NAIROBI, Kenya, Oct 25 – A United Nations economist has warned that Kenya could be heading into a recession, citing the runaway inflation, a weak shilling and problems in the money markets.
United Nations Millennium Campaign Regional Director for Africa Charles Abugre observed that Kenya is also facing a poorly performing stock exchange, ballooning debt levels, widening trade deficit and declining reserves.
All these issues, he pointed out, are indicators of deeper problems that could morph into a bigger economic crisis with huge implications for Kenya.
“The banking sector depends on hot money to lend to the real estate sector which can borrow more from the over-valuation of properties. So you have these increased earnings of the value of real estate which serves as collateral for more borrowing. At some point, this has to come to an end,” he described the situation which is similar to what precipitated the financial crisis in the United States.
Abugre blamed the situation partly on the Central Bank of Kenya (CBK)which between September 2010 and April 2011 lent billions of shillings to the banking industry at very low rates and over periods of up to 30 days.
A huge chunk of this money was then invested in the real estate sector as opposed to going into other productive sectors of the economy such as agricultural or to the Small and Medium Enterprise Sector.
“Why is it that there is so much growth in the real estate when people’s average income have either increased very slowly or not at all?” he posed.
The other factor is policy failure which has seen the government liberalise the market and end up benefiting a few people in the economy at the expense of the masses.
This, he argued, has opened up a window that foreign investors normally exploit by taking advantage of the high interest rates offered in government papers or earnings from the stock market.
The high involvement of foreign participants at the Nairobi Stock Exchange (NSE) for instance was largely responsible for the boom at the bourse and the property markets.
However since they are always looking to make a quick buck and hardly invest in long term projects, he argued that the investors tend to get their money out of the country at the first sign of trouble.
“There has been a lot of flow of money into the stock market and that is why there was a boom and in my view this is also what fuelled the housing boom. Short money flows in quickly but it also flows out rapidly. It comes in hot and goes out hot,” he emphasised.
The fact that Kenya has anti-money laundering rules has not prevented the illegal capital flight that allows both legal and criminal businesses to move their money in and out of Kenya with minimal restrictions.
A rough approximation puts the volume of illicit capital flight between1970 and 2008 at $4 billion with about $3 billion moved between 2000 and 2008.
According to Abugre, this happens because the banking sector is largely unregulated and also because Kenya has a huge underground economy-which consists of many, large unregistered businesses- and which are not restricted to move cash.
It is the lax regulations in the industry that enables a company to open an account without identifying the real individuals behind it and thus makes it easier to stash cash abroad.
It is this ability to move money in and out of the country for instance that saw a ‘high net worth’ customer instruct his bank to transfer $100 million dollars to a Middle East account in mid last year.
This action led banks to believe that there would be a shortage of foreign exchange and they also started accumulating forex without selling it. This action fuelled reports of speculative activities that caused the shilling, which was on a gradual decline to suddenly crash early in August.
“The fact that it is possible to rapidly transfer capital in large quantities abroad suggests that the liberalisation of the capital account cannot only be a means of attracting investment but also a means of rapid dis-investment which can then create a massive problem,” Abugre said.
It is such policies that the government has adopted that have made Kenya so vulnerable to the perennial balance of payment deficit, the swings in interest rates and the local currency.
The government has employed knee-jerk reactions to these shocks by for instance raising interest rates or borrowing more money from say the International Monetary Fund.
Granted, these measures are short term and costly and only serve to drive poverty and inequality.
In addition, Abugre said these factors combine to just building bubbles in selected industries.
This bubble is also seen in the domestic borrowing front which he said only benefits a few people while impoverishing the majority.
This can explain the fact that inequality in Kenya is rising enabling the country to maintain its position among the top ten countries most unequal societies in the world.
According to a report by the Society for the International Development released in 2004, 10 percent of Kenya’s richest controlled about 42 percent of the country’s total income.
It is believed, that they now command more to be more than 45percent and this greater concentration of wealth only drives speculative investments.
To address these problems, the Ghanaian economist recommended a re-think of policies that would for example un-bundle the banking sector and ensure that there are no dominant players whose presence points to inefficiencies in the market.
Such laws would also have to give powers to the Central Bank and ensure that it is an independent body whose job is not only to formulate effective fiscal and monetary policies but one that ensures job creation and income growth.
Kenyans he says should also exploit the socio-economic rights guaranteed in the constitution to ensure that they are involved in the management of public finance.
Towards this end, he lauded the country’s efforts to formulate the Public Finance Management Bill but added that Kenyans must be vigilant and ensure the promotion of transparency and accountability in the management of public finances at the central government and county level.
He also underscored the importance of addressing not just ethnic marginalisation but also economic inequalities and gender disparities.