The second half of 2011 was a tumultuous season in the Kenyan financial Sector. We saw the Kenyan Shilling capitulate almost overnight by around 30% against the US Dollar to 107 KES/USD . In a bid to curb this dollar demand, interest rates soared in reaction to the Central Bank setting the benchmark Central Bank Rate higher. This made the cost of credit for business reach levels last seen in the 90s when the economy was in the doldrums. As this was cooking, inflation rates were soaring hitting over 20% on a month on month basis on the back of higher food and oil prices. These three factors: Inflation, Exchange Rates and Interest Rates, being all significantly negative, formed the ingredients of the perfect economic storm.
So, How vulnerable is the Kenyan Economy? We can try to get to the root of this by dissecting each of these factors.
Inflation
Inflation is a double edged sword. Too much of it diminishes your purchasing power, too little/ or lack of it indicates low economic growth (
read Japan's Lost Decades) A common sense approach to define a good inflation rate is one that does not outstrip the rate of GDP growth. Currently (
February 2012) , inflation stands at around 18% while projected economic growth for the year is 4-5% depending on who you ask.
Therein lies the problem, our common tab for goods we buy keeps on increasing at a higher rate than our common wealth. The simple solution is to either increase our rate of economic growth to 18+% ( which is means almost quadrupling our productivity....not very plausible) or reducing our rate of inflation to less than 5% ( which can and had been done)
Following this course of action requires that the country at ensure it has food security for at least two years. This requires that agriculture be modernized in terms of production, marketing and storage. Malawi is a great example of how food security can be achieved in a short time with targeted subsidies to smallholder farmers and efforts to use higher yielding and drought resistant seeds.(read
Malawi's food security success) There is also need to localize storage for farmers to enable all year long supply of grain. It would also make the farmer less vulnerable to middle-men if farmers can get credit using grain receipts as collateral. Also, there has to be conscious effort to commercialize agriculture.This is the only way food security can be assured in the long run.
Oil is also a major component in the inflation equation with far-reaching effects on the cost of production of most goods and services. Our major handicap is that we have no local production. Nevertheless, we still can institute measures to curb variance in supply and price. In the short term, we can curb our inefficiencies in the oil industry along the supply chain. From outdated infrastructure at the country's sole refinery to transport issues within the oil pipeline, the supply chain is riddled with shortcomings that are mainly due to poor management over the years. The industry is in need of reform to manage this resource. There also has to be infusion of competition in the industry which is controlled by a few companies. The recent moves to regulate the oil prices is also long overdue. The use of derivatives to manage the variation in pricing while sourcing oil also needs to be explored. In the long run, Kenya needs to develop its own energy resources: Oil and alternative energy resources. There also has to be an effort to source oil cheaply within the region from either Uganda or Sudan and Natural Gas from Tanzania. There is need for creating strategic reserves to curb interruptions in the importation of oil. Currently, Kenya buys oil with a months lag for downstream distribution. This exposes us to adverse geopolitical events in the Gulf region and attacks on shipping lanes by pirates.
