Business Daily (Nairobi)
Washington Gikunju
22 December 2011
A sharp increase in food and fuel prices slowed down growth in the third quarter of the year, raising concerns over the weakening economy’s ability to create new jobs and reverse the rapid fall in household incomes.
High oil prices and a record rise in the proportion of diesel-generated electricity power knocked down gross domestic production (GDP) growth to 3.6 per cent between July and September, compared to a 5.7 per cent growth rate in the same period last year.
Experts predicted an even slower growth in the fourth quarter of this year due to the current surge in the cost of borrowing, which has resulted from the move by the Central Bank of Kenya (CBK) to combat inflation.
“The economic slowdown that started in the second quarter of 2011 spilled to the third quarter,” said the Kenya National Bureau of Statistics (KNBS) in a report released Wednesday. “A number of factors, in particular the sharp rise in oil and food prices, have constrained growth since the start of the second quarter.”
The bureau noted that the rate of inflation averaged 16 per cent during the quarter, emerging as the biggest drawback to growth.Agricultural, manufacturing, wholesale and retail trade and energy sectors all recorded slower growth rates.
Expansion of the agricultural sector — the single biggest driver of the economy — nearly halved to 4.8 per cent from a growth rate of 8.6 per cent in the third quarter of last year.
Growth of wholesale and retail trade dropped sharply to 1.3 per cent from 4.7 per cent, indicating the shrinking consumption power caused by the high cost of living. The financial sector growth lost pace, expanding by six per cent from 10.6 per cent — showing initial signs that the steep rise in interesting rates was taking toll on the lender’s rate of expansion.
“Most of the sectors registered slower growths during the third quarter of 2011 compared to the same quarter of 2010, indicating that the effects of the slowdown had started spreading across the economy,” said the bureau.
The third quarter growth rate was the slowest since 2009, when the global financial crisis and effects of post-election violence dented a five-year economic growth rally that had started with change of the Moi administration in 2003.
The Treasury had projected a revised annual growth rate of 5.3 per cent this year, which now appears out of reach consideration that the expansion of the GPD has fallen below five per cent in the first nine months of the year.
The economy had grown by 4.3 per cent in the second quarter and 4.9 per cent in the first.
Uncertain growth is likely to turn focus on social security concerns, as the shrinking of major sectors of the economy pushes more Kenyans into joblessness.
“We are in a tough position, inflation is rising and the private sector is not creating jobs,” said Joseph Kieyah, an economic analyst at the Kenya Institute of Public Policy Research and Analysis (Kippra).
The urgent need to fight inflation, which crept to 19.72 per cent last month, is likely to hamper efforts to prop up private sector growth.
CBK has raised the benchmark policy rate to 18 per cent, pushing up the average cost of lending to over 24 per cent.
The high cost of lending is likely to discourage businesses and consumers from taking loans, suppressing demand for credit and slowing expansion plans.
“It would not make sense for any company to borrow at the prevailing rates; the big question is what can be done to encourage private sector growth,” said Prof Kieyah.
The Central Bank has tightened monetary policy to tame inflation and stabilise the exchange rate, which depreciated to an all time low of 107 units to the dollar in October.
Political instability in oil-rich Middle East and North Africa has been a wild card for Kenya’s economic policy planners, feeding inflation through the rapid increase in fuel pump prices –which peaked at Sh124 per litre of petrol before easing by five shillings in this month’s adjustments.
Insufficient rainfall compounded the problem by increasing the proportion of electricity produced by expensive diesel-powered generators to a decade high.
“Of the third quarter series in the past ten years, 2011 recorded the highest share (38 per cent) of electricity generated through thermal process,” said the Bureau.
Both households and industries suffered steep monthly power bills as the share of cheaper geothermal and hydro electricity declined from 22 per cent and 56 per cent to 20 per cent and 42 per cent respectively.
Productivity in the sugar sector declined sharply, further driving inflation as cost of the widely used commodity shot to Sh200 for a kilo, double the price a year earlier.
Sugar production declined by 38.6 per cent in the period under review to 74,000 metric tonnes in 2011, from 120,000 metric tonnes in 2010.
“This level of production was the lowest in a decade,” said the Bureau.
The construction sector, which is driven mainly by infrastructure investments and real estate developments, remained a bright spot expanding by 6.9 per cent.
The economy grew by 0.7 per cent in the third quarter from the previous three months on a seasonally adjusted basis, after a 0.1 per cent expansion in the second quarter.
The third quarter data also revealed a worsening balance of payment position, which has been a key factor behind the rapid depreciation of the shilling.
The balance of payments swung to a deficit of Sh14.5 billion ($174 million) from a surplus of Sh 20.9 billion in the same period a year earlier, while the current account deficit increased three-fold to Sh133.5 billion.
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