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How to kick-start Kenya’s second growth engine

Wolfgang Fengler's picture

Last year, Kenya’s economy was behaving like a plane flying through a storm on one engine. After a lot of turbulence, especially when the shilling reached a record low against the dollar, the Central Bank intervened forcefully, and brought the plane back to stability.

But Kenya’s exchange rate woes are just the tip of the iceberg (see figure). Kenya’s big challenge is to reduce the gap between the import bill and exports revenues, what economists call the “current account deficit” (which remains large, even when services—such as tourism—are included). Last year, the deficit reached more than ten percent of GDP, approximately Ksh 400 billion (US$ 4.5 billion). This is larger than Greece’s.

The East African ride to Middle Income

Wolfgang Fengler's picture

You have embarked on a long train ride in Africa. The train is in bad shape, the ride is bumpy and breakdowns frequent. You wonder when you will arrive at destination or if you ever will. But after a tortuous first half of the trip, the train is starting to gain speed. There are still a number of unnecessary stops but the destination is now in sight and passengers are becoming upbeat. Just as the train is about to enter the station you are overtaken by three trains, which had been accelerating even faster.

This train could be Kenya in East Africa’s race to Middle Income. The country remains the richest in East Africa and with almost US$800 income per capita is the closest to meeting the international Middle Income threshold of US$1000.  But its EAC partners Rwanda, Uganda and Tanzania are catching up fast.

Tanzania: Building bridges through education and small businesses

Jacques Morisset's picture

Attracted by the prospects of large unexploited natural gas reserves in the south of Tanzania, big players are in town. The British Gas Group has publicly announced that it may invest over US$35 billion in the next 25 years – 1.5 times Tanzania’s current GDP. Policymakers and donors are jockeying to position themselves and understand what is at stake.

The excitement is well founded but perhaps a little bit premature. According to the most optimistic projections, revenues from natural gas will not materialize for 5-7 years. Moreover, international experience shows that commodity-driven growth does not guarantee success. The Tanzanian authorities are therefore right to prepare for the future by setting up the fiscal and financial rules required for future transparent and rational use of these funds now. They should not forget also to focus on the coming 5-7 years because the economy is facing a number of challenges.

The effects of the Euro zone crisis on the CFA franc zone: a View from Cameroon

Raju Jan Singh's picture

For French, click here.

As the sovereign debt crisis is unfolding, many are wondering what could be its effects on the economies of the CFA franc zone, a part of Africa with close relations with Europe, especially France. In the case of Cameroon, the Euro zone still represents the main market for the country’s exports and hosts the largest community of Cameroonians abroad.

La crise de la zone euro et ses impacts sur l’Afrique sub-saharienne

Shanta Devarajan's picture

Lors d’une mission au Mali, j’ai présenté les constats du dernier « Pouls Africain » à un séminaire avec une centaine de participants, y inclus le ministre des finances du pays.   J’ai soulevé quatre points:

Africa’s 2012 growth prospects appear bright, but downside risks could dampen momentum

Punam Chuhan-Pole's picture

Sub-Saharan African countries bucked the slowdown in the global economy and grew at a robust pace in 2011 (see Africia's Pulse, February 2012 Update).  

The region’s output expanded by an estimated 4.9 percent, faster than in 2010 and just shy of the pre-crisis (average of 2003-08) level of 5 percent.  Excluding South Africa, the regional growth rate was 5.9 percent.  Particularly notable is the fact that this growth was widespread:  over a third of countries posted 6 percent or higher growth; another 40 percent grew at between 4-6 percent.  Equally important is the fact that several countries saw sustained growth rates of over 6 percent a year in both 2010 and 2011.

So what can Sub-Saharan Africa expect in 2012?  Barring a serious deterioration in the global economy, the outlook for the region seems bright, with a pickup in GDP growth to 5.3 percent in 2012 and 5.6 percent in 2013.  High commodity prices and strong domestic demand, especially buoyant private consumption, are expected to sustain the expansion.

But these factors also point to Africa’s vulnerability. 

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

Landlocked or Policy-Locked?

Aaditya Mattoo's picture

We are used to thinking of landlocked countries as victims of geography.  We worry that Ethiopia, Mali, Rwanda and Zimbabwe, among others, cannot benefit fully from flows of trade, tourism and knowledge.  But do these countries use policies to improve connectivity and offset the handicap of location?

A new services policy database shows a perverse pattern. Landlocked countries tend to restrict trade in key “linking” services like transport and telecommunications more than other countries. 

Zambia, for example, bravely liquidated its national airline in 1994, but it still denies “fifth freedom rights” to Ethiopia to fly the Addis Ababa-Lusaka-Johannesburg route, and to Kenya to fly the Nairobi-Lusaka-Harare route.  In fact, the restrictive policies of many African countries make a mockery of the decade- old Yamoussoukro Decision (and a subsequent COMESA agreement) to liberalize air transport.

Boosting Intra-African Trade: What Role for External Trade Regime?

Dominique Njinkeu's picture

African Head of States and Governments will convene in Addis Ababa, Ethiopia later this month to launch a continent-wide free trade agreement (CFTA). The summit will focus on solutions to the numerous impediments that hinder intra-African trade: inefficient transit regimes and border crossings procedures for goods, services and people; poor implementation of regional integration commitments.

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