Have you ever wondered why a “debt crisis” in distant European countries matters to us all the way in Kenya? Or why the greedy actions of a handful of financial institutions on Wall Street in the US can have adverse effects on our daily lives?
The answer lies in the financial system we live in today.
It may not seem obvious on the surface, but such is the current state of the global financial system that most global country economies, Kenya’s included, are now intertwined in a delicate inter-relationship involving imports, exports, debt, currency and the like. For instance, tourism and travel predominantly from Europe contributed 11.9% of employment in Kenya in 2011 according to the World Tourism & Travel Council; quite significant considering jobs are very scarce to begin with.
What does this mean for us?
Simply put, the health of Kenya’s domestic economy depends a lot on that of foreign economies; predominantly the most powerful ones like Europe, China and the United States.
The latest global economic alarm is the Eurozone Crisis. Basically, Greece, Ireland, Italy, Portugal and Spain borrowed a lot of money over past decades to invest in their economic growth. However, this growth didn’t exactly happen as planned, and now they either can’t easily repay their big loans, if at all.
The ripple effect of this has been immense, as Eurozone creditors, consisting healthier European economies such as France and Germany among other nations like the United States, face significant losses through loan defaults. This in turn has led to more stringent budgets, monetary policies and risk aversion among the world’s largest economies known as austerity measures.
Closer to home, the Euro zone’s financial woes have devalued the Euro currency thereby strengthening the dollar and in turn threatening to weaken the Kenya Shilling whose value is pegged on the dollar through our dollar import–export mechanism. Remember when the Kenya Shilling hit a low of 108 to the dollar late last year?
According to the Report on the Parliamentary Select Committee on the Decline of the Kenya Shilling against foreign currencies, the Eurozone debt crisis played a role in this devaluation of our local currency. To fix the situation, the government borrowed $600 million from a consortium of foreign banks in conjunction with the IMF. Ordinary Kenyan citizens will have to pay this money back. With interest.
Furthermore, with less money for European countries to spend, demand for tourism and horticulture which are Kenya’s main exports to the region are threatened. Tourism alone accounts for more than 10% of Kenya’s GDP; a very significant contribution. Already, horticultural exports have dwindled plunging the industry into uncertainty regarding its future performance, not to mention that of the several families it feeds.
Finally, despite being a very “resource rich” country, Kenya relies a lot on donor funding from an array of international banks of which the Euro zone is a key contributor. Austerity measures in the Euro zone threaten our access to money used to finance infrastructural development needed for our economic growth. Vision 2030 cannot likely happen as planned without continued funding from Europe.
Individually, these effects on the Kenyan economy are bad enough, but combined, they can lead to our very own economic crisis and policy adjustments far worse than higher interest rates. This could happen, as it’s clear that there are major flaws in the global financial system.
For now though, it’s clear that the Euro zone’s economic problems aren’t only theirs; Kenyans may also face similar adversities if the situation gets worse.
Isn’t it just alarming how our economic stability depends on decisions made by far away countries and people who barely care what Kenya is?