By Jackson Okoth
In its regular review of the country’s economy, the International Monetary Fund (IMF) put charged politics and high inflation on top of its list, as key challenges facing Kenya as it prepares for the polls.
Other priorities include putting in place the necessary legislation to ensure that devolution takes place and also ensuring that the current old and dilapidated Value Added Tax (VAT) system is overhauled.
"The main challenge in this election year will be to ensure that efforts to contain inflation and manage inflation expectations are pursued by bringing domestic demand under control," said Ragnar Gudmundsson, Resident Representative of IMF Kenya.
It still remains to be seen whether Kenya has learnt from its past election year mistakes, including printing of currency, politically instigated violence and a fall in performance of the economy. Observers point out to several dangers that lie in wait in the run up to the 2012 polls.
"Essentially, our track record at handling elections is sub optimal. The 1992, 1997 and 2007 polls were all fails with a pass rate of less than 25 per cent. This economy cannot take another fail and thus the 2012 polls are a ‘last chance saloon’ for us," said Aly Khan Satchu, a financial guru and market pundit.
While the political atmosphere is already heating up, there is a strong feeling that Kenyan cases currently before the International Criminal Court (ICC) has dampened the mood somewhat.
"I think the ICC has been a game changer, putting politicians on notice that the era of impunity is over. It is this which I believe has changed behaviour," said Satchu.
Kenya is going into the 2012 polls at a time when the degree of international surveillance is simply unprecedented, something that would deter some would be troublemaker.
Election politics
It remains to be seen how election politics will impact on the economy in a poll that will see the incumbent Head of State quit office in a transition. With Kenya’s economy tied to politics, there is bound to be increases in the price of staple commodities as has already been seen in inflation figures. When the markets opened on the first day of trading this year, the Shilling was weak. Pressure is expected to build on the local unit as the polls approach.
"The shilling is multi-sided and I remain worried about oil prices. I think the US administration is keen on an Iranian adventure and this is likely to push the price of oil higher this year, putting more pressure on the shilling," said Satchu.
Like in all election years, foreign and local investors normally flee the Nairobi Stock Exchange (NSE) waiting for a new administration to come in. Already, activity at the NSE is on a slowdown falling about 28 per cent last year.
"Most of the NSE downside is baked into the price. None of the potential good news is baked in; therefore, I see a rally of about 25-35 per cent in the stock market through 2012. Of course, if we see a repeat of 2007, all bets are off," said Satchu.
All eyes will be on the Capital Markets Authority (CMA) as it pushed through demutualisation of the NSE and raising capital requirements for listed companies.
"Foreign Direct Investment (FDI) may be put on hold pending outcome of the 2012 polls. There is also a risk that tax revenue could fall if the economy goes on a slowdown," said Nikil Hiira, a Partner at Deloitte and TouchÈ.
He adds that if Kenya experiences any election problems, the effect of this will be a volatile Shilling as loss of investor confidence affects domestic output and consumption levels.
The Central Bank of Kenya (CBK) is already pursuing a ‘tight monetary policy’ stance to ensure that monthly inflation rate is brought down to within its target range of nine per cent.
The IMF acknowledges that there is signs inflation is starting to abate as a result of monetary policy actions taken so far, boosted by more favourable weather conditions.
Issues on focus
"Moreover, the Kenyan authorities appear determined to keep expenditure under control and to limit the primary budget deficit to about two per cent of Gross Domestic Product (GDP) in the 2011/12 financial year to the next one, while increasing the relative share of development and social expenditure in overall spending," said Gudmundsson.
As the 2012 calendar of events begins, focus will be on parliament as it seeks to enact a comprehensive Public Finance Management Bill before devolution takes place. This is to ensure that the principles of sound fiscal management apply at both the central and county government levels.
A new value-added tax law has already been prepared and is expected to be ready for discussion when the House resumes. In addition, the Public Finance Management Law has been submitted to the Commission for the Implementation of the Constitution (CIC).
This law defines the responsibilities and the revenue sharing mechanism among different levels of government, consistent with the fiscal decentralisation envisaged by the new Constitution.
"Implementation of the new VAT law contributes to increasing revenue mobilisation and minimising administrative costs," said Gudmundsson.
While MPs will be discussing the new VAT Bill, attention will also be on how debate unfolds on attempts by the House to curb the level of interest rates charged on loans by commercial banks.
The IMF has insisted on the need for close supervision and sound provisioning for banks to survive the current high interest rate environment.
"The threat of recession in Europe, Kenya’s key trading partner, as well as instability in the Middle East and its impact on oil prices, could hit the economy in 2012. There is also the risk of adverse weather and concerns surrounding this year’s elections," said Edward Gitahi, an analyst at PineBridge Investments East Africa.
Drought effects
Since the beginning of 2011, Kenya has been hit hard by drought, which has affected the price of essential foodstuffs, pushing inflation figures through the roof. At the same time, high fuel prices and other costly imports have created a nightmare for consumers and local firms, widening the current account deficit and putting pressure on the shilling.
Although CBK has been aggressive in reducing inflation and stabilising the shilling, the jury is still out on whether its response has been swift enough.
Economists regard political instability as a serious malaise, harmful to economic performance. They argue that political instability is likely to shorten policymakers’ horizons, leading to sub-optimal macroeconomic policies.
It may also lead to a more frequent switch of policies, creating volatility and thus, negatively affecting macroeconomic performance. Kenya witnessed first hand the impact of bad politicking on economic performance in its 2008 disputed elections, to an extent that political instability proved to be destructive.
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