Damned if You Don’t: Why Kenyans Need to Prioritise the Effects of Climate Change on Macroeconomic Stability
As a country located in sub-Saharan Africa (SSA), Kenya is one of the least producers of (GHG) emissions, the main driver of climate change but is the most severely affected¹. Research shows that Kenya produces a yearly average of 1.26 MtCo2eq per year, a measure of greenhouse gas (GHG) emissions as compared to the global average of 7.58. Notwithstanding, climate change continues to creep in our everyday life and ultimately affects the country’s total economic productivity. Hence, this article will argue that climate change needs to be embedded in macroeconomic planning and national investments in Kenya.
Macroeconomic stability anchors resource allocation decisions, investments and ultimately affects sustainable economic growth and development. For Kenya, agriculture, tourism, energy and infrastructure need to be adapted in a climate-smart manner since they form the backbone of the economy.
The national government has made strides in the addressing climate-related issues by coming up with various laws and policies like the National Climate Response Strategy 2009 and passing the Climate Change Act 2016. National Treasury has also been active in green policy formulation, engaging international stakeholders and obtaining accreditation from The Green Climate Fund. The Central Bank of Kenya has also provided forward guidance on sustainable finance issues.
Increased temperatures, erratic rain patterns and changes in air pressure have dampened economic productivity that has a knock-on effect on the above mentioned climate-sensitive sectors. Let us consider the nexus of macroeconomic stability, climate change and each important economic pillar.
First, Kenya and other sub-Saharan African countries are known for the high reliance on rain-fed agriculture which according to the International Monetary Fund (IMF) stands at 95% globally. This has increased vulnerability to short-term income losses and food insecurity. The current national drought coupled with inflationary pressures in the commodities markets has resulted in the Unga crisis that has forced government intervention through subsidies. This has also seen a dip in the foreign exchange earners, tea and coffee due to the drought that has been experienced from late 2016.
Unfortunately, agricultural insurance in SSA is lagging behind compared with other regions which the IMF has estimated to be only 0.5 percent of the total agricultural insurance premiums in the world paid in the region. This can be attributed to limited financial sector development: low levels of access to credit especially insurance both domestic and for sovereigns reduce the scope of risk transfer and for financing for post-disaster relief and reconstruction. Moreover, these SSA countries face capacity constraints in preparedness and post-disaster response and this is further exacerbated by limited access (and uptake) of insurance².
Second, the tourism sector is specially included in the people-centred universal agenda as a target in three of the Sustainable Development Goals (SDGs): Goal 8 on decent work and economic work; Goal 12 on responsible production and consumption, and; Goal 14 on protecting life under water. Already the tourism has endured security challenges and natural disasters that have impeded the national implementation of these SDGs. Climate change further threatens to place tourism as Kenya’s highest foreign exchange earner- that is predominantly driven by micro, small and medium enterprises (MSMEs) at risk.
Scientists from the University of Illinois, Chicago have projected that coastal towns located in the Tropics will experience the highest sea level rises by 2050 that properties in popular tourist destinations might be submerged if adaptation measures are not implemented³. This will have a negative domino effect on the coastal ecology, human and animal population and impair the coastal real estate market. Moreover, this will disrupt the coastal tourism sub-sectors: accommodation, food, excursions and handicrafts while denting Kenya’s macroeconomic indicators.
Third, much of the country’s energy demands are met through natural resources largely hydroelectric power and hydrocarbon sources. Shortfalls are plugged by imports from neighbouring countries to support the country’s industrialisation and domestic consumption. Erratic rainfall patterns and the volatile international crude oil markets take a toll on the country’s energy bill and the final costs are borne by consumers.
The national government has resorted to mainstreaming renewable sources of energy as means of attenuating this demand. But have also resorted to promoting nuclear energy which may negate these efforts, if lessons are drawn from historical events à la Chernobyl. A number of efforts have been made in promoting consumption of cleaner energy to reduce the pressure on forests and vegetation. Much more can be done to incentivise clean energy providers and to educate consumers on alternative energy conservation technologies.
Lastly, climate-smart infrastructure particularly energy and transport can ease the transition towards a low carbon economy⁴. Increased frequency and intensity of extreme weather events such as flooding and high temperatures impairs continuation of post-impact economic activities, access to important services and livelihood options. Therefore, information and disclosures are important at the stages of the project to identify different risks that climate change may pose at different project stages. This is imperative as stakeholders tend to conflate the costs of climate change impacts and the actual costs of adaptation measures which may pose additional liability risks to the investors. Maybe this could have prevented the recent collapse of the KES 1.2 Billion Budalangi Sigiri Bridge.
Not to further paint a gloomy picture, but official development aid may not be as forthcoming as before. Kenya’s major development partners are realigning their national agenda and reviving their own economies which could mean a decline in future climate financing allocations. Since 2017 is an election year, debt sustainability has frequently featured in national debates. The IMF reported that Kenya’s gross public debt has increased from 44 percent of the GDP at the end of 2013 to 52 percent in September 2015. It is likely to stabilise at around 54–55 percent between 2017–2019. Therefore, the incoming government should consider greening public finances and processes to minimise future adaptation and mitigation costs.The country should employ risk management policies such as early warning systems, resilient infrastructure and increase access to cost-effective insurance.
By employing climate-smart agriculture, Kenyans will regain food security as well as narrow the importation bill. The assent of the Movable Movable Property Security Rights Act 2017 has broadened the collateral pool to include intellectual property, durable goods and livestock to secure loans.This will enhance the demography of citizens (particularly farmers) who can access credit as well as spur enterprise development.
This was welcomed by financiers following the passing of Banking Amendment Act 2016 (the interest capping law). Initial evidence shows from the Kenya Bankers Association shows that the law has contributed to the slowdown in private sector credit. Banks are playing it safe and are largely to disbursing credit to four sectors: household, trade, manufacturing and building & construction. Hence, innovative MSMEs in the green space have fewer chances to obtain bank financing due to their perceived high-risk profiles. The government can further intervene by providing public credit guarantees for agri-financing through the banking sector boost the MSMEs in this critical sector.
From the above discussion, it is evident that if we do not heed to the challenges of climate change, the country’s macroeconomic stability could be further exacerbated. Less talk and more action is required from players at the macroeconomic level and translated into actionable steps for the average Kenyan. Kenya can borrow a leaf from the Dutch who have that has learned to survive with the threat of flooding. To paraphrase Michael Kimmelman of the New York Times, let us contrive to live with nature, rather than fight (what will inevitably be, we will come to realise) a losing battle.
REFERENCES
- IMF Regional Outlook for sub-Saharan Africa October 2016
- Ibid.
- Vitousek, S., Barnard, P., Fletcher, C., Frazer, N., Erikson, L. and Storlazzi C. (2017) Doubling of coastal flooding frequency within decades due to sea-level rise. Scientific Reports 7, (1399) doi:10.1038/s41598–017–01362–7 [Available here]
- Nakhooda S. and Watson C. (2016) Adaptation Finance and Infrastructure Agenda. ODI Working Paper 437. London: Overseas Development Institute.[Available here]
Further Reading
Charlene Watson and Jan Kellet (2016) Financing sustainable development: The Critical Role of Risk and Development ODI, UNDP and Swiss Agency for Development and Cooperation (SDC) March 2016
Brahmbhatt, M., Bishop R., Zhao, X., Lemma, A., Granoff, I., Godfrey, N., and te Velde, D.W.,( 2016). Africa’s New Climate Economy: Economic Transformation and Social and Environmental Change. London and Washington, DC: New Climate Economy and Overseas Development Institute . [Available here]
Karumba, M. and Wafula, W. (2012).Collateral Lending: Are there alternatives for the Kenyan Banking Industry? KBA Working Paper 3. Nairobi: Kenya Bankers Association:Centre for Research on Financial Markets and Policy. [Available here]
Disclaimer: All views expressed here do not necessarily reflect the opinions of my employers or clients, past or present.
