Economic costs of political unrest

What you need to know:

  • “It is entirely alarming that like global warming, the political heat keeps hitting record highs given that we remain some days off the election,” said Mr Khan.
  • Business people and economic analysts are united in their warning that the current political stalemate will have far-reaching consequences on the economy which is expected to grow six per cent in the 2016/2017 financial year.

Before the 2007/08 post-election chaos erupted to devastating effect, economic growth was roaring at more than 7 per cent.

Several months down the line, with debris of unprecedented mayhem all around, the economic growth plummeted to about 2 per cent.

All the painstaking work that had been done for years to put the economy on an optimistic trajectory was painfully brought down in one fell swoop.

Did the country learn any lessons from that period that has invariably been described as “a moment of madness”? Apparently not if the disturbing political unrest the country is going through is anything to go by.

Business people and economic analysts are united in their warning that the current political stalemate will have far-reaching consequences on the economy which is expected to grow six per cent in the 2016/2017 financial year.

The weekly protests against the electoral commission are already exacting a heavy toll on the business climate.

Yet the current political heat seems certain to get hotter as political protagonists adopt a hardline stance. Cord, which is spearheading the protests, continues to dig in and has threatened to make the demos a daily affair, worsening an already tenuous situation.

The Kenya Private Sector Alliance (Kepsa) says traders are losing in the region of Sh80 million every Monday thanks to protests against the Independent Electoral and Boundaries Commission. The alliance says thriving businesses presuppose a peaceful and stable environment.

“Businesses thrive in a politically stable environment and the riots are creating fear among businesses. So far each of the  Mondays that the protests took place businesses lost about Sh80 million,” said Kepsa chief executive Carol Kariuki.

Cumulatively, the losses that businesses have recorded since the violent protests are said to run into billions of shillings. This is already an alarming figure yet the elections are almost a year away.

Analysts say  the wave of mounting political intolerance witnessed over the last few weeks could reverse expected growth prospects if they continue.

Mr Aly Khan Satchu, investment analyst and chief executive of Rich Management told Smart Company that even though the real extent of the preliminary damage to the country’s economy as a result of the political chaos has yet to be fully quantified, key sectors are losing money as foreign investors adapt a wait-and-see attitude.

“The ‘’Political’’ economy has extracted a big pound of flesh from Kenya Inc. You only have to correlate the electoral cycle to GDP and you will note politics crushed our Economy in 1992, 1997, 2007 which is three out of five elections,” said Mr Khan referring to the pattern of unrest which grips Kenya ahead of every general election.

Mr Khan put the cost of the current anti-IEBC protests to the economy at a billion shillings every single day the protests are held.
“…Monday protests cost (in my back of the hand estimation) at least $10 million (about Sh1 billion). That is a substantial amount of money,” said Mr Khan.

It is entirely alarming

He said if political rhetoric remains heated, things are bound to take a disturbing proportion.
“It is entirely alarming that like global warming, the political heat keeps hitting record highs given that we remain some days off the election,” said Mr Khan.

Economist Robert Shaw told Smart Company the build-up in political uncertainty, if not checked, would undermine efforts to bolster economic recovery.

“Nervousness and uncertainty is increasing daily and will inevitably undermine confidence in the economy and reduce investment. It is something the country can ill afford. For instance tourism’s recovery is now in jeopardy,” said Mr Shaw.

Tourism minister Najib Balala echoes Mr Shaw’s sentiments saying continued turmoil would keep away potential visitors. This, he added, is not good news for a sector that has been grappling with a rough patch over the last three years.

Sterling Capital Investment Director John Kirimi warned of far-reaching pressures to the economy if the rising political temperatures are not cooled.

“I think there will be a serious effect if the political fallout is prolonged and if it escalates to be more serious and widespread because invariably it always takes a tribal dimension and our institutions are manned by these tribes,” said Mr Kirimi.

Mr Kirimi said foreign investors are keenly watching the unfolding events to take positions including possibly delaying foreign direct investment.

“Our economy is external in view of the fact that the proportion of business that we do with the outside world compared what we do with each other is much higher than in other countries. External counterparts will disappear at the sound of the first warning shots. The stock market in Kenya has started experiencing it judging by the drop in the NSE index,” he said.

Kenya’s business community has in recent weeks raised concerns over effects on the economy of the increasingly confrontational approach to politics. According to the Retail Trade Association of Kenya, (Retrak) businesses affected by the riots so far have faced “huge costs”.

Retrak which represents retailers of all sizes said recently it was too early to count the exact cost of the damage but noted that it could be long-term and widespread.

“These Monday demonstrations are adversely affecting our businesses because we have been forced to occasionally close our shops for hours during the protests to safeguard our businesses,” said Retrak chief executive Wambui Mbarire last month.

Retrak called for dialogue to end the stalemate. “This sector was among the worst hit during the 2007/2008 post-election chaos. Our businesses are often turned to looting grounds that in the end leave us staring at billions of shillings in losses. Some of the businesses are still recovering from the effects of the chaos more than eight years down the line,” she said.

Tuskys chief executive Dan Githua said the retailer’s branches had been “hugely” affected by the riots.

“Every day we have these demonstrations, customers shy away from shopping centres. We lose about 50 per cent of our expected sales. Losses from this scare effect are much more than the shops we have closed so far,” he said.

Global rating agency Standard & Poor’s (S&P) has since warned that the tense political environment is adding undue pressure on the country’s sovereign rating.

Sovereign ratings are used by international investors as a guide to the level of risk when pumping money into a country, meaning that a good rating eases the access and terms when a country is borrowing from the global markets.

“We could lower the ratings if Kenya’s fiscal deficits were to increase further or debt increased more than we currently expect. We could also lower the ratings if political tensions flare up and undermine stability-oriented economic policy making, or if Kenya’s external liquidity or financial conditions markedly deteriorate and lead to a significant loss of foreign exchange reserves and widening external financing gap,” said S&P in the latest sovereign rating update on Kenya which maintained Kenya’s sovereign credit rating at ‘B+’ for the long term and ‘B’ for the short term.

The Kenyan economy capped the end of 2015 on a high note with recent government data showing the country’s economy expanded at a rate of 5.6 per cent in 2015.