Economic Implications of

the Oil Discovery in

Kenya

Habil Olaka

Chief Executive Officer

Kenya Bankers AssociationPrepared by:

The Centre for Research on Financial Markets and Policy

Kenya Bankers Association

BackgroundKenya 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 semi-skilled 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 Entrepreneurshipo 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 rent-seeking

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