BY GEOFFREY NYAMBOGA
The recent rapid depreciation of the Kenya shilling highlighted major fundamental flaws in the management of country’s economy, it brought to core questions on the sustainability of the current economic model.
President Kibaki tagged Economic reform as a key pillar of his presidency; many years of economic stagnation under retired president Moi were overturned in 2003 when the country registered a positive economic growth and continued to a high of 8% in 2006/2007. The impressive growth was however undermined in 2007/2008 by the post election violence.
The trade deficit is blamed for depreciation of the Shilling against the dollar and other major currencies. The central bank and treasury have put in motion various measures that should see the shilling stabilize against the dollar, though it was too little too late. The treasury and CBK stand accused of slow policy action that could have mitigated the extent and effects of the depreciation.
The government is fallaciously convinced that the real quick fix lies with the flooding of the market with the dollars, the current talks with IMF will enjoin a request for quick disbursement to fund FX reserves. The IMF team is way too smart to yield to any substantial levels of the request and as usual at best they may loan half of the request.
The shocking fact is that there are no quick fixes for a systematic situation. There is no one specific course that can be attributed to the chaos in the FX market, borrowing from the IMF to fund the FX reserves will ring fence only one of the problems while others will be roaming large. Sourcing funds from IMF to increase FX reserves is not sustainable; it will only work for few months at its total best.
The strategy adopted by CBK in handling the problem revealed a serious weakness in the person of governor, however it is not only about the Central Bank being unable to execute policies BUT the fact that treasury’s budget numbers look bleak as revenue collection to bridge the budget deficit is glaring.
The famed 1 trillion budget by finance minister is a leading cause of the shilling’s depreciation, KRA has not been able to collect sufficient revenues to fund the bloated public expenditure hence the government has continuously resorted to public borrowing (monetizing debt). This basically means that the government lends money to itself or just to put it plainly the government prints paper money. The printing of money to finance the budget has lead to more Kenyan shillings into the system hence the supply side economics dictates that there will be devaluation of the shilling.
Sustainable Solution
The government should seek sustainable ways of diversifying the exports, dependency on agriculture and tourism is sure way to remain a factor based economy and attaining goals of vision 2030 will just be a dream on paper. A 21st century economy worth mention at the global stage should aspire to be efficiency driven.
The government MUST as a matter of urgency address the competitiveness of the local industry; what can the government do to attract Foreign Direct Investment (FDI)?
We need a crisis agenda to get out of the trade deficit and a growth agenda that involves a radical and ambitious strategy of transforming the economy from a factor based to efficiency based economy.
The strategy should involve identifying growth drivers and optimal use of available resources in harnessing the country’s economic potential and enhance the overall global competitiveness.
The key growth drivers for Kenya’s sustainable global competitiveness include:
Innovation to power efficiency: Innovation will help our local manufacturers to produce high quality products competitive at the global market. It will enable local manufacturers to produce efficiently hence cutting on production costs.
Competitive products will guarantee a place at the global markets presenting a new stream of exports that will earns us more dollars. Continuous Innovation will ensure transformation from raw production to high tech products for global market.
Foreign Direct Investment (FDI): The government should set in motion policies that will attract foreign direct investments (FDI). The famed emerging economies of China, India and Brazil (BRICS), are powered by a huge in flow of FDI from Europe and USA. Western economies have matured and investors are looking for growth opportunities, the government should capitalize on the current dynamics to position the country is an investment destination with a high growth pontential.
Kenya has the capacity to be destination of choice for global investors if appropriate incentives are offered to foreign investors. Incentives will see foreign businesses establish production centers and R&D centers here in our country. This will provide employment opportunities, knowledge transfer to local companies and also produce products for export.
Logistics Hub: We are strategically located to handle logistics for the East and Central Africa, The port of Mombasa is a gold mine wasting away due to politics of tribalism, In order to accelerate the goal of a regional logistical hub, the expansion of Mombasa port should focus on handling more traffic and accommodating emerging large vessels.
In order to attain higher levels of efficiency, critical port services must be privatized. This is in line with world trends where almost all ports are operated by private enterprises. Efficiency will promote the port to a regional hub and a world class sea port of choice. The expansion will accommodate the expected Oil exports from Uganda and Southern Sudan.
Construction of the Lamu free port: Lamu Island is strategic with natural deep draft of 18metres and capable of berthing modern vessels. The port construction should commence immediately to help ease expected congestion at the Mombasa port. The ports will generate millions of dollars in fees annually.
Expansion of major airports JKIA and Moi International Airport: Nairobi is already a aviation hub for East Africa, however with expected rise of industrial clusters in the region, a more robust aviation industry is of neccessity.
21st Century Infrastructure: Good road network will reduce transport costs to farmers and companies; currently a high percentage of cost of production in Kenya is attributed to high costs of transport occasioned by bad roads, inefficient railway transport and delays at the port of Mombasa.
An efficient transport system will enhance competitiveness locally and globally. The Northern corridor linking Southern Sudan, Ethiopia and Uganda to the yet to be constructed free port city of Lamu should be pursued as with urgency.
Nairobi as a regional finance center and other professional services: The banking industry is growing fast and capable of offering specialized and sophisticated services in the region. We have a super talented workforce that can offer services to the neighboring countries. Professional services can be a new frontier of our economic growth and a source of foreign exchange.
Oil Refinery in Lamu: A new oil refinery to be set up in Lamu will offer its services to Uganda and Southern Sudan, the two countries will pay millions of dollars per year for the service. The refinery will also present a chance for us to source oil at preferential rates if our membership to regional economic blocks subsists.
Green Energy: The race is on for safe, clean, affordable and reliable energy supply and Kenya must meet its medium term energy supply requirements while innovating for longer term renewable. KenGen should seek to diversify its energy generating sources;
Northern Kenya has enormous solar energy capacity that can be tapped to supply energy to the national grid. Additional energy generation will cushion the hydro power sources which are not sustainable due to climate change occasioning prolonged droughts. A surplus energy generation will bury power rationing, reduce tariffs leading to low production costs for locally produced goods making them cheaper locally and competitive at the global market.
Global outsourcing destination; the increasing wages in traditional global sourcing countries like India and China is making big corporations relocate back office operations, R&D centers and productions plants to countries like Kenya to take advantage of cheaper wages and the growth prospects in the region.
Nairobi can be a global sourcing destination for business process outsourcing (BPO) a feat that can be attained with the current national skills set. However to gain visibility in sophisticated IT industry the government needs to create a pipeline of highly skilled and trained IT professionals who will propel the industry to compete against outsourcing champions. Skills availability will expand technology and scale of production by foreign enterprises locally.
Local universities and institutes of higher learning should be empowered to effectively participate in R&D programs. Well planned R&D programs will attract partnerships from companies. The joint research programs will lead to innovation, new products, efficiency and it will encourage staff mobility between various sectors
Mechanized Agriculture; the government need to open new frontiers for agriculture through mechanization/Agriculture. It is a shame that we import maize, beans and rice all that we can produce abundantly locally. Sustainable food production will save us a lot of dollars used to import food. With the world population set to hit seven billion, and threats of global warming biting hard, it is high time Kenyans re-evaluated their stand on GMO.
In summary, our country has a chance to improve the livelihood of Kenyans by seizing the opportunity presented by the economic stagnation of leading economies. Global competitiveness should be the ultimate goal for a sustainable surplus balance of payments.
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