Kenya Strikes Oil! What Next?
BY ROSELYNE M. KIRAGU AND MACHARIA NGINYO
It is great news that Kenya struck oil and we, the citizens, should be thankful to the deities that were responsible for this blessing that has befallen our great nation. It is now all up to us, ostensibly! Given this unexpected yet timely finding, is Kenya at a crossroad or not? Do we wait for the black gold or do we go for the multiplier effect?
As ordinary citizens, my co-author, an IT sales professional, and myself, a financial risk management professional, we’ve recently been trying to understand the predicament of Kenya’s uncontrolled inflation. As we grapple to understand the inflation assumptions stipulated in the Kenya Policies for Prosperity, we’re inevitably led to contemplate what Kenya’s oil ‘strike’ would mean to Kenya’s fiscal policy and macroeconomic management. Utilizing a measured approach, we can assume that oil production may begin in the next six years or so and the real impact of revenue generation will take effect in about ten years.
So, what will we do in the interim to set a solid foundation that allows us to extract maximum value for economic and social gains? How will we ensure we emulate the successes of the Norwegians and Saudis, for example, and not become wrought in social conflict and currency over-valuation, as seen in Nigeria?
It is indeed timely that our new Constitution considers county-level development. This development presents unlimited potential for revenue from oil drilling to be directed towards the development of marginalised areas in a coherent and structured approach to achieve economic and social gains and alleviate growing poverty.
Additionally, by the precedent set by the current government we can assume that infrastructure development would continue at a faster pace. Further, we can optimistically predict that an increase in government income would provide more funding to address the high rate of unemployment and promote increased levels of education linked to labor market requirements for the youth.
Could oil revenues lead to an inflection point in Kenya’s education reform efforts and maybe thrust Kenya into the echelons of viable, strong, emerging markets like India and Brazil? Or will the powers that be squander this momentous opportunity like they did when Kenya was equally rated with Singapore in the context of economic development? The latter, amongst its other accomplishments, now boasts one of the most effective education systems in the world.
The How, Simplified
Needless to say, it is imperative at this point in time (black gold or none) that the Kenyan government formulates macro policies targeted at key drivers of economic growth. The drivers must support a pattern of economic development that is more sustainable and efficient in order to achieve higher-level and higher-quality development for the long-term and curb the rate of inflation while deviating from net consumerism.
Moreover, the government needs to establish if we have the necessary structures to manage the oil revenues. For example the Norwegian government has a very well-run sovereign wealth fund that effectively managed oil revenues to benefit future generations as well as crucially, to also ‘inoculate’ the local economy from currency over-valuation from an influx of dollar revenues. This was the cause of the so-called ‘Dutch disease’ phenomenon among many oil producers (Nigeria being a prime example) where an influx of dollars in the local economy led to overvalued local currencies that effectively biased imports vs. local production. Nigeria is a net food importer to this day.
Additionally, the government would need to develop value-added industries around oil, from refining, to downstream industries such as petrochemicals, and not just export unrefined crude (only to import refined products at significant cost — to wit, see Nigeria). Given South Sudan and Uganda also have oil, the cost of building refining capacity in Kenya could be spread over greater production and make this more viable than it otherwise would be.
While the government needs macro policies to ensure we achieve optimal gains from oil revenues, it needs to be cautious that Kenya does not end up negating agriculture or tourism and must also focus on intergenerational wealth distribution. Agriculture and tourism policies could be enhanced as a direct result of increased revenues. The agricultural sector requires more coordinated and focused government support to develop self-sufficiency and surplus at a national level, and to maximise value from agricultural output.
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