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Global Economic Slowdown Presents an Opportunity for Kenya to diversify

BY Soko Directory Team · August 31, 2016 07:08 am

The Nairobi Declaration, announced at the end of the two days Sixth Tokyo International Conference on African Development (TICAD VI) summit in Kenya, outlined new emerging challenges for Africa such as the falling of commodity prices, outbreak of Ebola virus disease and the rising wave of radicalization, acts of terrorism and armed conflict.

The declaration called for the need to diversify and industrialize the continent’s economy, develop human resources and strengthen health-care systems.

Bloomberg has already reported that Africa’s two largest economies (Nigeria and South Africa are stalling amid slumping commodity prices and political infighting that’s hampering decision making.

Inflation in Nigeria hit its highest level in almost a decade, surging to 16.5% in June highlighting a deepening crisis for Africa’s biggest economy.

On the other hand, South Africa’s economy contracted the first quarter due to a slump in farming and mining output, manufacturing, which accounts for about 13 percent of GDP, expanded in the three months through June, retail sales grew and business confidence improved.

Kenya, East Africa’s largest economy’s growth is projected to rise to 5.9 percent in 2016 and 6.1 percent in 2017.

The MPC has said they expect it to remain within the Government target range in the short term despite temporary upward pressures on consumer prices due to recent increases in fuel tax.

“We are comfortable that the war against inflation has been won. When I came in, there was a cocktail of problems: rising interest rates, foreign exchange market, inflation and poor Government spending something that was ‘horrendous’, but towards the end of 2015, we had stabilized the economy,” the Central Bank of Kenya Governor Dr. Patrick Njoroge had said in a past event in May.

This is similar to his MPC statement in July, “The foreign exchange market has remained stable, reflecting a narrower current account deficit due to a lower import bill, improved tea and horticulture exports and stronger diaspora remittances.

“The stability was also supported by the CBK’s closer monitoring of the market before and after the UK vote to leave the European Union (Brexit),” he added.

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For the rest of Africa, the Nairobi Declaration resolved to contribute in sustainable manner to economic diversification and industrialization by helping to accelerate the growth of industries including agriculture, livestock, minerals, blue/ocean economy, innovation and ICT-led economy, manufacturing and tourism.

Kenya continues to increase its budget allocations towards infrastructure investment, security and irrigation projects aimed at improving the business environment and lower food prices in the medium term. Kenya has braved the storms that arise due to global economic factors from its diversified economy.

The economy posted growth of 5.9 percent in the first quarter of 2016, compared with 5.0 percent in a similar period 2015 with all sectors positing positive growth rates.

“The private sector remains optimistic for a higher growth in 2016 supported by macroeconomic stability, infrastructure investment, strong agriculture performance and tourism recovery.”

World Bank’s Quarterly Report Commodity Markets Outlook – From energy prices to food prices: Moving in tandem? States that, “Given the energy-intensive nature of agriculture, lower energy prices are expected to reduce the costs of producing food commodities. They should also ease policy pressures to encourage biofuels production, which has been a key source of growth in food commodity demand over the past decade. Energy prices declined 45 percent in 2015 and are projected to drop another 16 percent in 2016.”

Read: Energy Reliability is not Negotiable for Growth

Other opportunities that are emerging in Kenya and Africa at large that are projected to provide long-term growth prospects include:

Demand for commodities in emerging economies in the Middle East and Asia. Mckinsey says ‘it gives African governments more bargaining power, so they are negotiating better deals that capture more value from their resources.’

Steven Radelet, Director of the Global Human Development Program at Georgetown University’s Edmund A. Walsh School of Foreign Service, in ‘Africa’s Rise—Interrupted?’ notes, “Countries with more diversified exports are experiencing a more moderate impact on export prices, coupled with gains on the import side. Kenya, Mozambique, Rwanda, Tanzania, and Uganda are still expected to grow by 5 percent or more this year.”

Read: Kenya Will Have 6 percent Economic Growth in 2016 -CBK Governor

Radelet also cites that Sub-Saharan Africa’s population is projected to climb from 965 million in 2016 to 2.1 billion in 2050.

However, he raises a red flag on the rising urban populations will grow especially quickly, posing major challenges in job creation, infrastructure, education, health, and agricultural production.

“But demographic shifts also provide an opportunity: history shows that population growth is not necessarily a constraint on growth. Larger urban populations, a growing share of working-age people, and increased female labor force participation all present opportunities to expand manufacturing and services—much as happened in Asia in recent decades—especially when accompanied by investment in infrastructure and education.”

agricultural value chain — A section of the foodstuffs that were displayed at the ministry of agriculture stand at the Kakamega show.

Besides the three emerging challenges for Africa, climate change pose to be a threat with temperatures in sub-Saharan Africa are expected to rise between 1.5 and 3 degrees Celsius by 2050, and weather patterns, temperatures, and rainfall are expected to be more erratic.

“Arguably worst will be the blow to output and labor productivity in agriculture, the dominant source of income in Africa, especially for the poor,” says Radelet.

Kenya is addressing its macroeconomic aspects with the CBK in its last MPC meeting stating that its foreign exchange market has remained stable, reflecting a narrower current account deficit due to lower import bill, improved tea and horticulture exports and stronger diaspora remittance.

With the Treasury projecting a budget deficit amounting to Ksh 398.1billion with an aim of bringing it below 4 percent of the GDP, it is confident it will bring it down by mobilising domestic resources and increasing tax revenues, which will allow it to control deficits while financing developmental projects to benefit Kenyans.

Read: Kenya Private Sector Growth Signaled Rebound in July

To withstand the global markets volatility, Kenya is diversifying its dependence on commodity exports by establishing more favorable environments for private investment in downstream agricultural processing, manufacturing, and services to help expand job creation, accelerate long-term growth, reduce poverty, and minimize vulnerability to price volatility.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory