How to avoid ruining Kenya's economy as polls campaigns take shape

The economy has suffered its fair share of shocks this year with soaring fuel prices runaway inflation and the rapid depreciation of the shilling piling agony on consumers.

But the biggest challenge to economic stability in Kenya in the next year will not come from conventional sources such as turbulence in the financial markets or a shortage of rainfall.

Pressure on the economy will be drawn above all from an event the Constitution demands should happen every five years: the General Election.

It has long been known that Kenya experiences a downturn every time an election comes around.

But the extent of the toll that election-related political uncertainty takes on the national economy – in contrast to more stable countries such as Ghana, Botswana and Tanzania – is highlighted in new research that examines economic growth patterns in Kenya over the last two decades.

Every election year

A draft paper by Institute of Development Studies professor Karuti Kanyinga illustrates the losses in overall gross economic output that the nation has experienced in every election year since 1992.

It shows that agricultural production has virtually collapsed every time an election – or a referendum – has come around in the last 20 years and highlights how policy makers and other influential personalities have their work cut out to stop this cycle of failure repeating itself in 2012.

The project paper finds that there is a close correlation between agricultural output and electioneering, recording that agricultural growth levels fell to all-time lows between 1991 and 1993 during the first multi-party elections, and to -4.98 in 2008, after the country erupted in unrest following the last elections.

The findings have highlighted the need for a nation reeling under multiple economic shocks to find ways to ensure election-related political risk in 2012 does not lead to an economic crash.

“We have had a very poor track record around our elections with only 2002 proving a success,” says investment banker and analyst Aly Khan Satchu.

“In fact, we have a 75 per cent failure rate in that 1992, 1997 and 2007 were three fails out of four. Therefore, our political risk remains very high and the consequences for the economy are there for all to see. We essentially ‘crash and burn.’

“Our expansions have no longevity and the economy is trained to stop start.”

Industrialist Vimal Shah says the nation must find a way to assure investors jittery about the chaos that seems to accompany every election that 2012 will be different.

Defer decisions

“What happens is that when foreign investors detect that the climate is not right they slow down their decision making process.

“They will defer major decisions and will say let’s wait until after the elections. If we didn’t have any tension people would say hey, let’s get in quick.

“But we are not alone in this game and all our neighbours are also aiming to attract the same investors. A political environment which is seen as unstable, despite the fact the reality may be that this is a false perception, suffers capital flight.”

Writing in the project paper, Political Economy of Agricultural Policy Reforms in Kenya, Prof Kanyinga notes that every sharp economic downturn in the last two decades has occurred during a season of heavy political activity.

As illustrated in the charts on the facing page, agricultural production shrank by about 3 per cent annually between 1991 and 1993 before stabilising in 1994.

In 1997, economic growth took a nosedive in the final election contested by President Moi before recovering marginally. It went south again in 2000 when the reform movement hit its peak with nationwide demands for better governance.

President Kibaki took office in 2002 at a time when the economy was in negative growth territory with Gross Domestic Product (GDP) recorded at 0.8 per cent.

A period of recovery followed with growth jumping to 1.5 per cent in 2003 and up to 5.8 per cent in 2005.

That year saw the first major electoral contest of the Kibaki presidency. His Cabinet was split down the middle over the referendum on a proposed constitution expected that year.

Not surprisingly, the momentum of growth stalled. In 2006, for the first time under Mr Kibaki there was no swift improvement in year-on-year economic data with growth recording a marginal dip to 5.7 per cent.

The relatively smooth manner in which the referendum was conducted seems to have injected a fresh dose of confidence among investors with a surge in economic activity leading to peak economic growth in 2007, when real GDP growth rate stood at 7 per cent.

The disastrous 2007 elections returned the country to levels of economic growth last seen during the transitional year from Kanu to Narc in 2003.

Growth stood at 1.7 per cent while agriculture fared much worse ending the year in negative territory.

In an interview, Prof Kanyinga told the Sunday Nation the agricultural sector, on which eight of 10 Kenyans depends, is one of the most vulnerable to disruptions caused by politics.

“Agriculture is not neutral to politics. It is sensitive to what politicians say on the platform. The tone of the campaigns will determine whether farmers stay put or send their workers home until after the elections.

“It will determine what level of investment the farmer will put in or whether he will pack and go and return after the elections. It is instructive that the level of agricultural growth correlates very neatly with what is happening on the political scene.”

Prof Kanyinga says it is vital that going into the next elections politicians avoid focusing on attacks on personalities and invest in a campaign strategy based on issues.

Several other analysts offered similar prescriptions on how the country can avoid going back to negative growth levels and the widespread economic pain that would cause.

The stakes in 2012 are especially high because it comes at a time of economic tumult on the global scene and local upheaval and security risks generated by al Shabaab militia that has carried out a number of cross-border raids in Kenya.

Transparency International executive director Samuel Kimeu says the way politicians approach the campaigns will be key:

“It is possible to engage in politics in a civilised way where people compete using the ideas and not through mobilisation of communities through alliances. We need leadership that can galvanise.

“We also need to be careful in use of resources for purposes of political campaigns and draw distinction between political campaigns and the operations of government.”

Mr Kimeu said one of the reasons the economy slows down around election time was the fact there have been major financial scandals in election seasons as politicians seek to raise funds for their campaigns.

Mr Shah urged the media not to focus too much on pronouncements that could incite tensions in the run up to the elections.

He said there should be campaigns to focus those in authority on issued that could guarantee future stability such as implementation of the constitution.

Reduce leakage

According to Mr Satchu, Treasury and other players spearheading recovery efforts will have to be creative. “I would argue we need to leverage technology and empower the crowd to maintain real oversight.

“We need to reduce leakage (corruption) and get real about it. I would urge the government to re-ignite their initial public offering pipeline, to remember that it is all about keeping the pipeline open. In fact, I would bring a geothermal IPO at a 50 per cent discount. We desperately need to unlock the pipeline.”

Mr Satchu says the government must improve its communication strategy to impress upon investors that the fundamentals of the economy are not in bad shape and that Kenya remains the anchor state in the region.

“Our messaging is hardly 21st century. It is disjointed and amateurish. Too often our people think they are speaking to a narrow and defined and local constituency when in fact everyone is listening from an investor in Moscow to Johannesburg. There are some very powerful narratives that we need to ventilate.”

Other prescriptions offered include some by Wolfgang Fengler, lead economist at the World Bank office in east Africa, and the IMF’s country representative R. Gudmundsson who have urged the government to take urgent measures to shore up the economy.

“The country needs to better leverage its good location and as a hub of the larger East African region in upgrading its infrastructure, creating a better business environment, and continuing with regional integration. The best way is to modernise the port of Mombasa.”

Writing in the Nation, they urged the government to try alternative approaches to dealing with food insecurity. (READ: FENGLER: Economics for everyone: Development Discourse)

“Cash is usually better than food in responding to food shortages. One cannot emphasise enough the danger of price controls that end up hurting the consumers they are intended to protect… Kenya can learn many lessons from the 2009 food crisis, including attempts to manage food markets that resulted in subsidies going to the rich, while creating opportunities for corruption. Instead of trying to deliver food aid directly to the poor — which can be expensive and inefficient — it could provide the poor with cash transfers, enabling them to purchase sufficient food in the market.”

The major problems the economy is suffering, especially the twin problem of high food and fuel prices – which has eaten into household incomes now – ranks as the biggest source of anxiety among Kenyans.

In the Kenya National Dialogue and Reconciliation Monitoring Project report for October released last week, researchers noted the concern among wananchi over the state of the economy.

“Many Kenyans identified the high cost of living and inflation in general, as the single most serious problem facing the country,” it reported.

“There were no significant changes in this perception during the period under review. When asked, ‘in your opinion, what is the most serious problem facing Kenya today?’ as many as 76 per cent of survey respondents cited the high cost of living, while 10 per cent and seven per cent mentioned unemployment and corruption, respectively, as the most serious problems. Another five per cent cited poor leadership as a serious problem.”

While many countries in Sub-Saharan Africa are suffering these problems, the key difference is that the successful countries do not also experience the regular election-time reversals that the Kenyan economy suffers.

“In the final analysis, we sit on the cusp of a break out moment in our region’s fortunes,” says Mr Satchu.

“The natural resources are not to be underestimated, the oil in Uganda and Sudan and probably in Turkana. There is also geothermal resource in Kenya.

“The common market is coming into view with no less than 126m Consumers. We remain the jugular vein of the region and its route to the sea. This geopolitical fact is compelling but it will not exist forever.

“We need to manage this delicate transition and make sure that the new does not collide with the old and that it simply overtakes it.”