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The impact of the Euro crisis on Kenya

Wolfgang Fengler's picture

Kenya exports flowers to EUA luxury liner, out on a peaceful vacation trip, encounters a small rock causing the huge vessel to sink. Chaos erupt and the captains abandon the ship, failing to manage the unfolding crisis and resulting in unnecessary deaths of passengers. One cannot help but compare this sad incident with the state of European economic affairs. As the ship sank on the coast of Italy’s shores, the credit rating of several EU-countries was being downgraded.

The events in Europe come as a reminder of the tremendous changes that have taken place worldwide over the past decade. Economic power is shifting from West to East, and from North to South. The big loser has been Europe, while emerging markets, especially in Asia, have reaped the lion’s share of the benefits. A decade ago, the possibility that China would come to the rescue of a bankrupt EU-country would have sounded outlandish-- no less inconceivable than saying that Nigeria could bail out China 20 years from today!

Some African countries may feel a sense of Schadenfreude as they witness the challenges faced by former colonial powers. European policy makers are no longer in any position to lecture their African counterparts. In fact, if you look at the quality of macroeconomic management over past years, many European countries could learn a lot from Africa, especially on how to handle fiscal deficits and debts. If Kenya was a member of the EU, its debt levels would be among the lowest in the union.

In reality though, Europe’s economic woes will create additional challenges for Kenya’s economy in 2012, a defining year for both this country and the Euro-zone

Why has the Kenyan Shilling declined so sharply?

Wolfgang Fengler's picture

How would you feel if, after a normal take-off, you noticed one of the engines on your plane wasn’t working properly? What if you then found out the other engine was overheating? Now suppose the captain announces that you should buckle-up because the plane is about to meet an approaching hurricane?

This is what Kenya’s economy is currently going through. The country is in the middle of a perfect storm, and the declining Shilling is the most visible manifestation of Kenya’s economic woes. Why has the Shilling been falling so much and so unpredictably?

The main reason is that Kenya’s economy is increasingly imbalanced: the country is importing too much and exporting too little.