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Drought threatens return of good times in Kenya

January 19, 2011
“Trying to forecast the macro-economic fundamentals of the Kenyan economy requires a good dose of meteorological skills,” a Kenyan economic analyst once told me.

He was referring to the agriculture sector’s outsized influence on east Africa’s largest economy. Farming, including coffee and tea growing, accounts for a quarter of output and employs nearly two-thirds of the population.

Over a third of electricity is generated from dams which are fed by rainfall, with drought leading to outages, which affect manufacturers and other firms.

While any slack in agriculture usually results in a reduction in the overall growth rate, shortfalls in food items usually drive inflation higher. Inflation rose to 4.5 percent in December from 3.8 percent in November.

And so officials, investors and pundits have been fixated with the outlook for rains this year to determine whether a celebration of third quarter economic growth data and an optimistic forecast for 2011 were a bit premature.

The economy grew by 6.1 percent during the period from 0.5 percent in the same quarter of 2009, surpassing analysts’ expectations of about 5 percent and driving up shares of firms that are closely linked to economic performance like banks.

Officials forecast the country could return to a growth trajectory interrupted by a bloody post-election crisis in early 2008.

But a very dry spell in the country this year has made that outlook more uncertain.

Millions face famine in parts of the country. Executives in the energy sector have vowed to ensure electricity supplies are not interrupted by drought.

Politics could also have a bearing on the economy. All eyes will be on the International Criminal Court at The Hague, which is expected to rule in March whether two cases involving six prominent Kenyans accused on roles in the 2008 violence will be brought to trial.

In reaction to opening of the cases last month, members of parliament voted to pull Kenya out of the treaty establishing the court, a move that could deter investors who would view it as a vote for impunity.

But Prime Minister Raila Odinga wants the country to stay in the ICC, creating uncertainty as to what action will eventually be taken.

What are your expectations for the Kenyan economy in 2011? Will drought crimp its outlook?

Picture: Construction workers erect a new bridge along the Nairobi-Thika highway project. REUTERS/Thomas Mukoya

2011 holds quite a good level of growth with it.The country is back on its feet after the disputed 2007 polls,which disrupted the steady growth we were experiencing earlier.
The rains are predicted for aprill,and hopefully if it does then the effects of the drought wouldnt be that much.

Posted by smally | Report as abusive

Its not just about the drought. The economic fundamentals of this this country no longer make sense. Monetary policy is not well managed. There is rampant inflation coupled with crazy monetary easing (low interest rates) and out of control government expenditure (increasing budget deficits) fueled by unrealistic political promises.
This is heading us too hyper inflation, collapsing currency, public misery,hunger, riots and ultimately political instability. Watch this unhappy space. Bad economics repeating itself…this time in Kenya

Posted by Wagathee | Report as abusive

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