Considering that stretched elections are now a permanent fixture of our Constitution and the fact that the political deadlock Kenya is now witnessing could see the exercise stretch beyond the 60 day period for a repeat exercise contemplated under the Constitution, SHADRACK MUYESU indulges Anzetse Were, Kosta Kioleoglou and Antony Mutunga on what this portends for the economy and some guidance on the way forward.
Ms Were is a development economist and a researcher with over ten years of experience working in Africa on development economics, Impact Investment and Enterprise Development. Mr. Kioleoglou is a civil engineer, an expert real estate valuer and the regional managing director of Africa Plantation Capital while Mr Mutunga is an Economist and a writer for this magazine.
How is the prolonged electioneering going to affect business in the long term?
Anzetse Were: There is a need to appreciate the complexity of the context and how it will have both short term and long term, as well as positive and negative effects.
In the short term, the effects are largely negative. One immediate effect has been seen in the Nairobi Stock Exchange (NSE) whose position worsened after the Supreme Court delivered its verdict. The NSE has yet to recover. Secondly, Kenya was downgraded by Moody’s Investors Service, which is of the view that the Supreme Court verdict nullifying the presidential election outcome is a ‘credit negative’ and will prolong policy inertia and uncertainty. Thirdly, elections in Kenya are already expensive in terms of cost per person. In comparison Kenya has a cost of $25.4 to a person as opposed to Ghana’s $12, Tanzania’s $5.16, Uganda’s $4, and Rwanda’s $1.
Finally, the extra spending will likely pull money out of economically productive development spending and redirect it into economically unproductive recurrent expenditure in an environment of aggressive recurrent spending and subpar revenue generation.
However, the Supreme Court decision is creating a positive long-term effect on Kenya’s economy because there is a sense that the Judiciary is independent from the Executive. This is very important in Africa. The decision set an important precedence for an African economy with the international community feeling that it builds democracy and the rule of law. This is important, not only because international investors will be affected by such sentiments but also because the decision makes it more likely that any future election dispute will be addressed in the courts, not the streets. Thus, in this sense in the long term, the Supreme Court decision augurs well for the Kenyan economy.
Kosta Kioleoglou: Despite the general opinion, the prolonged electioneering period is not going to affect any business in the long term. What can or will affect the economy and business is the environment during this period as well as who will win. What is going to make the difference is if everything will end peacefully and without tension.
On top of that, there may be an effect to the economy as a result of the winners’ ideology and how successful they will be in implementing those ideas. Today, everybody blames the election period for the bad performance of the Kenyan economy and the stagnation of almost each and every sector.
Elections are not the reason; elections are just a good excuse for exposing the real face of the Kenyan macroeconomics, which has not doing well for quite a long time. The Kenyan shilling is losing in value against most currencies following the USD negative course while other currencies are capitalizing on the weakness of the USD. Inflation is extremely high, the expected growth of the economy is now estimated to be lower than 6% and recently the government’s forecast was cut down to 5.5% for 2017.
The real estate sector is struggling with the House Price Index not being able to produce real profits. External debt is growing day after day and the account balance deficit looks really bad. But all these are not new. As long as the Kenyan economy is focused on public expenditure, borrowing money and cannot balance its imports and exports, as long as Kenya will not focus on the primary production sector, agroforestry, manufacturing etc. things will remain difficult and might even get worse. If I could say all that in one phrase I would say simply “Stop consuming, start producing”.
2. The World Bank in its Kenya Economic Update of March 2016 projected a 6% economic growth in 2017 while the International Monetary Fund expects Kenya’s economy to grow by around 6.5% in 2018. The assumption is that they factored in the elections. Considering that anything above 6% usually means a resilient economy, how true are these statistics bearing in mind the slump being felt all across the country?
Anzetse Were: First, it’s important we note that the Kenyan government revised GDP growth downwards to 5.5% The World Bank and the IMF take cues from the government in their own predictions so we’re likely to see a downward revision from them.
Second, it’s important we also appreciate the fact that, outside of the elections, the Kenyan economy has already taken a lot of problematic hits this year. The first is the drought, which pushed up inflation and made the living economic context very difficult for Kenyans. Secondly, this is the year where the economy is feeling the heat of the interest rate cap.
Private sector credit growth has dwindled; growth slowed down to 1.6% in June compared with 9% a year earlier, according to the Treasury. Those most affected are Small and Medium Size Enterprises, which are the economic engine of the country. So, the economy will take a hit from the interest rate cap.
Then we have the election. The IMF and the World Bank are already wary of the growth prospects of Kenya’s economy in the run up to the elections. The Kenyan economy slows down in an election year by about 1.2% – 1.4%. We seem to be already feeling this effect because the economy expanded by 4.7% in the 1st quarter, down from 5.9% in the same period of 2016. Indeed, of the 10 elections the country has had, 7 have been associated with slower economic growth, and it takes 26 months for economy to recover from an election.
These factors combined will negatively inform the economic growth of the country in 2017.
Kosta Kioleoglou: On September 15 the Kenyan government announced that they cut the 2017 economic growth forecast to 5.5% from an initial 5.9% which is the same with the World Bank’s forecast announced on April 2017. For the same period, as per the latest report of IMF, the expected forecast for the growth is 5.3% according to the World Bank, with several factors such as the prolonged drought and the rise of energy costs affecting growth. According to the World Bank, Kenya faces a marked slowdown in credit growth to the private sector. At 4.3%, this remains well below the ten-year average of 19% and is weighing on private investment and household consumption.
Over the last two years, Kenya as a net oil importer has been enjoying the benefits of extremely low oil prices, which helped a lot the country’s economy but the rise in global oil prices compared to the lows of 2016 has a dampening effect on economic activity. However, in the medium term, economic growth is projected to rebound to 5.8% in 2018 and 6.1% in 2019.
As per their forecast, the economy will exceed 6% growth marginally after 2019. That is of course under normal conditions and without any international or local turbulence. Kenya depends a lot on foreign aid and investments. So while the medium – to long-term outlook appears quite favorable, Kenya’s economy remains vulnerable to downside risks. These include potential for fiscal slippages, a more prolonged drought in 2017, and external risks from a weaker than expected growth amongst Kenya’s trading partners, as well as uncertainties related to U.S. interest rate hikes and the resultant stronger dollar.
Brexit and other European developments also affect Kenya. Since we are still in a pre-election period with the reelection in front of us, any violence could be catastrophic to Kenya’s future. Over the last few years, terrorism and fear destroyed the tourism sector.
Any other incident that would add to that would be a disaster. The World Bank and IMF amongst others are issuing very analytic forecasts and it is clear in their analysis that Kenya’s economy is quite fragile and vulnerable. It is also important not to confuse the macroeconomics with the microeconomics of every Kenyan family. Until the economic model changes from public expenditure and borrowing to a healthy and sustainably, growing private sector and production, any percentage of growth is creating a better life only for a few and is not sustainable.
Antony Mutunga: For starters, the idea of growth during elections post 2007 is borderline impossible. Before 2007, there was stability in the office of the President which stability extended to the economy. If there were a degree of certainty as to who would be president, investors wouldn’t have moved to cushion themselves. Drought wasn’t also factored. Drought pushed inflation. But what’s more, Consumer Price Index underreports inflation and misstates GDP growth. It doesn’t factor in all the circumstances hence it’s not the best way of determining our economic health. Chances are that the situation is far worse than is reported.
3. Stretched elections are a permanent fixture of our Constitution and they create a toxic atmosphere thanks to a deeply stratified society. What can the government do to avert further slump, cushion consumers as well as businesses and perhaps minimize its effect in future?
Anzetse Were: Two actions; one by government and the other by Opposition.
Government needs to focus more effort into making institutional structures resilient in the face of the election. Kenya is a young economy and a young democracy and that pairing creates a scenario where politics substantially affects the economy and vice versa. In order to mitigate this, government needs to create an attitude in government ministries, departments, parastatals and agencies, as well as the broader civil service, that things will continue as normal even during an election year. Government needs to create a sense that daily work will continue and long-term strategy regardless of what’s happening in the political sphere.
On the other hand, the Opposition needs to give Kenyans a clearer sense of what they offer beyond ‘change’. It is well known that Kenya’s political system is not ideologically oriented and this creates an air of uncertainty because one is only sure of the policies and ideologies of those in power. No one knows how the Opposition would operate if they were in power.
This can change if Opposition is more proactive in creating a track record in critiquing government action from a technical point of view through the process of shadowing. The Opposition should present a shadow budget, or a shadow agricultural policy or shadow banking policy to give Kenyans and investors a sense of how they would approach rule if they were in power. While shadowing is predominantly practiced in the British parliamentary system, there is nothing stopping Opposition from using this proactively to provide a sense of what their approach to rule would look like. This would likely mitigate the air of uncertainty around elections because it would be clear what the approach to rule is from both government and opposition.
Kosta Kioleoglou: What I believe needs to change is mostly the way people think about elections. An election is the constitutional right of everyone to choose the people they believe will govern better their country and will create a better future. Rallies, demonstrations, celebrations, fights, arguments have no place in democracy. For example in Netherlands people do not even have a day off to vote. They just take 2 -3 hours break from work go to vote and then continue whatever they were doing. The economy, life does not stop because of the elections.
If you consider the amount of money spent for the pre-election period you can understand that this system is not right. While people are dying of hunger and ancient diseases, politicians are spending billions to be elected, and they do so with the blessing and support of the voters. So if something has to be changed, it is the way you run the pre-election period and people’s mentality.
Kenyans need to understand that a better life requires hard work. Waiting to have a better life simply because you support one party or the other and you expect them to get elected and support you, then nothing is going to change.
