Growth will not suffer says Central Bank governor: the violence that followed the December polls not only shocked the population at large, but also threw out careful calculations by some of the world's major credit rating agencies. Neil Ford describes how polls wrongfooted the experts

African Business, Feb, 2008 by Neil Ford

Prior to the December elections, the major credit rating agencies believed that the polls would have little impact on Kenya's economic development.

In mid-December, rating agency Fitch gave Kenya a B-Plus long term foreign currency default rating, with a stable outlook and little impact predicted from the elections.

Fitch analyst Richard Fox commented: "Kenya is one of the most diverse economies in sub-Saharan Africa with a large and vibrant private sector and developed financial markets. It is also the only low income country in sub-Saharan Africa not to have needed debt write offs from official creditors."

The company added that it did not expect the 27 December elections "to materially affect the direction of economic policy, but a change of government could result in some delay of policy implementation".

Standard & Poor's also gave Kenya a B-Plus rating with a stable outlook.

Two weeks after the election and its immediate violent aftermath, Kenyan minister of finance Amos Kimunya conceded that the instability could have cost the country up to $1bn, while it has been estimated that the government could lose $30.4m a day in lost taxes.

Even for experienced economists, it is rarely possible to make anything other than an educated guess at the economic impact of such crises, but there is no doubt that the reputation of Kenya has suffered. Unquantifiable damage may also have been done to national cohesion and this too can have economic as well as social and political repercussions.

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However, Kimunya insisted that the economy would recover within 12 months at most. He said: "I expect whether it's within the next couple of months or within a year ... that people will be able to recoup all that.

"Depending on the rate of recovery, Kenyans will eventually settle down and go on with their production. I expect probably our target [on GDP] will be met." The government's growth target for 2008 is 7%.

The Central Bank of Kenya is also remarkably upbeat about the economic impact of the crisis. While GDP is estimated to have grown strongly in 2007 at 6.9%, the Central Bank predicts that it could rise yet further in 2008 if the country can put the violence behind it quickly.

The bank's governor, Njuguna Ndung'u, commented: "Given that the disruptions were temporary, it is not expected they will have a major impact on GDP growth for 2008. Our estimation is that the economy can still achieve 8% GDP growth in 2008 but this is conditional on the speed of reconstruction as well as the incentive boost in some affected areas."

Ndung'u is confident that the government will be able to fund any emergency relief from the $390m raised from the sale of a 51% stake in Telkom Kenya to a consortium led by France Telecom. He said: "Given these developments, the government is, in fact, likely to borrow less from the domestic market than was originally planned even with the current crisis and reconstruction demands."

Inflation is expected to rise during the first few months of the year because supply problems should drive up the cost of many basic commodities. Ndung'u insists that the rapid depreciation of the Kenyan shilling after the election will be a short term problem, resulting from "the temporary shock". He added: "The exchange rate should therefore remain stable in the coming weeks and months."

An initial public offering (IPO) of a 25% stake in Kenya's most profitable company, Safaricom, is expected to proceed as planned in March, although the IPO has already been delayed on several occasions.

However, not all experts agree. Terry Ryan, a member of the monetary policy advisory committee that advises the Central Bank, said: "We expect the economic growth rate to scale down to between 2% and 4.5% and that is assuming that the situation returns to normalcy soonest possible."

He said that the tourist sector, financial services and agriculture could all be badly hit and argued that the Treasury could find it difficult to float its planned KSh20bn Eurobond, ($304m) which depends on credit ratings.

Ryan added: "The good ratings are now history; the country has to start winning the international community's confidence all over again."

The tourist sector is often highly susceptible to political instability. Indeed, the Kenya Tourism Board (KTB) has announced that about 90% of all bookings in January were cancelled. As the biggest source of foreign earnings, this is a major blow to the economy.

KTB spokesperson Rose Kwena said that tourism earnings for the month of January would have been Kshs3bn because it is a high season for the destination. "I must say that the impact at the moment is big, in a sense that we don't have any arrivals coming in right now. Planes, especially the charters, are coming in empty to pick up those people who are going back because their holidays are over but they are not bringing in any fresh tourists," she added.

The Kenyan government and Central Bank may expect the current instability to have little impact on long term economic growth but it is in their best interests to talk down the crisis. Even if the political stalemate is broken quickly, more energy will be put into resettling displaced people and coping with the legacy of the unrest than in long term economic planning.