What Britain’s EU exit portends for Kenya

Friday June 24 2016

The leader of the United Kingdom Independence Party, Nigel Farage, reacts outside the Leave EU (European Union) referendum party at Millbank Tower in central London on June 24, 2016 as results indicate that it looks likely that the UK will leave the union. PHOTO | GEOFF CADDICK | AFP

The leader of the United Kingdom Independence Party, Nigel Farage, reacts outside the Leave EU (European Union) referendum party at Millbank Tower in central London on June 24, 2016 as results indicate that it looks likely that the UK will leave the union. PHOTO | GEOFF CADDICK | AFP 

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David Cameron yesterday walked to the doorsteps of his official residence to declare his resignation and acceptance of the results of a referendum that saw citizens vote to leave the European Union, the world’s most successful integration project. The decision to leave the EU was supported by 52 per cent of voters in a high stakes election whose turnout is unprecedented since 1992.

The decision has a huge political, economic and social implications for the United Kingdom, its international partners and members of the European Union itself.

The immediate consequence of the resounding win by the coalition that supported the exit is that a formal mechanism for unshackling the United Kingdom from the EU would commence. The pound sterling saw a single day downward change that was larger than experienced during the financial crisis of 2008. In other words, the decision has had immediate economic consequences.

It is fit to explore what the consequences of the exit of the United Kingdom mean for Kenya since this country is among its economic allies on the continent. Economists who published opinions overwhelmingly supported the campaign to stay within the European Union. Nobody has quantified what the effects of an exit are primarily because there is a two-year window during which the terms of exit would be negotiated and implemented. This means that a lot of things are still in flux and so the effects on Kenya will in turn be through indirect and possibly weaker channels that are not immediately evident.

While the pound sterling has lost value in relation to both the US dollar and the euro, there is no certainty that these effects will persist. It is unwise to reason from this initial price change because this reaction is largely driven by the surprise of the outcome and not necessarily that the currency will continue in its weakness.

The effect of this on Kenya is that there may be an initial boost in the value of the Kenyan shilling vis-à-vis the pound sterling. On Saturday evening, the shilling was quoted at 138 against the pound sterling, a drop from 150. This change in relative value of the shilling to the pound could make some imports cheaper, and overall raise shipments from the United Kingdom, which stood at Sh43 billion in 2015.

The currency effect could also mean that British visitors may find Kenya a more expensive destination on account of the slide in the value of the pound sterling relative to the shilling. This decline alone would not confer a distinct advantage to Kenya because of a similar effect relative to other currencies.

One reason Kenya should be worried about the effects of the Brexit decision is that the uncertainty about the terms of exit could destabilise the British economy. The worst case prediction suggests that acrimony between the British government and its partners in the European Union could trigger a recession in the United Kingdom.


The probability of this occurrence is remote because the Bank of England is well-prepared and will be vigilant as the politically messy exit is negotiated. If this unlikely recession were to occur, then it will affect the purchasing power of both households and firms in the United Kingdom. This would mean that tourists from the United Kingdom would be faced by the coincidence of a weak currency that should lead to higher consumption on the one hand and a recession that has a countervailing effect leading to lower demand for Kenyan products and services.

The recession would probably cancel out the currency effect and affect Kenya negatively too in terms of demand for Kenyan goods within the United Kingdom.

The largest firms based in the United Kingdom were big supporters of the British membership into the European Union. In addition to citing the adjustment costs that would issue from the Brexit win, they were concerned about the possibility of London losing its preeminence as the capital of European finance.

Now that this reality is facing them, British firms would adopt a wait-and-see attitude to first understand how domestic and continental business conditions would change. In a moment of such uncertainty, firms would probably save their funds and, thus, Kenya could suffer from a reduction in British investments. Thus, one of the more obvious channels to watch would be the amount of investments that come to Kenya after today. There is a real risk that some investment could be deferred if the recession occurred. Part of the reason residents of London voted overwhelmingly in support of staying in the European Union is because it is a cosmopolitan city.

Among the undertones of the Brexit campaign was concern about immigrants and the claim that they displace local people from getting decent jobs. It is yet unclear whether London’s pre-eminent position will be affected but any departure by foreigners would affect its real estate markets.

In clearer terms, the very expensive homes within the city would remain unaffordable for many people but a drop in their value could see some affluent Kenyans acquire some property in that city. This would not be a large number but it would be attractive given the stability of British common law.

To conclude, the effects of the Brexit will not be as clear this early because the United Kingdom will need a new Prime Minister to trigger Article 50 of the EU treaty allowing for formal departure, to happen at the end of two years, a long time for individual actors to respond to risks as they become salient. The lesson here is that the exit is a loss of the United Kingdom as an influential voice in the EU.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs [email protected]