Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya’s Inflation Rate up to 28.2% in September 2008, GDP Growth Recovers in Q2

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Kenya’s Inflation Rate up to 28.2% in September 2008, GDP Growth Recovers in Q2

Thursday, 02 October 2008

Unrelenting price increases in Kenya are becoming a growing concern for business as the economy recovers from the political violence in early 2008.

According to the Kenya National Bureau of Statistics (KNBS) in a statement released on 30 September 2008, the overall year on year inflation rate increased from 27.6% in August 2008 to 28.2% in September 2008. Underlying inflation, i.e. excluding food prices, rose more modestly from 13.1% to 13.3%. On a monthly basis, food items (2%), housing costs (2%) and medical goods and services (1.4%) showed the strongest price increases. Year on year, food and non-alcoholic drinks (37.2%), fuel and power (31.6%), transport and communications (19.1%), alcohol and tobacco (15.6%) and medical goods and services (14%) had the largest price increases.

However, the Kenyan economy appears to be recovering from the economic impact of the post-election crisis in January and February 2008. The KNBS stated that the economy recovered from a 1.0 % first quarter detraction, caused by the post-election crisis, to register 3.2 % year-on-year growth in the second quarter. But the KNBS also added that while the second quarter growth reflected well on the first quarter, it was still way short of the 8.9 % figure for the same period in 2007. "This was the lowest growth for the second quarter under review since 2003 when the growth was 0.4 %," it said.

Outlook

It appears unlikely that the initially very optimistic GDP growth projections of Central Bank of Kenya (CBK) governor Njuguna Ndungu and currently suspended Finance Minister Amos Kimunya of 6% and more will be met, but at the same time, the growth figures for the second quarter of 2008 show that the economy is, overall, recovering and reprising its upward growth trajectory of 2007. Of course this also depends very much on the individual sectors. Displacements have affected food production considerably, whereas e.g. horticulture appears relatively unscathed. The tourism sector, one of Kenya’s key foreign exchange earners, had been hit severely and will take longer to return to the end 2007 level of bookings, but the construction sector is still going strong. Current growth projections are slightly more positive at 4% to 4.5% than the 3.5% immediately after the crisis. Following their latest mission to Kenya, the IMF projected a good 4% GDP growth for 2008.

But there is no doubt that the high oil and resultant high electricity costs are, indeed, a risk to growth: In an environment where the costs of doing business are high already as a consequence of, for example, weak infrastructure and persistent high crime rates, the latest increase in power prices of a good 100% has become a severe concern for business, and the Kenya Association of Manufacturers (KAM) released a statement (KAM Warns on Effects of Escalating Power Costs )asking government for an intervention, otherwise job losses would become inevitable. The high inflation rate also drives demand for wage increases, which employers will be very reluctant to entertain in the current circumstances.

There are concerns that Kenya’s persistently high inflation rate may, in fact, not be an entirely accurate reflection of price developments since its composition has come under scrutiny. On a regional level, Kenya has registered the highest levels of inflation in the past 14 years and the highest in the region, well above the price increases in Uganda and Tanzania, its main trading partner and neighbours in the East African Community (EAC). Even though rising, inflation rates were at single digit levels in the two countries this year, with Uganda hitting the double digit rates in June to a rate of 11.5% while Tanzania remained in the single digits with 8.5%.

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