Kenya is entering a decisive year. Threemain developments will make 2012 extraordinary. First, Kenyawill hold national elections for the first time since thetraumatic post-election violence of 2007-08, which endedKenya's high growth momentum abruptly. Second,Kenya's economy will need to navigate through a severeeconomic storm, which could well become a hurricane,especially if Europe enters into a recession. Third, thecountry will implement its most ambitious governance reformsever, namely the devolution of responsibility to forty-sevennew counties. Kenya's policy makers will need todisplay tremendous skill and steadfast leadership in orderto balance the need for fiscal prudence, with ensuring thatresource flows to new local governments are sufficient tomeet their needs. High expectations of the promise ofdevolution need to be met by equally high quality planningand execution of its delivery. Kenya will enter 2012 from aweaker-than expected economic position. Kenya's economyis navigating rough economic waters, where existingstructural weaknesses have been compounded by short-termshocks. The most visible sign of Kenya's economicchallenge is the depreciating shilling, which reached an alltime low against the US Dollar in October 2011. The elementsbehind this situation are high international food and fuelprices, the drought compounded by conflict in the horn ofAfrica, the Euro crisis, widening fiscal and current accountdeficits, and major inefficiencies in Kenya'sagriculture sector. The recent developments are alsoundermining one of Kenya's main strengths over the lastdecade: the credibility and predictability of itsmacroeconomic policies.
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