Download Economic Implications of the Oil Discovery in Kenya

Economic Implications of
the Oil Discovery in Kenya
Habil Olaka
Chief Executive Officer
Kenya Bankers Association
Prepared by:
The Centre for Research on Financial Markets and Policy
Kenya Bankers Association
Background
 Kenya is classified as a low-income country
 Per capita GDP is less than US$1005 per annum
 Its mainly agriculture-based economy
 Country is a net importer
 Petroleum and related products accounted for
22% of total import bill in 2010
POSSIBLE EFFECTS OF
THE OIL FIND
Effects on Exchange Rate
 Petroleum and related products accounted for 22% of
total import bill in 2010
 Changes in oil prices have direct effect on shilling
exchange rate
 Domestic oil production will possibly reduce high import
bill reducing demand for foreign currencies
 Increased export earnings will increase inflow of foreign
currencies
 Shilling will therefore appreciate against major world
currencies
Possible change in the composition of Trading Partners
 UAE largest source of Kenyan imports mainly because of oil
 Accounted for an average 18% of total imports between 2002
and 2010
 Domestic production of oil likely will change the trading
partner composition
 Kenya likely to trade more with countries with high oil demand
like China, India, USA, Japan
 Increased manufactured goods exports from East African
region due to reduced costs of production
 Possible relocation back to country of manufacturers who had
left due to high operating costs
Increased Employment
 Country has high unemployment rate
 Labour participation rate was around 66% between 2007
and 2010
 Employment is concentrated in the informal sector
 Overall open unemployment rate estimated to be 12.7%
in between 2005 and 2006
 Oil production process will provide skilled and semiskilled labour opportunities increasing employment
Increased Immigration and consumption
 Population will tend to move towards the oil producing
regions including Turkana
 Most of this population will move to either take
advantage of the economic opportunities in the area as
well as to provide services
 Citizens of other countries with interests in the oil
business are also likely to move to Kenya to take
advantage of the new business opportunities
 This is likely to increase aggregate consumption in the
oil producing areas and the economy in general
Inflation
 Underlying inflation- measure of inflation that excludes fuel
and food
 Overall inflation measures inflation that includes fuel and food
 Separate measure because oil and food prices tend to be
volatile
 Oil prices affect prices in other sectors of the economy such as
food, transport, energy, manufactured goods
 Domestic oil production means better control of domestic oil
prices
 Domestic production of oil will therefore likely reduce inflation
 Prices less volatile
 Less external shocks outside Government’s control
 Ability to tame inflation through monetary policy
POSSIBLE
CHALLENGES
Resource Curse
 Resource Curse- Countries with natural resource wealth
tend to grow more slowly than resource poor countries
 Paradox because conventional wisdom dictates abundant
resources stimulates growth
 Why?
1. Resource abundance renders the export sectors
uncompetitive
 Consequently, resource abundant countries never pursue
export-led growth
Resource Curse
 Logic extends to other sectors
o Entrepreneurship
o Innovation
 Crowding out of other sectors as skill is
attracted to the natural resource sector
 Rent-seeking in the natural resource sector
crowds out productive economic sectors
Dutch Disease
 Dutch Disease- means the contraction in output from
other sectors of the economy as a result of massive
inflows of foreign currency, usually from natural
resources
 Reason:
 Many governments do not spend and absorb the
earnings
 Because fear of inflation and currency appreciation
respectively
Possible solutions for Resource Curse and Dutch Disease
 No quick fix for Resource Curse and Dutch Disease
 Prudent fiscal and monetary policies needed
 Consideration to both local and international macroeconomic
environment
 Revise capital account regulations to take into account new
source of foreign currency
 Good governance and effective legal system to combat rentseeking
 Well-drawn concessions to ensure equitable distribution of
earnings to country and investors
OPPORTUNITIES
• The is an opportunity for more Foreign Direct Investment (FDI)
to explore more oil fields
• Increased earnings should be used to improve infrastructure
(road, railway, pipeline, telecoms, etc) to boost trade volumes
locally and regionally.
• There is an opportunity for increased trade with the East
African region as well as Asia and North America
• Opportunity to balance of trade and build sound international
forex reserve
• Growth in all sectors as a result of lower fuel and related input
bill.
• Admin of forex crucial to avoid resource curse, and instead
achieve growth and attain Vision 2030 goals.
Thank You