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Possible Trouble Brewing for Kenya's Economic Outlook

Customers wait to place their orders at a Kentucky Fried Chicken [KFC] restaurant at the Nakumat junction in Nairobi, Kenya, August 23, 2011.

In Kenya, World Bank officials are forecasting lower-than-expected growth rates for this year and next due to global shocks that have had big impacts on Kenya’s economy, especially imports. Kenya is being urged to expand its export base as one way to boost growth. Not everyone is worried about Kenya’s economic future, however, including a world famous investor who is setting up a new tourism venture.

Kenya’s imports are proving to be problematic for the country’s economy in two major ways. To begin with, there are disproportionately too many. Wolfgang Fengler, lead economist for the World Bank’s Kenya program, said the current account deficit is at minus 10 percent.

“The current account deficit measures exports minus imports. Because imports are much bigger than exports in Kenya, it is negative. It is more negative than Greece. Fortunately, Kenya doesn’t have the same fiscal problems as Greece,” said Fengler.

Imports, exports

According to U.S. State Department figures, Kenya’s exports in 2010 amounted to almost $5 billion, while the country’s imports were valued at $11.6 billion.

Fengler says Kenya needs to diversify and expand its exports, particularly into the area of manufacturing.

“An economy cannot just succeed on tea and flowers alone. No matter how good Kenya is, it needs other sectors to compete to export,” said Fengler.

Obtaining alernative energy

Another major problem is that oil imports are Kenya’s second-largest expense, normally accounting for 22 percent of the country’s total imports, but now rising to 25 percent due to political instability in the Middle East and North Africa region.

The World Bank’s country director for Kenya, Johannes Zutt, said Kenya is very heavily dependent on emergency diesel generation, and urges the government to tap into alternative energy sources.

“There’s tremendous potential for geothermal energy generation, both at Olkaria, which is a proven field, and then Menengai north of Nakuru, which looks extremely promising, and then also for wind generation at Lake Turkana,” said Zutt.

World Bank observations

The World Bank has forecast lower-than-expected growth rates of 4.3% for 2011, from 4.8%. It says if Kenya manages its risks and follows its two main recommendations to expand exports and alternative energy, then it can expect to recover slightly.

“But 2012 - assuming the shocks are mild, or Kenya will navigate through them successfully as it did two years ago - we project a growth rate of 5.0%, which, however, if these shocks materialize, Kenya will only reach 3.1%,” said Fengler.

The World Bank warns what also could hinder Kenya’s growth rate next year is the continuation or worsening of economic shocks, such as inflation, the value of the shilling [local currency] and the current account deficit.

On the political side, the World Bank notes that an instability arising from Kenya’s 2012 elections also could damage growth. If the country’s new constitution is not properly implemented - especially regarding the devolution of power - it warns growth also will be dampened.

Branson's investment

At least one international investor is not worried, though, about Kenya’s political or economic future.

At the same time the World Bank was giving its forecast, Virgin Airlines founder Richard Branson was in Nairobi addressing a conference on being an entrepreneur.

Richard Branson (C), founder of the Virgin Group of Companies, gestures during a ceremony where he was installed as a Maasai elder in the Maasai Mara national Park, 260 km southwest of Nairobi, Kenya, June 2007. (file photo)
Richard Branson (C), founder of the Virgin Group of Companies, gestures during a ceremony where he was installed as a Maasai elder in the Maasai Mara national Park, 260 km southwest of Nairobi, Kenya, June 2007. (file photo)

Branson - whose Virgin airlines recently began flying into Kenya - announced plans to develop a luxury tented camp and game reserve just outside Masai Mara. He said he thinks Kenya is generally economically and politically stable.

“I’m doing my best to get the word out that 99% of Kenya is safe, and hopefully just by coming here myself, that helps send a good message. We’re slightly worried about one or two government taxes which are being proposed, and which will hit the airline industry further, but we’re determined to make a success of it,” said Branson.

Branson said he thinks the African continent as a whole is growing much faster than Europe or North America, and that with the right leadership, the continent can be as powerful as the Far East.