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[Dehai-WN] Businessdailyafrica.com: Is Kenya's oil search a fool's gold hunt?

From: Berhane Habtemariam <Berhane.Habtemariam_at_gmx.de_at_dehai.org>
Date: Mon, 9 Apr 2012 17:06:13 +0200

Is Kenya's oil search a fool's gold hunt?

By Mbui Wagacha ( <javascript:void(0);> email the author)

Posted Monday, April 9 2012 at 14:41

In Summary

Unexpected wealth from natural resources is destabilising unless enjoyed

Consider the Saudis and the Norwegians.

Even when writers pursue comic adventures, such as Miguel de Cervantes
Saavedra's Don Quixote de la Manchaby, the reader ignores the author's
uncanny insight and powerful ideas at his own peril.

The main character in Don Quixote is witty. He spends money unwisely and
keeps doubtful accounts.

He goes to jail for that.

Yet, when he warns his 16th Century Spanish government of irrational
spending of money earned from gold raided from the Americas, he leaves a
message for modern gas and oil exporters.

Unexpected wealth from natural resources is destabilising unless enjoyed

Consider the Saudis and the Norwegians.

The former attract labour from faraway places such as Kenya, the
Philippines, and Bangladesh while they jet off to party in western capitals.

They are accused of being unfair, even cruel, to foreign hired hands.

The Norwegians, on the other hand, are renowned for disciplined use of their

Some of the money from oil goes into a sovereign wealth fund for the good of
both present and future generations of Norwegians.
Peddlers of the resourse curse notion argue that more oil is not good for
poor countries.

The hypocrisy finds a ready gallery, especially in the western media that
entertains its readers at the expense of third-world oil producing

The laughing masses in the West might soon include Kenya on the list of
countries that have caught the Dutch Disease if Ngamia 1 spurts out oil in
good quantities.

Kenya should start with open and fair oil exploration contracts, and attend
good classes on governance and economic management.

The country should join global bodies such as the Extractive Industry
Transparency Initiative (EATI) that guarantee best practices and
transparency, helping governments to avoid political meddling in oil

It should avoid Nigeria's Niger Delta gun-fights and kidnapping through
inclusion and fair income distribution.

And it should run Nairobi's corruption barons out of town if they try to
foray into oil. Like Norway, the country should ban politicians and
puppeteers from politicking on oil in election campaigns.

Oil and gas earnings are game-changers whether the exchange rate is fixed or
flexible as in Kenya's case.

Under fixed rates, a "backdoor" exchange rate sprouts as inflows of foreign
reserves increase money supply and drive up inflation.

In our flexible exchange rate case, petro-dollars would increase the supply
of foreign currency and strengthen the shilling; just what the doctor

For Kenya, the biggest threat to address will be a tendency for a gradual
de-industrialisation and contraction of the export sector as the domestic

Much more complex and potentially far-reaching are the "resource movement
effects", where demand for capital and labour shifts to the booming
production sectors, including an emergent oil industry.

With Kenya's universities, colleges, and technical institutes booming, and
spilling skilled people that have difficulty finding employment on the
streets, one should pray that oil discovery generates many new jobs. But
this may not be the case.

Why? Minerals, including oil, are economical on labour and heavy on capital
and equipment.

Good management

Appropriate economic policies should consider whether the oil flow is
transitory or permanent. If temporary, the earnings require good management
that slows the expected strong appreciation of the shilling to protect

The process is called sterilisation. One approach is to create a sovereign
wealth fund abroad.

Typically invested in global financial markets, the aim of the fund is to
minimise risks and maximise earnings.

The fund should be tailored to economic policy, impact, and consistency with
the country's macro-stability in mind.

Measures to strengthen productivity also counteract exchange rate
appreciation. So does diversification of exports and markets.
With hindsight, Kenya's stability is a stroke of luck given that the country
has already started implementing Vision 2030's medium term plan.

Its complex and ambitious infrastructure projects, when completed, will help
increase the competitiveness of the manufacturing sector and transform the

Above all, the oil find should be used to unite Kenyans.

Money earned from oil should be spend on social sectors such as education
and health, as well as creation of economic opportunity with the aim of
reducing Kenya's inequality.

The case of Saudi Arabia and Norway has long term lessons in regard to
sharing the oil resource as well as responsibilities that come with it.

It is thus possible to heed advice from Don Quixote without being hindered
by his poor personal finances, and without a sense of guilt that Kenya's
elite will gorge themselves with "raided gold from the Americas".

Dr Wagacha is a Macroeconomics consultant.


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