Prolonged uncertainty bad for economic growth

Saturday September 9 2017

A trader waits for customers at Kariakor Market, Nairobi. She says that the business is slow after August 8 General Election. PHOTO | ANTHONY OMUYA | NATION MEDIA GROUP

A trader waits for customers at Kariakor Market, Nairobi. She says that the business is slow after August 8 General Election. PHOTO | ANTHONY OMUYA | NATION MEDIA GROUP 

By IRUNGU NYAKERA
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There is need to remain vigilant  amidst the current political developments to ensure that macroeconomic stability is maintained, investor confidence is secured and adequate supply of food is sustained.

Kenya has gone through a peaceful General Election despite the heated political environment. However, the Supreme Court nullified the results of the presidential election through the ruling made on September 1. A new date for the presidential election has been set for October 17 and the country is in a campaign mood once again.

This year, the General Election spreads across two quarters and it is not clear when political tensions will ease.

The prolonged uncertainty created by the elections is likely to slow down the growth of the economy in 2017 from various angles:

(i) the wait and see attitude by investors  slows down  investment

(ii) travel advisories due to perception of insecurity  during the election period negatively impact key sectors such as tourism

NEGATIVE MARKET

(iii) the stock market (NSE) index is also adversely affected by negative market sentiments and

(iv) and disruptions to many other economic sectors such as hotels, transport, wholesale and retail  as people stay away from work.

Some key indicators already point to a slowdown in economic growth in 2017. 

First Quarter estimates of Gross Domestic Product (GDP) growth by the Kenya National Bureau of Statistics (KNBS) indicate that the economy grew by a low 4.7 per cent. 

Other leading indicators such as cement consumption indicate a downward trend from March to July 2017, based on recently available data.

The Consumer Price Index (CPI), which measures the changes in the cost of living, has also risen from 6.3 per cent in August 2016 to 8.0 per cent in August 2017.

FOOD PRICES

This increase is mostly explained by increases in the prices of food and non-alcoholic beverages, which increased by 13.6 per cent over the period.  The increase was mainly attributable to depressed food supply due to the prolonged drought. 

As we gear to the repeat election, there is thus need to be vigilant on any uncertainty created by political developments that could negatively impact on food supply. 

As already noted, there is a relationship between the performance of the stock market and economic growth. 

Periods of low stock market performance are accompanied by slow economic performance.

In the recent period, turnover at the stock market has been dominated by foreign investors, and in May and June their trading was more on the sell side than on the buy side. This could reflect dumping of shares in fear of the uncertain market situation and prospects of growth in the future.

NEGATIVE SHOCKS

Despite the negative shocks to the economy arising from the uncertainty and developments associated with their extended electioneering period, generally, macroeconomic stability has been maintained and the value of the Kenya shilling has remained stable vis-a-vis other major world currencies. 

Official reserves held by the Central Bank of Kenya have also increased from $7.5 billion in January 2016 to $8.1 billion in July 2017. Such reserves are adequate to support imports as well as ensure the stability of the shilling. 

In conclusion, it is important to note that prolonged periods of uncertainty surrounding elections are detrimental to economic growth, hence the need and urgency to conclude the 2017 presidential elections.

The 2013 General Election demonstrated that when a government is formed immediately, economic activity is generally not significantly affected and this, in turn, secures investor confidence.

 The writer is the Principal Secretary in the Ministry of Planning and Statistics