Transcript GLADYS PKEMEI: MUNICIPALITIES AND GLOBAL ECONOMIC …

AFLRA: NORTH-SOUTH LOCAL
GOVERNMENT CO-OPERATION
CONFERENCE
TOPIC: MUNICIPALITIES AND GLOBAL
ECONOMIC CRISIS
VENUE: MWANZA, TANZANIA – 24TH – 27TH
NOVEMBER, 2009
Presented by :-
GLADYS PKEMEI – ASSISTANT TOWN CLERK
MUNICIPAL COUNCIL OF NAKURU
PROJECT COORDINATOR – NORTH/SOUTH
PROJECT, NAKURU - KENYA
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INTRODUCTION (1)
I would like to express a warm Thank You to you
all,
To the Hon. Mayor of the city of Mwanza Mr.
L.B Bihondo, for hosting us here ...in this
beautiful location ….in this amazing and
wonderful city … where it is easy to forget for a
few hours that the world has been in a deep
economic and financial crisis. This global crisis is
here. It affects us all….
some of us in this room directly and personally;
all of us in some way, directly or indirectly.

We see the signs advertising special sales in
shop windows, 50-70-90% discounts.

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Continuation…….
 Shopkeepers and taxi drivers tell us their business is
down by half or more.
 We hear graduating students say they have no hope
of finding a job.
 We see more homeless people in our streets.
 We see the anger in people’s faces on buses, on ferry
boats, in the metro.
 We know that street crime has begun rising in many
of our towns.
 We recognize that the economic plight of so many
people has played, and will play, a major role in past
and future elections in our cities and countries—as
voters blame current leaders and put their hopes on
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OBJECTIVE
The objective is :
1. To give you a Kenyan perspective on how
we see the global financial crisis playing out
in terms of real economic effects on our
municipalities.
2. To share some thoughts from the country’s
urban group on how the crisis affected
urban areas and the government.
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THE ISSUES:

Elements of the global financial shocks, which
focus on the types and magnitude of shocks

Shocks at the national level, which identifies
the effects so far on municipalities in Kenya

Capital flows, revenue and aid.

Effects on growth, investment, poverty and
inequality and debt and

Policy implications
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CONT....

SSA countries are barely integrated into the
global financial system.

Would they be spared of the global
financial crisis?

Already, the crisis is anticipated to derail
the high growth that SSA has been
experiencing in last decade (of about 5%).
The available estimates (e.g. IMF) already
point to economic slowdown in Africa.

This paper therefore, analyses the effects
and impacts on Kenyan Municipalities.
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NATIONAL SHOCKS(1)

There has been a big debate on the likely
impacts of the global financial crisis on Kenya.

According to the Prime Minister, the Kenya
economy will be badly affected.

On the other hand, Ministry of Finance and
Central Bank officials postulate that the
impacts will be indirect and most likely small.
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NATIONAL SHOCKS (2)

According to CBK, Kenya is primarily a rural agrobased economy with only a small minority of the
population directly interfacing with the developed
world.

The main sectors likely to feel any significant impact
include tourism and commercially- oriented agriculture
such as horticulture, tea and coffee.

Other effects might be felt through foreign exchange
volatility, cost and availability of inputs and also the
credit and trade restrictions.
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IMPACT ON MUNICIPALITIES
The profound impact of the crisis on
municipalities
The declining property prices has hurt families,
firms, and municipal balance sheets.
Foreclosures and vacant buildings may increase.

Municipalities’ revenues will fall, and borrowing
will be harder and cost more, so there may be no
or limited scope for deficit spending.

The crisis creates major social challenges.
Financial crises tend to hit the urban poor hardest.

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Continuation…..

Overall, unemployment will be higher;
migration into some cities will increase; and
crime is on the rise too in many
municipalities.

Reduced finances and increased needs pose a
double challenge. And governments and
cities face a particular dilemma if they are
forced to cut infrastructure investments,
which are crucial for long-term growth.
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CONT…

The impact on Kenya is both direct and indirect
exposure

Indirect effects include slowdown of the
tourism sector that relies heavily on foreign
tourists, the construction industry and the stock
market that benefit from remittances by
Kenyans living abroad and foreign institutions
e.g. hedge funds

Exports, especially horticulture, lower which
will impact on foreign exchange earning .
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DIRECT EFFECTS (1)

It is argued that, in general, African banking sectors
are insulated from foreign finance.

The sectors rely on domestic deposits and lending
and does not have derivatives or asset-based
securities among their portfolio.

Even though some banks have significant foreign
ownership, the parent banks are typically not from
the US and the foreign ownership share relatively
small – 5% compared to 46% for developing
countries.
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BANKING SYSTEM

Overall, the Kenya’s banking sector has improved
tremendously in the last six years or so.

During this period, only two banks have been put
under CBK statutory management (Prudential and
Charterhouse Bank), in comparison to the 1980s and
early 1990s when a large number of banks collapsed.

The banking system therefore seems poised to
withstand the global financial crisis.
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
About 75% of Kenya’s tourists come from North
America and Europe. However the US accounted
for 5.9% of the number of tourists.

According to some estimates, if the number of
tourists from North America and Europe were to
be halved, the loss would be in the range of $316
million.

There has been a substantial decline in tourist
earnings, caused by various factors including the
post-election violence, increased oil prices and
the global financial crisis.

In the first 10 months of 2008, tourist arrivals
declined by 35%.
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COMMODITY EXPORTS

Commentators have mainly focused on a
few products:
 tea,
 cut flowers
 and to a lesser extent, coffee

These are Kenya’s main commodity exports.
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TEA (1)

The auction tea prices have substantially declined
(by 60%) since September 2008, with major
players staying away from the market.

This has been caused by increased supply of tea
in the global market.

They have been enticed by unsustainably high
prices (US $ 2.15 per kg compared to a realistic
price of under US$2 per kg, according to FAO).
The decline has also been caused by political
problems in Pakistan which is a major buyer of
Kenyan tea (it took 28% of the tea exports).

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TEA (2)

Pakistan also entered into a free trade
arrangement with Sri Lanka, hence buying
more tea from that country.

Other major buyers are Egypt and UK,
which may be severely affected by the
global financial crisis and hence the
demand for tea.

In 2007, Kenya produced 369 million
kilograms of processed tea. In 2008, the
country was expected to produce a smaller
output of 335 million kilograms due to the
drought in the country.
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CUT FLOWERS
 Some expect cut flower exports in decline
because cut flowers are a luxury (Kibaara 2008).

Others expect cut flower exports to be fairly
stable because of their emotive feel-good factor
(Kenya Flower Council, KFC).

According to the KFC, Kenya exported 93,000
tonnes in 2008, a slight increase over the 91,000
tonnes exported in 2007.

Cut flower exports are likely to be boosted
further by the planned introduction of direct
flights between Kenya and the USA.
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TOTAL EXPORTS

More generally a large proportion of Kenya’s exports are
sold in the region.

COMESA accounted for 31.4% of Kenya’s total exports
in 2007

These are mainly essential manufactured products and
are unlikely to be unduly affected by the global crisis, at
least in the short-run.

The European Union accounts for another 26.4%, mainly
agricultural products.

The USA - less than 5% of the exports share.

A depreciating currency has helped cushion export
earnings.
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REMITTANCES

The reduction of incomes and the loss of jobs by
Kenyan in the Diaspora is expected to reduce
remittances.

According to CBK, remittances actually increased
by 6.6%, from US$ 573. 6 million in 2007 to US$
611.2 million in 2008.

Remittances were quite volatile in 2008 – no clear
pattern.

Data on remittances are quite unreliable. Some
other sources give the remittances for 2007 to be
US$1.3 billion, almost triple the CBK data.
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ODA
 Aid flows may also reduce, due to the massive
bailouts at home.
 Kenya is however not considered to be a high aiddependent economy.
 At its peak in 1989-90, net ODA inflows averaged
14.6% of the gross domestic income, declining to
2.52% in 1999 and were 2.94% in 2002, before
increasing to 4% in 2006.
 At 3-4% of GNI, Kenya dependence on foreign
assistance is low, compared to neighbouring
countries.

Nevertheless, Kenya receives much ODA from the
world Bank which has pledged to fund a number
of projects in the country in 2009
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MACRO IMPACTS (1)
 Reduced capital inflows including a reversal/
reduction of portfolio capital have aggravated the
macroeconomic imbalances in the economy such
as the current account and budget deficits in
municipalities.
 According to the 2008/9 budget, the government
was expected to incur a budget deficit of Kshs 127
billion (18.1% of government expenditure), with a
component of Kenya’s 2008/9 budget to be
financed from abroad.
 This has been affected by the financial crisis. A
$500 million sovereign bond was postponed while
the Kenya Revenue Authority has not been able to
achieve its targets.
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MACRO IMPACTS (2)

These imbalances have also caused a
depreciation of the Kenya shilling as well as a
running down of foreign exchange reserves.

In 2008, the Kenya shilling depreciated by
22.6% against the US$ and by 15.6% since July
2008.

The reserves declined from 4.94 months of
import covers at January 15, 2008 to 3.26 months
of import cover as at January 15, 2009.
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THIRD-PARTY EFFECTS

First, high fuel prices that peaked in July 2008
fueled inflation and increased current account
deficits.

The subsequent tumbling of oil prices has
brought some relief.

It is hoped that this is extended to other raw
imported materials such as fertilizers, reducing
the cost of production and increasing food
production.
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IMPACT ON GROWTH

All these effects have adversely affected the
Kenya growth rate.

In 2007, the country experienced a growth rate of
7%, the highest growth in over two decades.

In 2008, the growth was expected to be 4% (IMF)
due to the post-election violence in the first
quarter of the year, drought and the global
financial crisis.

In 2009, growth is expected to be about 3% (AIG).
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POLICY ISSUES

Kenya has set up a Task Force to look into
ways of cushioning Kenya’s economy from
the effects of the global financial crisis.

It is comprised of officials of the ministry of
finance and planning as well as the central
bank.
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SOME SUGGESTED SOLUTIONS:

Lower interest rates. CBK has already
lowered the cash ratio from 6% to 5% and the
Central Bank Rate from 9% to 8.5% ,
although some contend these actions are not
enough to significantly reduce interest rates.

Expand Expenditures e.g. acquisition of
shares by the government or its agencies to
shore the stock market

Facilitate and lower the cost of remittance
costs which are currently quite high.

Etc
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The Global Crisis Demands
Global Solutions

What can be done, and what is
being done?

At the G-20 summit in Washington, world
leaders called for global solutions to this
global crisis
The G20 communiqué stated:


We agreed that a broader policy response
is needed, based on closer
macroeconomic cooperation, …” And:
―… through continued partnership,
cooperation, and multilateralism, we
will overcome the challenges before us
and restore stability and prosperity….”
In their communiqué, the G20 leaders
stressed the important role of the
International Monetary Fund in crisis
response.



1. Transparency, Integrity, and Effective
Regulation are key, especially in financial
markets. I would like to highlight that this
includes sound and prudent public financial
management by cities, and strong national
central-local fiscal frameworks.
2. Continued open global trade flows are
crucial. The production cuts and layoffs in
export industries I mentioned, and how they
affect the working poor all around the world,
provide another example.
3. Policy coordination matters. Especially on
trade, on deposit insurance and financial
regulation, and on fiscal and macroeconomic
policies.
THANK YOU
&
MERRY
CHRISTMAS
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