IMF says Nairobi must bring inflation down

When President Mwai Kibaki took office in 2002, economic growth was less than 0.6 per cent.

Steady improvements including a purge of bloated state payrolls helped boost spending on development. But many of those gains were lost in the bloody turmoil of post-election violence in December 2007 and January 2008.

Since then the coalition government of President Kibaki and Prime Minister Raila Odinga has regained much of its economic momentum with a new constitution and an ambitious plan to transform Kenya into a globally competitive middle-income nation by 2030.

The Vision 2030 plan envisions annual 10 per cent growth with a 50/50 split between recurrent and development spending.

Current economic growth – which had been on target for 5 per cent – slipped to 4.3 per cent on a sharp jump in prices and unexpected volatility in the Kenyan Shilling, which lost nearly 25 per cent of its value in 2011 to reach a record low of 107 to the dollar.

The Central Bank of Kenya raised its lending rate from 6.5 per cent to 18 per cent in less than three months as the government moved to tighten liquidity and halve commercial banks' trading in foreign currency.

The ensuing inflation sparked strikes by doctors, nurses, and teachers as Kenya's trade deficit widened to more than Ksh 225 billion in the third quarter of 2011.

A public opinion survey commissioned by the African Union's Panel of Eminent Personalities shows that higher prices have overtaken political and legal reforms as the leading threat to national stability with 76 per cent of respondents most concerned about rising living costs compared with only 10 per cent for corruption and 7 per cent for unemployment.

Despite two years of drought and higher-than-expected consumer prices, the IMF says Kenya's economy is continuing to expand, though “sustaining high growth will require addressing macroeconomic vulnerabilities."

The IMF's executive board topped-up its extended credit facility, bringing the total to more than $760 million.

Planning Minister Wycliff Oparanya says good rainfall and the Kenya Shilling's rebound should push overall economic growth for 2012 above five per cent.

“Rising food prices and high oil prices affected our growth for 2011,” Oparanya says. “But we are very hopeful that with a lot of rain, our economy is going to recover.”

That recovery will be built on Kenya's traditional strengths in tourism and agriculture as well as its position at the center of East Africa finance.

Tourism was especially hard hit by the post-election violence, dropping nearly 47 per cent. But the strong brand of Kenyan safari and beach holidays has tourism again accounting for about 11 per cent of GDP, bringing in more than two million arrivals in 2011.

The Vision 2030 plan envisions a tripling of tourism earnings from 2007 levels with 2012 expected to top three million international arrivals. Expansion is underway at both Moi International Airport in Mombassa and Jomo Kenyatta International Airport in Nairobi.

Kenya Airways topped three million passengers for the first time in the 2010-2011 fiscal year  with net profits up more than 73 per cent, exceeding $1 billion in turnover. KQ is buying ten more Embraer E190 jets to begin service in 2012 and has orders for nine of the 787 Boeing Dreamliners for delivery in 2013.

Kenya Tourist Board director of marketing Jennifer Opondo says Novair charter flights from Stockholm to Mombasa have resumed.

“We are excited that this airline is back in Kenya at a time when there is increase tourist number flows from the Nordic states to Kenya,” she says.

Kenya Wildlife Service is spending Ksh150 million to revive coastal tourism areas, improving the quality of the beach along the Mombasa Marine Park and Reserve with 35 beach cleaners, more beach patrols, and more life guards.

“In revamping the beach, steps have to be taken to restore the lost glory that has been associated with our pristine white sand beaches,” says KWS Senior Warden Arthur Tuda.

Coffee, tea, and horticulture dominate an agricultural sector that accounts for one-quarter of Kenya's GDP and employs more than five million small-scale farmers who account for 65 per cent of total exports.

As the world's fourth-largest producer and its third-largest exporter, tea earnings for 2011 rose nearly 40 per cent to Ksh 97 billion.

The federal government wrote off Ksh 2 billion in bad loans to coffee farmers but were unable to cover Ksh 5 billion in debts owed by tea farmers because they were private loans taken by the Kenya Tea Development Agency from Barclays, NIC, Equity, Cooperative,and Stanbic banks.

Horticulture continues to expand with roses, carnations, and lilies taking a larger share of a growing European market. Sugarcane, maize, wheat, rice, and cotton involve firms including Del Monte, Mumias Sugar, and Bidco Refineries.

The Fresh Produce Exporters' Association of Kenya says one of the biggest obstacles to further expansion is the price of electricity. The Kenyan Association of Manufacturers says its members are paying power bills that are twice those paid by competitors in COMESA rivals Egypt and South Africa.

KenGen says it is working to reduce those costs by as much as 30 per cent by 2014 with new investments in geothermal power in the Rift Valley at Olkaria.

“In order to meet the growing energy demands in the country, we are exploring other sources,” says KenGen managing director Edward Njoroge. “The country has great geothermal potential which we intend to fully exploit.”

Current geothermal production at Olkaria is about 115 MW. India's KEC International is designing and installing a new sub-station and transmission lines. Two new power plants are each expected to generate an additional 140 MW.

Kenya's Geothermal Development Company says more than 20 firms have expressed interest in developing proven steam wells at Menengai, where there could be another 400MW from 120 wells within four years.

With help from the French Development Agency, the World Bank, the African Development Bank and the European Investment Bank, Kenya has already drilled several test wells at Menengai. The GDC is also looking to open up sites in the Bogoria-Silale area with the potential to generate as many as 800MW.