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Last Updated: Wednesday, 2 January 2008, 17:23 GMT
Violence threatens Kenya's economy
By Katie Hunt
Business Reporter, BBC News

A giraffe in Kenya's Tsavo West National Park
Kenya is one of Africa's top tourist destinations.
Tourists arriving in Kenya hope to catch a glimpse of lion or elephant while on safari, or lounge on the country's 300 miles of white, sandy beaches.

Instead, holidaymakers are finding themselves reluctant to venture from their hotels as violence has erupted across the country, killing around 300 people, after a disputed election.

Kenya's tourism industry, which brings in some $900m (455m) a year and attracts more than one million visitors a year, is sure to take a hit after four days of rioting and ethnic clashes.

British tourists in Kenya have been advised by the Foreign Office to stay indoors, and the UK is warning against all but essential travel to areas of Mombasa and the capital, Nairobi.

The disruption threatens to derail one of sub-Saharan Africa's rare economic success stories.

"Until recently Kenya was seen as a bastion of stability in Africa," says Razia Khan, an analyst specialising in Africa at Standard Chartered bank.

"The impact on tourism depends on how quickly there is a restoration of normal conditions."

Few cancellations so far

UK tour operators, who met today to discuss the situation, say they have so far received few cancellations, and the main safari and resort areas remain unaffected by the violence, according to trade body ABTA.

Kenya's economy

But reports say that holidaymakers were held back after their flights landed at Mombasa's Moi International Airport while people arranged armed convoys to escort buses to hotels.

Kenya's economy has weathered travel warnings and steep drops in tourist numbers before.

Holidaymakers steered clear of Kenya after the US embassy bombing in Nairobi in 1998 and the Mombasa attacks in 2002, and the economy would likely survive any drop in tourist numbers.

"The Kenyan economy is in a position of strength. Tourism flows have been strong so there will be room to withstand any temporary downturn," says Ms Khan.

Disruption

A potential bigger problem for Kenya's economy, if the violence continues, could be disruption to the country's thriving horticulture and agriculture sector, which represents a quarter of the country's gross domestic product.

Exports of tea, vegetables and flowers are big earners of foreign exchange.

There are fears that food prices could increase throughout the region if the unrest continues
BBC Africa analyst Mary Harper

Unofficial roadblocks by young men armed with machetes are likely to interrupt transport of such products between Kenya's major cities, ports and airports.

Any disruption would be very costly for suppliers of perishable goods such as cut flowers, of which Kenya is the main supplier to Europe.

The violence has also postponed the world's biggest tea auction, held weekly in the port city of Mombasa.

But analysts say it is too soon to assess the real impact of the violence on the economy, which could take months to filter through.

"We've only really seen two days of violence. Two days of disruption is not enough top make people look elsewhere for suppliers," says Ms Khan.

Regional impact

The violence in Kenya is affecting other parts of East Africa, especially landlocked countries which depend on it for essential imports, especially fuel, reports the BBC Africa analyst Mary Harper.

British tourist arrives back at Gatwick airport from Mombasa
Tourists are cutting short their holidays in Kenya

Uganda, Rwanda, Burundi and eastern Congo all get their fuel from a refinery in Eldoret, the town in western Kenya where on Tuesday more than 30 people were burned to death in a church.

"Fuel prices have doubled in Uganda, and there are long queues at petrol stations as supplies start to dry up," she says.

As the most industrialised country in the region, it also provides many countries in East Africa with basic household goods such as cooking oil, salt and flour.

"There are fears that food prices could increase throughout the region if the unrest continues," she warned.

Foreign investors

Private investment has been behind Kenya's thriving economy. It has averaged GDP growth of 5% since 2002 and the economy is expected to expand by 7% in 2007 - rates of growth that are only beaten in booming Asian countries such as China.

Kenya's shilling strengthened by 9% against the dollar in 2007 as foreign investors poured into the country's stocks and bonds, but those gains were largely erased when currency markets began trading on Wednesday.

Kenyan beach
Tourism is Kenya's biggest earner of foreign exchange

Kenya's currency fell 7%, trading at 68 shillings per US dollar from 63.50 on 24 December, the last day of trading before the new year.

Share prices fell on Kenya's stock exchange although volumes were a fifth lower than normal as only a trickle of office workers in the capital Nairobi were able make it through police cordons to begin the new working year.

"There are not many countries in Africa with decent market infrastructure and Kenya happens to be one of them," says Beat Siegenthaler, chief strategist at TD Securities in London.

"This will serve to remind people that it is not straightforward to invest in emerging markets."

Reputation at risk

Kenyan authorities are acutely aware that the violence making headlines worldwide will sully its reputation among foreign investors. The government played down the risks to the country's economy:

"People will be on a wait and see attitude so there will be little trading. We still have a good comfort zone, so we are not panicking on that," says Kenyan Finance Minister Amos Kimunya.

Unlike many economies in resource-rich Africa, Kenya is not solely reliant on one or two commodities to drive growth. In addition to tourism and agriculture, the country is also a manufacturing and financial services hub in the region.

Analysts say this strong base should allow the country to ride out any economic slowdown, but with no sign yet of the violence abating, Kenya's economy will be lucky to emerge unscathed.

Map of Kenya





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