Commentary (by Jaindi Kisero) - This economy cannot survive political turmoil any longer

Ref: http://www.nationmedia.com/dailynation/nmgcontententry.asp?category_id=25&newsid=117771
Story by JAINDI KISERO
Publication Date: 2/27/2008

THIS ECONOMY BADLY Requires a new dose of optimism. Right now, the biggest barrier to a return to economic stability is the atmosphere of uncertainty hanging over the mediation process presided over by former UN secretary-general Kofi Annan.

Already, the effect of the climate of uncertainty that has engulfed the country can be seen on the sluggish stock market, a volatile exchange rate, and inflation that stubbornly remains at double-digit levels.

If Dr Annan fails, this country could plunge into a round of macro-economic instability, the magnitude of which was only witnessed in the early 1990s.

Optimism, although intangible, is a very powerful economic factor. No investor can risk putting his money into a new project in an environment of high political risk, and where he is unable to predict the future movement of prices and interests rates.

This economy will not regain the growth momentum it has been enjoying in the last three years if the climate of uncertainty lingers too long.

If you look at the Economic Survey, you will realise that the main sources of economic recovery in the last four years have been the following:

Top of the list is the agriculture sector, dominated by horticulture and cereals, the transport and communications sector, and the wholesale and retail sectors. Tourism and the Manufacturing sectors have also consistently recorded impressive growth rates.

In terms of expenditures, much of the growth is attributed to domestic consumption. Investment on roads, free primary education, and the revival of trouble-ridden parastatals also increased.

Trade, reflected in the volumes of exports of goods and services, has also performed well, growing at an average 15 per cent.

Still, the intangible factor behind all this growth has been optimism within the private sector. The business community believed that the growth pick-up was real and sustainable.

This is why firms were ploughing back profits rather than depositing the money in bank accounts abroad, while businesses were positioning themselves to produce for an integrated East Africa and for expanded markets with the Comesa trading bloc.

Instead of optimism, what we have now is an atmosphere of doom and gloom. Tourism is in the doldrums, while regional trade, the transport sector and agriculture have been adversely affected by the post-election violence.

Sooner or later, we will have a glimpse of the toll these negative conditions in the economy have had on the Government’s finances — revenues, external assistance and borrowing — when the Finance minister presents the supplementary budget in Parliament next month.

WE ARE LIKELY TO SEE MAJOR deviations between the original budget and the supplementary one. The predictions right now are that the recurrent budget will overshoot the printed estimates significantly, reflecting expenditures which were not budgeted for in the June budget — including the “free’’ secondary school education programme, and additional expenditure in providing security to quell the post-election violence.

And if Dr Annan leaves town without a deal and “donors” — especially the influential ones like the European Union — follow by freezing grants and loans, Mr Amos Kimunya will have even more problems trying to juggle with the allocations in the development budget.

Compared to Tanzania and Uganda, Kenya does not absorb that much budget support, namely quick-disbursing cash not tied to any project. But in terms of project loans and grants, we still depend a great deal on donors.

In the current circumstances, a freeze will badly affect the infrastructure investment programme, especially the roads, health and energy sectors where the European Union and a number of “bilaterals” have committed billions of shillings in the current financial year.

Opinion is unanimous today that physical infrastructure (especially roads) is the biggest impediment to private investment and expansion.

Indeed, poorly maintained roads, and expensive and unreliable electricity supply have combined to hamper productivity and stifle the competitiveness of our exports within the Comesa region.

A recent study found that while it costs Sh5,400 to ferry cargo from Shanghai to Mombasa — a distance of 5,000 kilometres — transporting the same cargo between Mombasa and Nairobi, 500 kilometres distant, would cost Sh3,000.

Can we, really, afford any delays in the infrastructure investment programme? Yet this will be the inevitable consequence of donors freezing aid.

The donor factor aside, this year’s budget is also set to experience pressure from shortfalls from privatisation proceeds.

The budget which Mr Kimunya presented to Parliament in June had assumed that the Government would, within the financial year, receive Sh36 billion in the second quarter of the financial year, especially from the planned initial public offer of Safaricom shares.

Although the Government realised the same amount from the sale of Telkom Kenya alone, it still calculated on receiving proceeds from Safaricom before the end of last year. It hasn’t happened yet.

Dr Annan must save this country.