RETURNS

Maximising Kenya's potential natural resource revenue

The resources while a source of significant revenues may at times be a double pronged sword

In Summary
  • Since Kenya’s discovery of oil deposits in 2010, the general populace has largely played a waiting game.
  • A decade down the line, the prospect of petro-dollars significantly boosting Kenya’s monetary resource pool is on the horizon.
Tullow oil equipment at oil Ngamia 1, oil site in Lokichar Turkana.
TULLOW OIL DRILLING: Tullow oil equipment at oil Ngamia 1, oil site in Lokichar Turkana.
Image: HESBORN ETYANG

Since Kenya’s discovery of oil deposits in 2010, the general populace has largely played a waiting game, with patience wearing thin, following the expectation that Kenya will speedily become a natural resource producing nation, specifically petroleum.

A decade down the line, the prospect of petro-dollars significantly boosting Kenya’s monetary resource pool is on the horizon, with the relevant contractors considering a Final Investment Decision (FID).

With the expectation of petro-dollars flowing into the Kenyan economy, it stands to reason that it is incumbent on the Government of Kenya to chart out a fiscal strategy on how to maximize benefits arising from the sale of petroleum in international markets, in view of the finite nature of natural resources and, particularly in relation to petroleum resources, the volatility of global oil markets.

As has been evidenced by petroleum dependent economies, such as Nigeria and Venezuela, the natural resource, while a source of significant revenues, may at times be a double pronged sword if not effectively managed. Due to the volatility of global oil markets, together with the finite nature of natural resources, an economy wholly dependent on petroleum revenues exposes itself to adverse consequences, most notably being the resource curse.

The resource curse, coined by British economist Richard Auty and colloquially known as the paradox of plenty or the Dutch Disease, refers to the failure of many resource-rich countries to benefit fully from their natural resource wealth, and for governments in these countries to respond effectively to public welfare needs.

Per numerous studies on the utilization of natural resource revenue, and its impact to the economic standing of a resource rich nation, it is indeed paradoxical that resource rich countries often tend to have higher rates of conflict and authoritarianism, lower rates of economic stability and economic stability as compares to their non-resource rich peers. These challenges largely arise due to the mismanagement of natural resource revenue, exploitation of natural resources revenue by multinational corporations and heavy reliance on oil revenues in exclusion of other revenue streams or industries.

In order to proactively prevent Kenya falling prey to the resource curse, it is imperative that adequate policies and mechanisms are put in place that ensure that natural resource revenues generated through the exportation of petroleum stand to benefit the Kenyan economy in the long term. A tried and tested solution, is setting up a sovereign wealth fund, through which the Government of Kenya may save petro-dollars for the benefit of future generations, and similarly invest the same with a view to diversity Kenya’s income streams. This ensures that the economy is not dependent on petroleum revenues, which may place the nation at the mercy of volatile oil prices, and that future generations may benefit from the natural resource, even once depleted.