Economic Crisis in Kenya During Recession Period between 2008 and 2009

By Anthony M. Wanjohi

Posted online: 2011

1.0 Introduction

In 2008–2009 much of the industrialized world entered into a recession, the late-2000s recession, sparked by a financial crisis that had its origins in reckless lending practices involving the origination and distribution of mortgage debt in the United States. The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The exorbitant rise in asset prices and associated boom in economic demand is considered a result of the extended period of easily available credit, inadequate regulation and oversight or increasing inequality. Kenyan context, economic crisis was even worsened by the 2007 much disputed general election results.

This crisis has its own impact on the economy as a whole. This paper looks into the impact of the crisis on social-economic development in public sector and gives suggestions on what can be done to solve the crisis.

2.0 Impact of Economic Crisis

The current concern for most Kenyans and investors is the extent to which the contagion of this global crisis will affect the domestic economy. Among the key question this paper addresses are: What is the impact of economic crisis on social-economic development and what can be done to solve this crisis? The impact of the crisis on social –economic development is explored while considering various areas that contribute to the growth of economy in general.  

2.1 Agricultural Sector

Tea production, a vital industry in Kenya, has been adversely affected. Kenya took over from Sri Lanka as the world's largest exporter of tea in recent years, but this position was put under threat with the current crisis. Dry weather has also hampered tea production. combined with the disruptions and corruption. Kenya's flower industry has also been affected (The independent, 2008).

2.2 Tourism Industry

According to Zagat's 2009 U.S. Hotels, Resorts and Spas survey, business travel has decreased in the past year as a result of the recession. 30% of travelers surveyed stated they travel less for business today while only 21% of travelers stated that they travel more. Reasons for the decline in business travel include company travel policy changes, personal economics, economic uncertainty and high airline prices. Hotels are responding to the downturn by dropping rates, ramping up promotions and negotiating deals for both business travelers and tourists (Zagat, 2009).

Tourism in Kenya has already been affected as tourists postpone or cancel visits abroad on account of difficult economic conditions and uncertain duration of the economic recession. However, recent data indicates that tourism has fully recovered in Nairobi but Mombasa and the lodges are still lagging.  

2.3 Unemployment

The International Labour Organization (ILO) predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis, mostly in construction, real estate, financial services, and the auto sector, bringing world unemployment above 200 million for the first time. The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast. (ILO, 2009).

The global economic slowdown and the accompanying cash crunch have hit businesses across all sectors, putting them under enormous pressure to cut back on expenses. In Kenya, a number of companies are laying off workers day in and day out. Companies like Zain, Telcom among others have in the recent past laid off a number of employees. This has resulted into an increase in the pool of the unemployed, majority of whom are youths.

2.4 Remittances from overseas immigrants

Remittances to some African countries from overseas immigrants have lessened by a significant margin. Sub-Saharan African countries took in 11 billion U.S. dollars in remittances last year. Once the income from remittance ebbs, the economy of African countries will be lashed quite seriously. Kenyans living abroad remit money home to support consumption, and for investment purposes. The current indications show that remittances have declined as disposable incomes decline in the countries experiencing the global recession.  

2.5 Impact on Financial Markets

January 2008 was an especially volatile month in world stock markets with a sharp decrease in non-U.S. stock market prices. There were several large declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October. As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year ( Krugman, 2008).

The stock markets, and respective investors, recorded a sharp fall in the value of their investments and general financial net worth following the current global financial meltdown. Stock markets fell by 21 percent in Uganda, 24 percent in the South Africa and 27 percent in Kenya between September 1 and November 30.

3.0 Suggestions on how to solve the economic crisis

Tough moments call for tough measures. To solve the financial crisis in Kenya, tangible policy measures need to be put in place.  This paper, recommends the following actions to safeguard the confidence of credit markets and stability of the financial system in Kenya.

3.1 Enhancement of capital requirements for banks

This could be done with an aim of reducing their vulnerability to sudden asset price movements and ensure they have the resources to support any off-balance sheet exposures. In this regard, the passage of the Finance Act, 2008 has increased the minimum core capital for banks to Kshs. 1 billion by the end of 2012. This measure is aimed at strengthening the banking sector further and enable it withstand periodic local and global turbulences. Thus the banks whose core capital is currently below Kshs. 1 billion should be encouraged to build up their capital plans to reach the mark.

3.2 Capital Markets Reforms

This should be done with an aim of restoring investor trust and confidence. The reforms should also cover a reappraisal of the role and activities of investment banks which remain the weakest link in the financial sector and their regulatory structure in order to stem any downside risk to the banking system.

3.3 Creation of Financial Services Authority (FSA)

Such a body should be created to regulate other financial institutions like Central Bank of Kenya, the Capital Markets Authority, the Insurance Regulatory Authority, and the Retirement Benefits Authority.

3.4 Good Corporate governance

This kind of governance is required to restore market confidence, attract Private capital inflows and investments and promote economic growth. This can be achieved by increasing:

• the accountability of directors
• the transparency of corporate structures
• valuation models
• transparency of financial transactions

There is need for an inclusive global governance serving literacy needs of all stakeholders large and developing economies 

3.5 Investor education and public awareness

Measures to make the public more knowledgeable on products so that they make informed investment decision. An informed investor is a protected investor.

3.6 Other Suggestions

• Multi-Partite Memorandum of Understandings (MoUs) between all the financial sector regulators to share information on risk and other cooperation to ensure no gray areas that are unregulated.
• Greater laws prohibiting predatory or sub-prime lending practices;
• Several factors to evaluate performance of a fund manager to ensure underlying funds are not subjected to undue risks. Where fund managers are evaluated on the basis of recent performance only, there may be incentive for managers to invest the funds in the riskiest vehicles that somehow reflect highest returns

Citation

Wanjohi, A.M. (2011). Economic Crisis in Kenya During Recession Period between 2008 and 2009. KENPRO Online Papers Portal. Available online at www.kenpro.org/papers

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