360° Analysis

Kenya Strikes Oil! What Next?


April 24, 2012 01:03 EDT

Co-authored with Macharia Nginyo

The extent to which Kenya’s newfound oil reserves will fuel its growth trajectory remains to be seen.

It is great news that Kenya struck oil and we, the citizens, should be thankful to the deities that were responsible for this blessing that has befallen our great nation. It is now all up to us, ostensibly! Given this unexpected yet timely finding, is Kenya at a crossroad or not? Do we wait for the black gold or do we go for the multiplier effect?

As ordinary citizens, my co-author, an IT sales professional, and myself, a financial risk management professional, have recently been trying to understand the predicament of Kenya’s uncontrolled inflation. As we grapple to understand the inflation assumptions stipulated in the Kenya Policies for Prosperity, we’re inevitably led to contemplate what Kenya’s oil 'strike' would mean to Kenya’s fiscal policy and macroeconomic management. Utilizing a measured approach, we can assume that oil production may begin in the next six years or so and the real impact of revenue generation will take effect in about ten years. So, what will we do in the interim to set a solid foundation that allows us to extract maximum value for economic and social gains? How will we ensure we emulate the successes of the Norwegians and Saudis, for example, and not become wrought in social conflict and currency over-valuation, as seen in Nigeria?

What’s possible?

It is indeed timely that our new constitution considers county-level development. This development presents unlimited potential for revenue from oil drilling to be directed towards the development of marginalized areas in a coherent and structured approach to achieve economic and social gains and alleviate growing poverty. Additionally, by the precedent set by the current government we can assume that infrastructure development would continue at a faster pace. Further, we can optimistically predict that an increase in government income would provide more funding to address the high rate of unemployment and promote increased levels of education linked to labor market requirements for the youth. Could oil revenues lead to an inflection point in Kenya’s education reform efforts and maybe thrust Kenya into the echelons of viable, strong, emerging markets like India and Brazil? Or will the powers that be squander this momentous opportunity like they did when Kenya was equally rated with Singapore in the context of economic development? The latter, amongst its other accomplishments, now boasts one of the most effective education systems in the world.

The How, Simplified

Needless to say, it is imperative at this point in time (black gold or none) that the Kenyan government formulates macro policies targeted at key drivers of economic growth. The drivers must support a pattern of economic development that is more sustainable and efficient in order to achieve higher-level and higher-quality development for the long-term and curb the rate of inflation while deviating from net consumerism.

Moreover, the government needs to establish if we have the necessary structures to manage the oil revenues. For example the Norwegian government has a very well-run sovereign wealth fund that effectively managed oil revenues to benefit future generations as well as crucially, to also 'inoculate' the local economy from currency over-valuation from an influx of dollar revenues. This was the cause of the so-called 'Dutch disease' phenomenon among many oil producers (Nigeria being a prime example) where an influx of dollars in the local economy led to overvalued local currencies that effectively biased imports vs. local production. Nigeria is a net food importer to this day.

Additionally, the government would need to develop value-added industries around oil, from refining, to downstream industries such as petrochemicals, and not just export unrefined crude (only to import refined products at significant cost — to wit, see Nigeria). Given South Sudan and Uganda also have oil, the cost of building refining capacity in Kenya could be spread over greater production and make this more viable than it otherwise would be.

While the government needs macro policies to ensure we achieve optimal gains from oil revenues, it needs to be cautious that Kenya does not end up negating agriculture or tourism and must also focus on intergenerational wealth distribution. Agriculture and tourism policies could be enhanced as a direct result of increased revenues. The agricultural sector requires more coordinated and focused government support to develop self-sufficiency and surplus at a national level, and to maximize value from agricultural output. Despite the global accolades of Kenya as a preferred tourist destination in Africa, the tourism industry has yet to optimize its potential. It is highly likely that with more structured government funded programs in the sector, the number of tourists visiting the country would exceed the current two million mark and worrisome incidences, such as the inability to host 6,000 visitors during the 2004 Global Aids Conference in Nairobi, would be allayed.

So, what would be a likely scenario in order to bring change in the above-mentioned sectors? A review and enhancement of existing policies and development of new strategic, long-term focused policies that foster wealth distribution and consider the country’s geographical stratification would be a great start. Targeted funding in the following areas would also be central to driving change: first, infrastructure development to support transport, communication, and irrigation on a national scale; second, broad financial incentives, which would include lower interest rates and tax incentives within the sectors; third, preferential land use, allocation, and easy access; and ultimately, local and global market linkages for optimal economic returns.

What Next?

As Kenyans bask in indefensible delight because their beloved nation struck black gold, it is vital that political tactics that undermine scalable economic development and positive social mobility of marginalized Kenyans be laid to rest. Strong and strategic policies and public-private alliances should be reinforced and new ones forged as we contemplate what striking black gold really means for the nation. To conclude and ask the million-dollar question, who within the political realm has mapped out an all-inclusive strategy to Kenya’s economic, political and social issues? Are we still looking at egocentric-based politics? Kenyan citizens shall go to the polls soon and decide.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

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