Economy on a standstill as country headed for elections

The Cabinet Secretary for Interior and Coordination of National Government was at it again.

This time, he directed his sharp words at the political class whom he accused of starving banks of the Sh200 and Sh100 currency notes.

According to Dr Matiang'i, politicians have been withdrawing these two notes in sack loads to bribe voters during campaigns.

"The bankers in the room, I understand now you have a shortage of Sh200 in your banks...and Sh100," said Dr Matiang'i in Nairobi.

Speaking during the launch of the report of the National Risk Assessment on Money laundering and Terrorism Financing taskforce, Dr Matiang'i said that most of this money is dirty cash that is simply being laundered.

"Because politicians are bribing villagers, people are not working. They are standing on the roadside to get Sh200 and so on from this money laundering."

The Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge denied there was a shortage of Sh200 and Sh100 currency notes.

Of course, Dr Njoroge has denied a lot of things, including there being a dollar shortage in the country. He also doesn't think the elections will affect economic growth in 2022, projected at around 5.4 per cent.

But elections, set to be conducted next week, come with their own peculiarities, and as Dr Matiang'i suggested, their own kind of economies, especially in rural areas where people abandon every other economic activity as they chase after politicians' hand-outs.

However, CBK data shows that there was an increase of Sh18.5 billion of cash outside of banks in the first four months of this year compared to an increase of Sh6.6 billion in the same period last year.

Much of the increase, analysts say, has been due to the electioneering with politicians getting money to bribe voters.

CBK governor does not expect private investor confidence to be affected by the upcoming polls, noting that confidence among businesses is high.

Never mind that the National Treasury has cited polls as one of the factors that has contributed to its decision to revise downwards economic growth projection this year. It is not the first time Njoroge has downplayed the impact of elections on the economy.

Speaking to KTN in an interview in October 2020, Dr Njoroge said unlike the risks posed by the rising political temperatures occasioned by a possible referendum and the 2022 elections, there was still an element of surprise with the pandemic.

He said Kenya, having gone through a lot of political risks, had somewhat learnt how to deal with them. He termed the risks - including the then US elections - as "known unknown". "Coronavirus is actually the one that is the unknown. The others are in the realm of known unknowns," Njoroge said. Other institutions do not see it this way. In December last year, the International Monetary Fund (IMF), in a country report, noted that there is a 30 per cent to 50 per cent probability of the country descending into political instability during this year's polls.

The global lender noted that there was a high risk of election-related skirmishes materialising within the next 12 months, derailing the country's growth prospects. "Political violence could emerge around this year's (2022) presidential election as seen in previous polls," said the IMF in the report published last week.

As a policy response, the Washington-based institution advised the Kenyan authorities to remain committed to reforms under the 38-month programme - aimed at addressing the country's debt vulnerabilities by taming expenditure and ramping up tax revenues.

"Within Kenya, upcoming General Election could pressure budget execution and reform implementation and potentially lead to socio-political tensions."

Kenya is gearing for the polls with the two leading contenders - Azimio La Umoja One Kenya's Raila Odinga facing off with Deputy President William Ruto of Kenya Kwanza.

Most economic forecasters, expect the economy to slow down this year due to the heightened political overtones with investors adopting a wait-and-see approach.

The business environment had barely recovered from the negative effects of Covid-19, which saw the economy contract by 0.3 per cent in 2020.

It was then hit by the Russia-Ukraine war which has pushed up the cost of raw materials including oil, fertiliser and wheat.

The World Bank projects the real gross domestic product (GDP) - the monetary value of all goods and services in the economy adjusted for inflation - to grow by 5.5 per cent in 2022, down from 7.5 per cent in 2021.

Although the World Bank reckons that the Russia-Ukraine war and drought, which is having a devastating effect on food security and livelihoods in many parts of the country is necessitating increased social spending on food assistance, the election might also have a dampening effect on growth.

The IMF noted that "pressures from the upcoming elections could also undermine reform momentum and give rise to socio-political tensions."

Heightened political activities every election year have only served to increase economic uncertainty, with some investors, particularly foreign ones, fearing post-election violence as happened in 2008.

Hundreds of lives were lost and property worth billions of shillings destroyed when Kenyans turned against each other over disputed presidential election results.

The trend is not any different this time round as the country prepares for another battle on August 9.

Regime change

As Raila and Ruto face off in a fierce race to succeed President Uhuru Kenyatta, this has built up a cloud of uncertainty - aggravated by the inevitability of a regime change and the economic aftershocks of the pandemic.

Investors are holding back their money, running down the clock as they wait to see who will take over as president and how they will constitute their cabinet. "It is going to set in a very uncertain period," said Gerishon Ikiara, an economist.

"That will affect us for almost six months after the elections as people see what kind of policies that are coming up, what level of stability, what are some of the programmes, for example, which sectors will be given priority."

Of course, people will continue spending on essentials such as food as they have to continue eating despite the uncertainty that comes with the possibility of a regime change. Moreover, some businesses such as advertisements will continue to boom.

However, it will not be easy for investors to commit their money to a new project, for example, when they are not sure of the outcome of the polls.

For instance, the value of buildings approved for construction by the County Government of Nairobi last year declined by 33 per cent to Sh102.9 billion, according to data from the Kenya National Bureau of Statistics (KNBS).

Johnson Denge, a real estate expert, says the housing sector has always declined in election years. However, he is afraid the trend might be more pronounced this year.

There is uncertainty as to whether the next administration will, for example, embrace the Big Four Agenda which has affordable housing as one of its pillars.

"Investors are even reluctant to continue pumping money into affordable housing because you don't know if the Big Four Agenda will be adopted by the next administration," said Denge.

Investors have always been spooked by political uncertainty that has become part of Kenya's election cycle. Consequently, most of them adopt a wait-and-see approach before committing their money to the Kenyan economy. The trend is being replicated this year and is likely to spill over into 2023.

As a result, this has reduced private investment, which has in turn depressed the Gross Domestic Product (GDP) - the monetary value of all the goods and services produced within the country.

Slow growth in GDP means a slower rate of job creation, which translates into a high cost of living. Left unchecked, this can degenerate into a social crisis.