Global Financial Crisis Discussion Series. Paper 17: Kenya Phase 2

Abstract

The objective of this paper is to update and extend the examination of the effects of the global financial crisis, possible impacts and the scope and limitations of current policy responses. It should be noted at the outset that the country faced several other crises in 2008 and 2009, so it has been difficult to disentangle their effects from those of the financial crisis.

The paper addresses a whole range of issues. For example, it looks at a number of indicators to conclude that the banking system seems poised to withstand the crisis, as the fundamentals remain intact. Banks’ profitability has substantially declined, however. In the capital market, by March 2009 the Nairobi Stock Exchange (NSE) 20-Share Index had fallen to a near seven-year low. It improved between March and June 2009, slumped in July-September of the same year and increased marginally by about 5% between end-September and December 2009 (0.8% in October, 4.1% in November and -0.1% in December 2009) as investors focused their portfolio on the bond market. Data on foreign direct investment (FDI) show a substantial decline in 2008 to a more normal level ($50 million) following an upsurge in 2007.

From a major decline in 2008, the tourism sector experienced some recovery in 2009. According to some estimates, by November 2009 tourism arrivals and earnings were up 90% from 2008. Tea exports, on the other hand, increased by 5.4% and earnings by 36.2% in 2008. Despite a production shortfall in 2009, earnings from tea exports increased by 17% in the first half of 2009 as a result of increased tea prices. Horticultural exports increased by 4.5% and earnings by 24.6% in 2008. Between January and August 2009, however, output declined, attributed mainly to a decline in flower production, which dropped 30% by October 2009, with exports moving in the same direction. The volume of coffee exports declined by 24.5% in 2008, with coffee earnings roughly unchanged. Coffee production peaked at 130,000 metric tonnes in the 1988/89 crop year, systematically declining since then. Less than 54,000 metric tonnes of coffee exports were expected in 2009.

Remittances from the Kenyan diaspora increased by 6.6% in 2008. In the first 10 months of 2009 they declined slightly, to $504.6 million, compared with $527.1 million in the same period in 2008 but more than $476.7 million in 2007. The database of the Organisation for Economic Development’s Development Assistance Committee (OECD-DAC) shows a substantial increase in foreign aid to the country in 2008. Kenya received $1523 million in 2008 (compared with $1345 million in 2007), with committed funds fully disbursed in 2009 compared with only 53% in 2008, reflecting the urgency of the situation.

With the global financial crisis and other crises, current account and budget deficits have widened. The current account deficit rose from $2.12 billion in 2008 to $2.388 billion in the year to August 2009, affecting the exchange rate and foreign exchange reserves. Implementation of the 2008/09 budget also faced numerous challenges, which included inability to achieve revenue targets and additional drought-related expenditures. In the 2009/10 fiscal year, the government adopted an expansionary fiscal stance. A budget deficit of KSh109 billion (about 6% of gross domestic product (GDP)) is envisaged, with concerns that heavy borrowing will crowd out lending to the private sector.

Kenya has implemented various monetary and fiscal policies to deal with the crises. There have also been attempts to design cash transfer programmes targeting the very poor, the elderly and orphans and vulnerable children. All the transmission mechanisms discussed above have affected growth. In 2008, the growth rate declined to 2.1%. Growth in the first quarter of 2009 was 4%, declining to 2.1% in the second quarter. Reduced economic growth has led to reduced employment and increased poverty in the country.

Citation

Mwega, F. M. Global Financial Crisis Discussion Series. Paper 17: Kenya Phase 2. ODI, London, UK (2010) 40 pp.

Global Financial Crisis Discussion Series. Paper 17: Kenya Phase 2

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