion, about 50 per cent of the total annual output or GDP on weak shilling and increased demand for public spending.

Currently, the debt is more than half the total annual output, in what pushes the country closer to where it was at the beginning of the Kibaki presidency in 2003.