Kenya's Economic Recovery Remains Strong, Although Slowed by Drought and Inflation – Modern Diplomacy
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Kenya’s economy continued to rebound from the pandemic in 2022 with real gross domestic product (GDP) increasing by 6% year-on-year in the first half of 2022, driven by broad-based increases in services and industry. This recovery was dampened by global commodity price shocks, the long regional drought, and uncertainty in the run up to the 2022 general elections.
The 26th edition of the Kenya Economic Update (KEU) notes that the ongoing drought and the cost-of-living increases have affected households throughout the country. The agriculture sector contracted by 1.5% in the first half of 2022 and, with the sector contributing almost one fifth of GDP, its poor performance slowed GDP growth by 0.3%. A recent rapid response phone survey that monitors the impact of shocks on households shows a rise in food insecurity, most severely in rural areas whereover half of households reduced their food consumption in June 2022. Most households reported an increase in prices of essential food items and with many being unable to access core staples, such as beans or maize. In response to the inflationary pressures, the Central Bank of Kenya (CBK) has raised the policy rate thrice since May 2022 by a cumulative 175 basis points to reach 8.75%.
“Kenya can further leverage the agriculture sector to spur growth, poverty reduction, and food security,” said Keith Hansen, World Bank Country Director for Kenya. “Boosting food resilience through community interventions in arid and semi-arid lands while supporting farmer groups to link into sustainable value chains will help to better feed Kenya during periods of drought.”
Kenya’s medium term growth prospects remain positive with GDP projected to grow by 5.2% on average in 2023–24 notwithstanding current global and domestic shocks. The baseline assumes robust growth of credit to the private sector, continued low COVID-19 infection rates, a near term recovery in agricultural production, and high commodity prices favorable to Kenyan exports. These developments are in turn expected to catalyze private investment to support economic growth over the medium term.
“Private sector led growth is critical to job creation and a steady increase in household living standards over time,” said Naomi Mathenge, World Bank Senior Economist for Kenya.
The government reduced the budget deficit in fiscal year (FY) 2021/22 from 8.2% to 6.2% through revenue measures and expenditure moderation. Total revenue increased to 17.3% of GDP in FY2021/22 from 15.7% in FY2020/21, reflecting the pick-up in domestic demand and a range of tax reforms as well as improvements in tax administration and the use of technology. These have yielded a reduction in tax expenditures through harmonization of exemptions, enhanced compliance through voluntary disclosure programs for previously undeclared tax, and easier access to the Kenya Revenue Authority (KRA) web system. The reduction in the fiscal deficit has contributed to the stabilization of the debt-to-GDP ratio at about 67.3% in FY21/22, thereby underlying the importance of fiscal consolidation.
The report recognizes that responding to the rising cost of living and climate change shocks, amid limited fiscal space are some of the immediate challenges facing the government. The KEU recommends the need to prioritize policy options that help to raise both productivity and resilience, at the household, producer, and national levels. The special focus section of this edition delves into policy priorities to advance productivity improvements in agriculture where a large number of Kenyans remain employed, spur economic transformation and job creation through the digital economy, while ensuring support for the most vulnerable households.
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Europe and the US are heading towards a serious trade and economic conflict, writes “Berliner Morgenpost”.
In the European Union hopes are fading that the US government will significantly amend the controversial subsidies law by providing billions in bailouts to US manufacturers. This forces the EU to protect domestic companies from threatening competitive advantages over US competition and to prevent investment from moving to America.
Fear of the “de-industrialization” of Europe is spreading. For example, buyers of a “Made in USA” electric vehicle with a battery also made in the USA receive a $7,500 subsidy. Subsidies also go to companies that make wind turbines or solar panels from American steel. Europeans are worried that not only will they have to contend with heavily subsidized US competition in future strategic sectors, but industrial cooperation with US companies could also be threatened.
The head of the trade committee in the European Parliament, Bernd Lange, told: “I assume that a few small changes to implement the IRA can still be agreed upon in the negotiations. But I do not think that anything will change significantly, because the Law has already been passed.”
The US IRA law goes into effect on January 1. By that time, the EU countries should have found a common line. France is already openly threatening a trade war and agitating for a tough counterattack: the EU should take a protectionist course and respond with the Buy European initiative. But there are also concerns in Berlin.
An EU trade expert argues that lower energy prices for industry should be considered, as they are currently ten times higher than in the US. European Commission economic policy spokesman Markus Ferber is also calling for a hard line: If the US side doesn’t give in now, the EU commission should “put all instruments of torture on the table” and consider boosting trade. Disappointment with the protectionist course of US President Joe Biden is great, Ferber says: “The American anti-inflationary law threatens Europe, and can make its economic situation much worse.”
International Affairs
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Emmanuel Macron warned that the U.S. risked “fragmenting the West” with a flagship climate law that the French president said would distort competition by massively subsidizing American companies to the detriment of European industries, informs “The Financial Times”. The harsh words, which came on the first day of his state visit to Washington hosted by president Joe Biden.
In a speech at the French embassy in Washington, Macron said while he agreed with the objectives of Biden’s Inflation Reduction Act, it would have negative repercussions for Europe by making it less attractive for companies to invest there. “We need to co-ordinate and re-synchronize our policy agendas.”
Macron called the new U.S. Inflation Reduction Act (IRA) “super aggressive for our companies,” according to comments reported by Agence France-Presse and confirmed by a person present. “Perhaps this law will solve your problems but it will make mine worse,” he said, adding that many jobs would be destroyed.
Macron has also called on the EU to pass a so-called “Buy European Act” that would offer similar subsidies to local industries. Other countries such as Germany are less supportive of the idea.
U.S. President Joe Biden was forced to retract. He said that new laws that give incentives for domestic production of computer chips and renewable energy parts were never intended to exclude European allies and could be tweaked.
Speaking with French President Emmanuel Macron at a joint press conference at the White House, Biden said “There are tweaks that we can make that can fundamentally make it easier for European countries to participate and/or be on their own.”
The United States and France also announced the formation of ‘Joint task force’ between the Unites States and the European Union to deal with trade disputes around clean energy issues emerging from the IRA.
Europe’s industry fears that the bill, which gives tax credit for each eligible renewable energy component produced in a U.S. factory, would take away potential investment from the continent.
Biden said he makes no apologies for promoting American manufacturing of essential goods, but said large legislation often requires tweaks to deal with unintended consequences.
“We’re going to continue to create manufacturing jobs in America but not at the expense of Europe,” Biden said.
Macron told reporters that he was encouraged by his talks with Biden and is hopeful of a fair resolution.
…We’ll see whether Biden keeps his word or not.
International Affairs
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The politicization of trade relations is proceeding rapidly. German Economics Minister Robert Habeck said: “The phase where many thought markets should rule and politicians should stay out is definitely over. Previously, this idea was wrong,” – quotes FOCUS.
The German economy is in a dangerous pliers. The craziness is that it is not the Russians or the Chinese who move with both hands in the tongs, but the Americans, who are clearly determined to organize their future prosperity at the expense of the Chinese and Europeans.
Pliers consist of two very different legs:
– On the one hand, the US Inflation Reduction Act (IRA) is primarily aimed at reducing US inflation. In fact, this is a gigantic program to subsidize new technologies. The legislative package plans to spend $369 billion over the next decade on energy security and climate change programs, putting pressure on European industry. The US wants to reinforce its industrial base again.
In some cases, subsidies offered by the US government are four to ten times the maximum government support allowed by the European Commission, French Finance Minister Bruno Le Mer said.
– On the other hand, US government sanctions against China’s semiconductor industry are putting pressure on China, and German industry is also suffering from restrictions. Chinese manufacturers make up one-fifth of the global semiconductor industry, and their European customers and suppliers are required to follow US policy.
Dutch company ASML was under pressure from US officials to stop selling individual chip-making machines to China, Bloomberg reported.
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