Monday, July 28, 2008

Economy in the midst of headwinds

After the clashes earlier this year, some of us our confident that because of the resilience of our private sector, the economy would get back on its feet very quickly. 6 months later:
  1. Inflation in the 20s: Has meant less disposable income as families have to spend more on the basics or most likely, reducing their consumption of these basics.. This means less can be invested or saved. If there is less being saved/invested, you effectively have less capital for new projects as it now costs more to get the funds. 2ndly, reduced consumption means companies earn less or pay more to get higher turnover. Lower margins mean lower profits. Inflation can be reduced by aiming at the cause. In this case, we have reduced supplies of goods to supermarkets, grocers and so forth due to the destruction of the North Rift. Crops will take a while to grow and maybe disrupted by patchy rainfall. Hence GoK importing things like maize. 2ndly, GoK can increase interest rates, but so far I think the inclination is not to do so.
  2. Safaricom IPO-induced liquidity crunch: Out of the Ksh236bn raised on the IPO, I'd conservatively say that 30% was done via loans which would have meant taking out a lot of liquidity from normal lending activity. Another 50% would have been a mixture of savings and investments and the remainder from shares. With quite a portion of this still stuck in the banks, the economy is experiencing some liquidity crunch. This is forcing banks to pay more on the interbank lending. Several have already raised interest rates on loans. For now, refunds will need to be speeded up but going forward, IPOs must be done differently.
  3. Electricity: Last year, at the height of the annual tariff squabbles between Kengen and KPLC, coldtusker and myself argued that the solution was for GoK to go ahead and allow KPLC to charge consumers more straightaway. Electricity generation is too important to be left to GoK and KenGen should be allowed to earn so it can re-invest. However, political expedience (i.e. suicide) came in and GoK agreed to pay KenGen instead so that voters didn't runaway. So this year, what should have been done last year has been introduced at the worst possible time. If the increase to individuals is anything to go by, some foreign companies will definitely eb reconsidering their location in Kenya. A doubling of electricity costs is nothing to be sniffed at, What should be done? Well, its a good decision but the timing is all wrong and I think GoK should consider continuing the subsidy for this year at least so that the economy gets back on its feet faster.

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