1. 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

2. 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

3. POSSIBLE EFFECTS OF THE OIL FIND

4. 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

5. 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

6. 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

7. 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

8. 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

9. POSSIBLE CHALLENGES

10. 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

11. 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

12. 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

13. 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

14. 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.

15. Thank You