Global Financial Crisis: Discussion Series

Abstract

This paper examines the effects (so far) of the global financial crisis, possible impacts and the scope and limitations of current policy responses in Kenya. It focuses on shocks at the national level; effects on investments, growth and poverty; and policy implications. While Kenya’s banking system seems poised to withstand the crisis, the Nairobi Stock Exchange has been adversely affected and foreign direct investment and remittances seem likely to be affected in the future. Tourism has suffered a blow and export prices have declined. The crisis has aggravated the current account deficit, depreciating the national currency, and also the budget deficit. Among third-party effects, the decline in the price of oil owing to plummeting demand has brought some relief to the country. There is substantial uncertainty regarding the future impacts of the crisis, which is a major deterrent to investment, in turn a major driver of economic growth. A decomposition analysis for Kenya estimated that the impact of reduced growth would be to increase the headcount poverty ratio, affecting other human indicators. Kenya has not articulated a strong view on how to handle the crisis, although the central bank has taken some actions.