Connect with us

Hi, what are you looking for?

Capital Business
Capital Business


How Kenya can escape recession

NAIROBI, Kenya, Dec 11 – Many Kenyans are not sure whether the country is already in a recession or not. For us to be able to answer this question we need to understand first what recession is. Economists all over the world tend to agree that recession means negative economic growth for two consecutive quarters. In other words, the economy has contracted during the two quarters consecutively. In advanced Western economies, it is easy to detect when recession has set in as the data used by economists is generally very reliable. It is less so in many African countries including Kenya.

Kenya is expected to slide into a serious recession soon for several reasons. Firstly, the tourism sector – which in the past has been a major catalyst for economic growth – has declined by more than 25 percent since January, courtesy of post election violence.

Secondly, remittances from Kenyans in the Diaspora have declined by more than half. This is because Kenyans are earning less income in their host countries due to recession and unemployment in their host countries.

Thirdly, most foreign portfolio investments on the Nairobi Stock Exchange (NSE) have been liquidated by the fast moving and unpredictable hedge funds who had invested on the NSE. Hedge funds are institutions which invest in risky assets for high returns and are ready to exit any market on the basis of any unpalatable information.

Other reasons leading to contraction of our economy include decline in farm outputs, courtesy, again, of tribal clashes in 2008, high cost of foods as well as high transport cost due to the high oil prices which have prevailed recently.

The consequence of a prolonged recession or continued contractions of economy are several. Firstly, it leads to massive unemployment as companies resort to cutting costs in order to survive by retrenching a lot of staff. Secondly, a government is unable to raise enough tax revenue to finance its budget. It has either to cut developmental budget or borrow heavily from the market. This latter activity can lead to crowding of the private sector. Consumption also tends to decline. There are social implications arising out of massive unemployment as well as political problems. Riots for food can result while political tensions may rise. In some cases Governments even fall or are removed from power.

Can Kenya escape a prolonged recession?

There are several ways through which Kenya can escape a prolonged recession. The general strategy is to go for economic expansion. This can be done as follows:

Firstly, is to lower interest rates. In Kenya this can be done through adjustments in monetary policy. The Central Bank of Kenya (CBK) has already reduced the cash ratio for commercial banks from 6 percent to 5 percent in order to increase funds available for lending.  This is a good strategy aimed at spurring investments. I however contend that this is not enough; The Central Bank should have reduced this by 3 percent. This would have enabled overall interest rates to come down. With low interest rates, you can rejuvenate investments particularly in the manufacturing sector, the construction sector and housing sector as well. It can also spur growth in the Nairobi Stock Exchange.

Advertisement. Scroll to continue reading.

What the Central Bank has done is laudable but not enough. The danger of adopting gradualism strategy in reducing the interest rates during a serious recession is that the economy or consumers or investors may not respond fast enough as required. What you need is shock therapy at this particular moment in time.

The second monetary policy tool is lowering discount rates or the rate at which banks borrow from the Central Bank. Borrowing from the Central Bank should also be encouraged, but once again what we need is substantial cut in Central Bank Rate [CBR].

Another area with great potential to stimulate the economy is for the government to consider returning to the market Sh41 Billion – the equivalent of what it pulled out from the market through the privatization of Safaricom. This the government can do by either acquiring from the market a substantial portion of the float of Safaricom shares (maybe 30 percent) on the NSE or by asking Central Bank or the National Social Security Fund (NSSF) to acquire a substantial portion of Safaricom shares and other type of shares, from the market.

In this way additional liquidity will be injected into the market. If CBK acquires such shares, for instance, it can hold them as long term investments and divest them in future when the economy has recovered fully or when foreign portfolio investors start trooping back into Kenya. The government should also bar Kenyan Fund Managers and Insurance Companies from investing off-shore.

An area of fiscal policy that should also be considered is to lend Rwanda, Uganda Burundi and Southern Sudan about $400 million to buy Kenyan manufactured goods or services whose origin is Kenya. Such exports would stimulate the Kenyan economy. The government can borrow such funds from Central Banks by issuing long dated Dollar denominated bonds. We should also consider revising the borrowing limit by the government from CBK to 10 percent from the current level of 5 percent. Please remember that difficult times require tough and unorthodox approaches.

A fourth way of helping Kenya to escape a major recession is for the City Council of Nairobi to demand that all houses in the city get connected to the sewer lines. The owners of houses would pay for the digging of tunnels and connection charges. This type of public work would also help in stimulating the economy. The funding of such a project could be raised from the local banks through issuance of appropriate municipal bonds. Various commercial and investment banks could coordinate the structuring of such a bond. Funds to repay the principal and interest of such a bond would come from households who would pay connection charge. Such a bond could be issued through a Special Purpose Vehicle.  Since the government would not use its tax revenue this is tantamount to eating your cake and having it at the same time. 
I am sure that there are many institutions that would like to assist the country in implementation of such a project.

Finally, we can try another radical approach. Let the Kenya Government sell its major buildings or offices and lease them back. In this process, they will raise funds to finance the budget deficit, they will continue to use the buildings and can eventually buy them back when they have budget surplus. Those who buy such buildings can repackage them and issue property-backed IPO’s.  Property   and pension funds could also buy these properties and eventually could be offloaded through the Stock Exchange. Again this is like eating your cake and having it at the same time. Why not try it?

In the process of expanding the economy one concern that will arise is that of inflation and particularly if the measures I have outlined above are adopted. But inflation in this country has been a cost–push one. It emanates from shortages, failure of rain which pushes cost of food upwards and cost of imports particularly oil.  The latter is also tied up with high transport costs. So to a very large extent we do not have much control over it. We can only tinker with monetary policy in order to minimise the pain. But right now oil prices are coming down, we have had adequate rains so far and therefore we expect the inflation to come down soon. But we should be careful not to worry too much about inflation at this time but as soon as we sense that demand-push inflation is creeping in then we should get a major hammer and nail it down for there is no better enemy of economic growth than inflation or macro-economic instability.

To me, when I look at the radical policies being pursued elsewhere in developed countries in order to resuscitate their economies, I feel we have a great opportunity to pre-empt prolonged economic decline and contraction through bold and unorthodox policies.

Advertisement. Scroll to continue reading.
Click to comment

More on Capital Business

Executive Lifestyle

NAIROBI, Kenya, Mar 12 – The country’s super wealthy individuals are increasing their holding of bonds, gold and cash, a new report by Knight...

Ask Kirubi

NAIROBI, Kenya, Mar 9 – Businessman and industrialist Dr. Chris Kirubi has urged members of the public to exercise extreme caution when making any...

Ask Kirubi

NAIROBI, Kenya, Mar 24 – Businessman and industrialist Dr. Chris Kirubi is set to own half of Centum Investment Company PLC, following a go-ahead...

Ask Kirubi

It is without a doubt that the COVID-19 pandemic has caught the whole world by surprise. Although its full impact is yet to be...


NAIROBI, Kenya, Mar 18 – Commercial Banks have been ordered to provide relief to borrowers on their personal loans, with loans eligible from March...


NAIROBI, Kenya, Jun17 – Kenya’s tea leaves manufacturer Kericho Gold, has been awarded the Superbrands Seal by Superbrands East Africa for their quality variety...


NAIROBI, Kenya, Apr 13 – As the local telecommunications industry gears up to roll out 5G networks in the country, the Communications Authority of...


NAIROBI, Kenya, Mar 22 – Airtel Kenya is offering free internet access for students in order to enable continued learning at home in the...