Navigating the Storm, Delivering the Promise
December 8, 2011
Kenya’s defining moment for new political space and economic prosperity
Nairobi, December 8, 2011—Kenyans will be hard pressed next year to deal with multiple challenges including elections under a new constitution and economic shocks transmitted from the global economy, says a new World Bank economic report.
The Kenya Economic Update says 2012 will be a defining year for Kenya due to national elections, the establishment of a new system of devolved government in 47 counties under a new constitution, and deteriorating global economic conditions.
But if Kenyans manage these challenges well, they may set the foundation for a more prosperous future, says the report, which is published semi annually by the Bank’s Kenya country office.
The theme of the report, the fifth in a series, is Navigating the Storm, Delivering the Promise, with a special focus on Kenya’s momentous devolution. The indicators of brighter prospects include peaceful elections and transition to a new government, successful introduction of a new system of devolved government and continued growth during a global financial crisis.
“Kenyans have another opportunity to turn political and economic challenges into the foundations of a better future,” says Johannes Zutt, World Bank Country Director for Kenya. “The Government has managed past economic challenges well, and can do so again. The key challenge for 2012 will be managing the political transition well, to avoid a repeat of the post-election violence seen in 2008 and to ensure continued growth in investment and job creation.”
Growth prospects for 2011 and 2012 are lower than earlier predicted. A growth rate of 4.3 percent is projected for 2011, rising to 5.0 percent in 2012 if Kenya succeeds in managing risks and avoids price and currency controls that distort economic activity. It is expected that growth will mainly be driven by services, tourism and recovery in agriculture.
“There is an urgent need for Kenya to contain macroeconomic pressures by reining in inflation and suppressing growth in debt,” says Jane Kiringai, Senior Economist, and one of the lead authors of the report. “Tight monetary policies and fiscal prudence will be necessary in economic management over the short term.”
The economy is experiencing turbulence caused by internal and external factors. High food and fuel prices, the recent drought in the Horn of Africa (which has been followed by heavy rains and flooding) and the euro crisis have further weakened Kenya’s external position this year.
“The problem remains that Kenya is still running on one engine, with high imports but weak exports,” says Wolfgang Fengler, Lead Economist for the World Bank’s Kenya program. “Kenya will succeed economically and be less vulnerable to shocks only if it balances its economy through stronger exports.”
The Economic Update urges Kenyans to seek a more diversified export base beyond tea, tourism and horticulture, and identifies textiles, chemicals and automotive parts as possible areas of growth.
Moreover, it calls on Kenya to continue improving its infrastructure and investment climate so that it can exploit new markets, including Asia, more effectively. Increased domestic energy generation, including especially geothermal energy, will play a critical role, as it will reduce dependence on expensive fossil-based thermal energy.
In responding to the economic crisis, Kenya’s policy makers will need to create the space necessary to deliver on the promise of devolution, while protecting public investment. The devolution program, one of the most ambitious of its type in the world, introduces reforms that will impact Kenya’s social stability, service delivery and fiscal health for the foreseeable future.
“The greatest challenge of the devolution is to ensure fair distribution of national resources in response to the peculiar needs of the counties and to balance national interests,” says Aurelien Kruse, Economist and one of the co-authors of the report. “The objective will be to equalize opportunities for all Kenyans while appreciating that economic growth will be concentrated in certain areas.”
An effective devolution program will ensure transparency and accountability at local levels. It will also include capacity building support for disadvantaged counties, especially the remote and least-developed ones, to strengthen their ability to manage devolved funds effectively and transparently.
The KEU is produced by the Bank in collaboration with Economic Round Table members, including the Central Bank of Kenya, the Kenya Revenue Authority, the Ministry of Finance, the Ministry of Planning and National Development, the Kenya National Bureau of Statistics and the Kenya Institute for Public Policy Research and Analysis and the International Monetary Fund. The Australian Embassy also provided support for the December 2011 edition.
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