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Kenya’s Economic Growth Declines As Presidential Election Hangs

Kenya’s Economic Growth Declines As Presidential Election Hangs

Kenya’s economic ordeals continue to worsen following the Supreme Court’s decision on 1 September to nullify the results of

the 8 August vote and hold an election re-run.

Deferred focus on economic policy, overshadowed by prolonged political uncertainties, will exacerbate an already challenging economic situation, which has been under severe strain since the start of the year due to an ongoing drought in the north of the country. The country’s trials are likely to persist and weigh heavily on economic performance going forward.

The re-run, scheduled for 17 October, followed a legal challenge to President Uhuru Kenyatta’s victory by the main opposition party led by Raila Odinga. In a ruling backed by four out of six judges, the Supreme Court found that irregularities and illegalities had botched the credibility of the outcome, with a mismatch found between the final vote count and the results declared at polling stations.

In a decision that sets a historic precedent, the Court stated that Kenya’s national electoral commission—the Independent Electoral and Boundaries Commission (IEBC)—had “failed, neglected, or refused to conduct” the presidential election in accordance with the constitution.

The unexpected verdict set off jitters in financial markets, and trading was suspended for a brief period after the Nairobi Stock Exchange 20 Share Index—which comprises the country’s most heavily traded stocks—saw more than 5% of its value wiped off in panic selling.

Presidential Aspirants Uhuru Kenyatta (left) and Raila Odinga (right)

With only a few weeks until the re-run, tensions are running high over the integrity of the upcoming vote, and if it will even proceed according to schedule, as the electoral commission is mired in infighting over who to pin the blame for the failure of the most expensive election in the country’s history.

Moreover, the opposition party has vowed that it will not participate in the re-run unless major reforms are instituted in the electoral commission. Amid the unending political saga, the stock market has been hurled into a downward trend over the past month.

While uncertainties prevail on the political front, the economy will continue to suffer. Economic activity in the private sector was hit by a slump in demand amid escalating concerns over prolonged instability, reflected by a plunge in the PMI, which dropped to a record low in August as unemployment continues to climb.

Also, reduced economic activity due to falling domestic and external demand amid amplified political tensions, high inflation, etc. are being compounded by the impact of the devastating drought and have already severely dented economic activity. The economy expanded at a weaker pace of 4.7% in Q1, down from 6.1% in Q4 2016, derailing the previous year’s strong growth momentum.

Recent data indicates the economic picture becoming bleaker: The PMI contracted for a fourth consecutive month, slumping to an all-time low in August, as the worsening drought stokes fears of a famine. On 7 September, the United Nations and its humanitarian partners made an appeal for USD 106 million to step up relief efforts.

Kenya Central Bank Maintains Policy Rate

In the midst of the heightened political tensions from a protracted election period and worsening drought, the Central Bank maintained the main policy rate at 10.00% at its 18 September monetary policy committee meeting, in line with market expectations.

Despite inflation having surpassed the Bank’s upper target bound of 7.5% in August, the Bank decided to hold the rate put. It was motivated by expectations of improved food supplies in anticipation of short rain spells and government aid measures, which are expected to reduce food prices going forward and hold off pressure on inflation.

Central Bank of Kenya

Food shortages due to a pre-election surge in demand and transport disruptions in the aftermath of the now-annulled 8 August presidential election triggered a rise in inflation to 8.0% in August from 7.5% in July. Demand pressures remain subdued, however, evidenced by a stable core inflation rate below 5.0%.

Higher inflation is seen as a temporary phenomenon that is expected to ease in the near term and return to the target range, motivating the Bank’s decision to maintain its stance. However, recent reports of lower rainfall failing to offer respite to the severe drought, raising alarms of a potential famine, cast a shadow of doubt over the Bank’s optimism and suggest a continued rise in inflation as disruptions to agricultural output persist.

The drought, combined with on-going tensions on the political front, has thrust Kenya’s economy into sustained turbulence.

Despite optimism about the trajectory of inflation in upcoming months, with inflation remaining elevated and currently above the Bank’s target range of 2.5%–7.5%, the Bank is constrained and unable to lower rates to support a revival in growth, preferring an unchanged stance in order to anchor inflation expectations.

The Bank’s statement did not contain substantive forward guidance, only stating that future measures will hinge on the close monitoring of domestic and global developments. It is predicted that rates will rise slightly towards the end of the year in order to keep inflation in check. An easing cycle is anticipated in 2018 as price pressures recede.

Deteriorating prospects prompted panelists to downgrade their GDP growth forecasts for the eighth consecutive month in September. The panel projects growth of 4.8% in 2017, which is 0.1 percentage points below last month’s forecast, and expects growth to accelerate to 5.3% in 2018, which is down 0.2 percentage points from the previous month’s forecast.

The possibility of a recovery this year seems far out of sight as political uncertainties persist and social unrest is likely to linger. The U.S. recently issued a travel alert to Kenya over possible violence ahead of the election re-run, and other countries are likely to follow suit. Another contest to the results, with a further stretch in uncertainties, would be calamitous for the economy.

Even in the event that the victory is upheld, measures to revive growth will take time to come into play and are unlikely to translate into a stronger economic course this year. Stéphane Colliac, Senior Economist at Euler Hermes sees “a protracted period of sub-potential growth led by weak leadership and policy slippages” as the main risk to a return to robust economic dynamics.

Political tensions and social unrest are likely to persist after the election. Combined with the adverse effects of the ongoing drought, they will continue weighing heavily on economic activity and likely keep growth momentum muted into next year.