How Kenya can navigate through the economic storm and come out on top

Kenya is going through turbulent economic times. Rising inflation, a weakening shilling, and a declining stock market index have led to concerns about the country’s economic outlook.

Is Kenya facing another episode of turbulence similar to 2008-09? This need not be so for two main reasons.

First, since 2010, a new growth momentum has been building aided by structural reforms, the new Constitution, and a dynamic private sector.

Second, Kenya has a strong track record of economic policymaking that has helped it to navigate previous shocks. This is a time to prepare, not panic.

Over the past decade, Kenya has developed a reputation for resilience and strong macroeconomic management. Public debt levels declined from about 60 per cent in 2000 to about 35 per cent in 2007, a trend supported by prudent fiscal policies and strong growth.

Inflation declined from about 16 per cent at end-2008 per cent to below 4 per cent by end-2010, enabling Kenya to issue domestic debt at lower rates. That the country can issue bond tenors of 30 years signals private sector confidence in future prospects.

Banking reforms have helped to deepen access to finance among the population, while significantly reducing the share of non-performing loans.

These indicators are impressive and help explain the recent increase in Diaspora remittances and the renewed interest shown by foreign investors in financing Kenya’s pressing development needs.

The country entered the global financial crisis buoyed by a strong macroeconomic performance that allowed for some fiscal stimulus, equal to 1 per cent of GDP in 2009/10. This helped the economy to stage a strong and unexpected recovery in 2010, growing at above 5 per cent.

All key sectors experienced strong growth, especially agriculture and manufacturing, both of which recovered from two years of negative growth.

Five structural factors could enhance prospects for a more sustained growth path this decade: the new Constitution; investments in infrastructure; strong macroeconomic policies; regional integration, and accelerated adoption of ICT technologies.

Even though global growth is projected to be moderately strong in 2011, economic policymaking will be fraught with significant challenges, and Kenya will need to traverse a number of shocks.

Turbulence in the Middle East, rising global food prices, uncertainty concerning the debt crisis in Europe, and recent developments in Japan have all added to global economic volatility.

The higher oil price alone has resulted in a widening of the current account deficit by 2 per cent of GDP. Combined with political tensions that triggered some capital outflows, this has started to put pressure on the shilling.

Downside risks to growth in advanced economies could also affect horticulture and tourism, two of Kenya’s main foreign exchange earners.

The lower shilling, coupled with higher oil and food prices, increased inflation from 3.2 per cent in October 2010 to 6.5 per cent in February 2011.

The Nairobi Stock Exchange has also been affected by the turbulence: after remarkable growth in 2010, the NSE index has lost ground in 2011, declining by more than 10 per cent since the start of the year.

Kenya can build on its track record of strong macroeconomic management.