Euro crisis, commodities hurt Kenya growth – WB

December 8, 2011
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, NAIROBI, Kenya, Dec 8th – The deepening Euro zone crisis and upcoming general elections could usher a period of economic uncertainty for Kenya in 2012 with the World Bank (WB) predicting a growth rate as low as 3.1 percent.

According to the WB Kenya Economic Update report launched on Thursday, if risks are not managed and price and currency controls are avoided to ease macroeconomic pressures, a slowdown in economic growth for 2012 is inevitable.

“Kenya has the capacity to navigate this storm reasonably well although it is in a weaker position than it was during the storm of 2009/2010. We believe the present storm will lower growth for 2011 and possibly for 2012,” WB Country Director for Kenya Johannes Zutt said.

The WB reviewed Kenya’s initial growth rate projection for 2011 downward from 5.0 percent to 4.3 percent that it said was triggered by high inflation and weak performance of the Shilling this year.

Kenya’s devolution process is considered one of the world’s most ambitious decentralization undertakings, which Zutt said, will put pressure on public spending with 47 counties having to share 15 percent of the national revenue.

“Kenya’s devolution will involve the creation of an entirely new level of government and it will be very challenging for the government to manage this transition while also ensuring that service delivery continues and is expanded in the urban areas,” he noted.

On the political scene, over the last 30 years, the report revealed election years have been associated with a one percentage point lower growth rate than the long-term average.

“If the government does not take pro-active steps to set the stage for a peaceful run-up to voting and a smooth transition thereafter, this unfortunate pattern could be repeated in 2012.

Still, escalating fuel and food prices are also expected to adversely affect Kenya’s economic growth going into next year, according to the report.

“Food prices drove inflation and are high for two reasons because of international high prices and domestic issues. The issues in maize and sugar are particularly troublesome. Germans pay half the price of sugar than Kenyans,” Lead Economist of the World Bank’s Kenya program Wolfgang Fengler said.

High commodity prices hit Kenya especially hard this year driving up inflation with a one kilogram packet of sugar on average costing Sh151 in Kenya compared to Sh40 in Europe.

World Bank Chief Economist for Africa Shantayanan Devarajan said the likelihood of a recession in the Euro zone is very high, which could affect not only commodity prices but Africa’s export market as well.

Devarajan said Africa’s export market is already heavily dependent on the Euro zone with 37 percent of non-oil exports from the continent going to Europe.

“If the European recession then turns into a global recession then that could affect commodity prices and most of our countries rely on commodity exports for their export revenues,” he said.

The horticulture sector is already Kenya’s second largest foreign exchange earner after tea registering Sh71.6 billion in 2009.

The report highlighted Kenya’s economic imbalance driven by a combination of weak exports and high dependence on oil imports.

“Its (Kenya) export performance is poor due to a number of factors including inefficiencies at the port of Mombasa, and an inadequate and expensive supply of energy. This makes Kenya too expensive for international investors,” it said.

Fengler stressed the need for Kenya to address structural issues to sustain growth and look at building sectors such as manufacturing, especially when countries like China are becoming increasingly expensive.

“Kenya cannot succeed and become a middle income country by tea and flowers alone, but ultimately it will come down to manufacturing. Manufacturing investments are lumpy and you need certainty. You need reliable energy, a strong port and strong roads,” he said.

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