Kenya’s economic outlook for the coming years looks robust, despite some challenges, such as a trade deficit, rising debt and global headwinds; yet the country is performing well, particularly in comparison to the more volatile conditions elsewhere in Africa and underwhelming growth in advanced economies. Following 2014’s GDP rebasing, the country is now East Africa’s largest economy and boasts a prominent profile in the EAC.
In his budget statement for the 2015/16 fiscal year (FY) presented in June 2015, Cabinet Secretary for the National Treasury Henry Rotich said growth was expected to be 6% in 2015 and to continue at a similar level for the coming years. Growth reached 5.3% in 2014 and 5.7% in 2013, according to the Kenya National Bureau of Statistics (KNBS). Rotich also highlighted progress in the statement, saying, “We have significantly improved the business environment; rolled out the biggest infrastructure in Kenya’s history (the standard-gauge railway); completed key programmes in the roads and energy sectors; and brought down the cost of living.” The statement covered the government’s commitment to improving the country’s rankings in terms of ease of doing business as well. Rotich said, “Reducing the cost of doing business and encouraging private sector innovation, entrepreneurship and business expansion is a key prerequisite to achieving strong and sustained economic growth and poverty reduction.”
According to the World Bank, GDP per capita was $1350 in 2014, and Kenya has been reclassified as a lower middle-income country and the largest economy in East Africa after a statistical rebasing, which shifted the base year to 2009, when the economy increased by 25.3%, making it Africa’s ninth-biggest economy. In 2014 growth was aided in large part by a stronger performance from agriculture, the country’s main export earner and employer, which added 14.5% to year-on-year (y-o-y) growth. In addition, on the back of major public works projects, construction accounted for 11.1% of 2014 growth, according to the KNBS.
The economy is also well diversified. Unsurprisingly, given the country’s status as a major producer of maize and cash crops like tea and coffee, agriculture was the biggest sector at 27.3% of GDP by activity in 2014. Agriculture also accounts for roughly two-thirds of all exports and supports as much as 80% of the rural population directly or indirectly. The second-largest contributor to GDP in 2014 was manufacturing at 11%, according to KNBS statistics, although its share is decreasing and is down from 11.8% in 2011 – largely as a result of depressed export demand, power outages and high input costs. Transport and wholesale and retail trade contributed roughly 16% of GDP between the two sectors. By comparison, the hospitality sector, including accommodation and restaurants, contracted by 4.7% as security concerns negatively affected visitor figures.
The future outlook, while slightly more modest than previously forecasts, is nonetheless impressively robust, with growth expected to be greater than in advanced economies. In June 2015 the IMF trimmed its expectations for the economy, cutting its 2015 estimate from 6.9% GDP growth to 6.5%. In mid-October 2015 the World Bank also downgraded its forecast for 2015 from 6% to 5.4% and reduced its expectations for 2016 from 6.6% to 5.7%. The World Bank cited the fact that the economy was struggling with currency volatility and tighter monetary policy, including an interest rate hike of 300 basis points and the shilling’s 15% drop against the dollar. However, the World Bank added that Kenya was still on course to be one of Africa’s fastest-growing economies despite the slight economic slowdown.
Government Goals & Strategy
Kenyan policy is shaped in terms of Vision 2030, which is sub-divided into five-year, medium-term rolling plans, with the current plan covering the 2013-17 period. The five-year plan contains 182 projects, many of which are large infrastructural schemes that may take more than five years. Several key projects include a shift away from rain-fed agriculture, such as the Ending Drought Emergencies plan, which will direct more investment towards irrigation, mechanising the sector, reviving cooperatives and farmers’ unions, and emphasising value addition, among other things. The 2013-17 plan’s priorities include a focus on counties and devolution, as well as meeting certain targets set under the Millennium Development Goals (MDGs). In September 2015, however, the MDGs were replaced by the UN’s Sustainable Development Goals, which include 17 broad goals with 169 targets. These will need to be aligned with Kenya’s own aims, especially in terms of sustainability and climate change. Oil and gas are also now part of a new economic pillar following recent discoveries.
The strategy and its associated components will require significant government financing. The government’s fiscal performance has been relatively stable over recent years (see analysis), although with public spending increasing to help underwrite major infrastructure projects, including the $24.5bn Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) corridor and port development, debt has been inching upwards. Concerns over debt levels, flagged by the IMF on the back of a $2bn eurobond issuance in 2014, prompted the Central Bank of Kenya (CBK) to offer reassurances that public debt is sustainable, after it reached 46% of GDP by mid-November 2014.
While the government stepped up borrowing during 2014, raising debt stocks on both the international and domestic markets, including through a $2bn eurobond, much of the funding was directed to transport and infrastructure. Njuguna Ndung’u, former CBK governor, told local press that the financial stimulus would be instrumental in boosting economic capacity. In June 2015 a KSh2.1trn ($23.1bn) budget, Kenya’s largest to date, was announced, with planned expenditure up by about 17% on funds allocated in 2014/15.
A number of sectors will benefit from the increase in spending, and infrastructure and energy are key recipients for the 2015/16 FY, receiving up to 18% of the total budget allocation. Other areas flagged for additional support include security, tourism, education and agriculture. However, while higher spending will be supported in part by increased tax revenues, which are up 13% on 2014 levels, surpassing the KSh1trn ($11bn) mark for the first time, the budget still faces a shortfall equivalent to 8.7% of GDP. The deficit is slightly more than one full percentage point higher than that of the 2014/15 FY budget. The government has noted that the deficit would be nearly 25% lower if capital spending for the planned Mombasa-Nairobi railway were to be excluded.
Kenya currently has a diversified group of trade partners, with strong ties to Asia, Europe and Africa. Appropriately for a country that is looking to position itself as a gateway to the continent, roughly 45% of its exports by value go to other African nations. Of this, the majority of Kenya’s Africa-bound goods go to fellow EAC states. However, concerns have been raised that Kenya’s position in these markets will be increasingly challenged by an influx of Chinese goods.
Despite this, the 2015 signature of the Tripartite Free Trade Area Agreement – which links the blocs of the EAC, the Common Market for Eastern and Southern Africa (of which Kenya is a member), and the Southern African Development Community in a joint trade accord – may help Kenya to penetrate new markets elsewhere on the continent.
Exports to Europe also increased in value, despite still low macroeconomic growth there, expanding by 11% y-o-y. The Netherlands and the UK are Kenya’s first- and second-largest European export markets. Most of the country’s outbound goods are agricultural products – namely horticulture and cash crops like tea and coffee – although textile products have been rising, aided in part by the Africa Growth and Opportunities Act trade agreement the country has with the US.
However, due to increased construction activity in the country for projects like LAPSSET and other initiatives under Vision 2030, imports have been rising at a far faster pace, and the country’s trade deficit has been exacerbated as a result. Export cover of the import bill has shrunk by 10 percentage points over the past five years, down to 33%, as a result of increased imports of industrial, transport and construction equipment. Purchases of new aircraft from the US, engineering products from China, and tractors from the UK and Germany have been the most dominant drivers of increased import values. Currently, Asia is the source of around 60% of all imports.
Kenya’s role as the largest economy in East Africa, along with its strong trade links to neighbouring countries, makes it a natural platform for foreign investors looking for an entry point into the region. Indeed, since independence the country has been a popular choice for foreign investors looking for a foothold on the continent. In comparative terms, however, Kenya has historically under-performed when it comes to attracting foreign direct investment (FDI).
According to UN Conference on Trade and Development (UNCTAD) statistics, for several years in the last decade Kenya lagged behind Tanzania and Uganda in dollar amounts of FDI after the financial crisis. In 2010, according to UNCTAD, Kenya received $186m in FDI inflows – equal to less than 1% of GDP – compared to $433m in Tanzania and $817m in Uganda, despite Kenya’s larger size.
However, thanks to the efforts of President Uhuru Kenyatta’s administration to improve the country’s business environment, such as the simplification of procedures and increased promotional efforts by the Kenya Investment Authority, as well as the surge in spending on infrastructure projects and the discovery of commercial oil deposits onshore and offshore, these figures have jumped significantly. While 2008 to 2010 saw the country receiving inflows equivalent to less than 1% of overall GDP, since 2012 that figure has gone up, rising from $96m in 2008 to $259m in 2012, $505m in 2013 and nearly $1bn in 2014. The historical figures may in fact be under-reported due to the lack of a single government agency having an explicit mandate to track FDI flows. Nonetheless, John M Ohaga, managing partner at TripleOKL aw, maintains that government processes must continue to improve if investment is to thrive: “Bureaucracy is by far the biggest obstacle to investors and doing business in the country. While some progress has been made, there is room for improvement if Kenya is to continue to attract world-class investors to the country.”
The raft of reforms is also having an immediate impact in other ways. In October 2015 Kenya ranked third globally among the countries that had made the most improvement on the World Bank’s 2016 “Doing Business” index. The country rose an impressive 28 places from 136th to 108th out of 189 economies in its overall ranking. Adan Mohammed, Cabinet secretary for industrialisation and enterprise development, told local press that the government has so far instituted reforms that cover access to credit and reduced power costs, reduced wait times for starting a business, and established a faster and more transparent process for registering property. The most notable improvements were in getting credit, which jumped from 118th to 28th; followed by the getting electricity indicator, which saw a spike from 141st to 127th; registering property, which rose from 121st to 115th; and dealing with construction permits, jumping from 152nd to 149th.
Deputy President William Ruto told local press that the government was committed to monitoring progress, ensuring the country stays on track and continues to improve. He said, “As investment flows seek new locations, Africa is their natural home. First movers in creating an enabling environment on the continent will be the winners.”
The population was estimated at 43m in 2014, according to KNBS, and is growing at 2.7% a year. In June 2015 Rotich said that roughly 800,000 jobs had been created in the previous fiscal year. The statistics bureau put wage employment at 2.37m in 2014, up from 2.28m the year before, while a report from the Kenya Institute for Public Policy Research and Analysis (KIPPRA) suggested that the informal sector, which is always an under-recorded part of any economy, saw the creation of another 693,000 jobs. As a result, exact numbers are subject to debate and there is much discussion over to what extent informal activity should be included in those figures.
However, tackling unemployment certainly is a priority for the government. On the back of the “2012-13 Household Budget Survey” conducted by KNBS, the country had its first official unemployment estimate of 8.1%. Media reports have suggested that it could be higher, particularly among the 18-35 age group, for which local press has cited figures as high as 70%. The informal sector plays a significant role in job creation, and, according to the KIPPRA, could account for as much as 80% or more of total employment. The smaller formal sector remains heavily weighted towards public employment, with government jobs accounting for roughly one-third of the total.
To help increase the creation of new jobs, the government has put in place several programmes to increase opportunities, including through direct hires – particularly at the county level and in the education sector, where new local government staff and teachers are in high demand – as well as through more innovative ideas like the Uwezo Fund, which provides financing for smaller firms.
The government has also taken an aggressive line on addressing concerns about national security in Kenya, which have weighed on investment and visitor numbers and led to a 12% y-o-y rise in total allocations for national security bodies to KSh223.9bn ($2.5bn, see analysis). Overall, much of the budget has been set aside for measures aimed at restoring confidence in the country. In May 2015 the police rolled out the first phase of a National Security Surveillance, Communication and Control System for Nairobi and Mombasa. The first phase includes 1800 high-powered CCTV cameras, an integrated command, control and communications centre, and an emergency response contact centre.
In addition, the new budget allocates KSh5.2bn ($57.2m) for the recovery of the tourism sector, with the extra funding to be used to market Kenya in both traditional and untapped markets. Tourism has traditionally served as one of Kenya’s largest foreign exchange earners, but security threats and travel advisories issued regarding the country led to an 11.1% y-o-y drop in international arrivals in 2014, according to official data released in May 2015. A further contraction of 16.9% for the first 9 months of the year was posted in 2015.
Ibrahim Mohamed, the principal secretary for commerce and tourism, said he was confident the tourism industry would fully recover over the next two years. “We have gone through the bad part and we have done what it takes to curb insecurity, which was our main drawback,” Mohamed told local press in July 2015. “We are also marketing Kenya using these gains and we have already seen travel advisories being removed by Britain.”
In March 2015 President Kenyatta highlighted corruption as a major constraint to development in his state of the nation address. Institutions and government departments involved in corruption cases include the Ministry of Energy, the Independent Electoral and Boundaries Commission, a number of state corporations and several county governments. Kenyatta also ordered the Ethics and Anti-Corruption Commission to investigate 170 officials for fraud, but on April 23, 2015 the chairman of the agency and his deputy were suspended on allegations of misconduct. An e-procurement module has been created on the Integrated Financial Management Information System and all government ministries, departments and agencies are now required to use it. It checks procurement contracts against market prices. All receipts must go through the e-citizen payment platform, including business registration, land transactions, motor vehicles, registration of persons, and birth and death certificates.
Counties & Devolution
Devolution is a result of the passage of the 2010 constitution, and the process by which a selection of national governance powers have been shifted to newly created local bodies. It represents a significant change in the country’s governance process and potentially its economic development trajectory. In an early 2015 report the World Bank said, “Kenya’s decentralisation is among the most rapid and ambitious devolution processes going on in the world, with new governance challenges and opportunities as the country builds a new set of county governments from scratch.” Apurva Sanghi, the World Bank’s lead economist and programme leader for Eritrea, Kenya, Rwanda and Uganda, told OBG that devolution was bringing new resources to previously marginalised areas such as Turkana County, North-East Province and the north-west, diversifying growth away from traditional centres such as Nairobi, Mombasa and Kisumu.
The process is laid out in the 2010 Kenyan Constitution and the County Government Act of 2012, which assigns service delivery in key sectors such as water, health care and agriculture to county governments, and grants them the power to levy taxes and fees. The official launch came in March 2013 with elections for 47 new county assemblies and county governors to take over from a hodgepodge of different entities, including eight provincial administrations and 175 local authorities.
Currently, the bulk of the counties rely heavily on transfers from the national budget, with counties required to receive a minimum of 15% of overall revenues – although in recent years this has been regularly exceeded. The 2015/16 budget includes KSh259.7bn ($2.9bn) as shareable revenues. There is another KSh27.3bn ($300.3m) of conditional allocations for purposes such as health care provision, road maintenance and development funding.
While the counties have seen their local revenues nearly triple y-o-y, Rotich warned about efforts by some county governments to introduce new fees and service charges, or to raise existing ones. In his budget statement, Rotich said, “If left unchecked, this situation can have detrimental effects on county revenues in the medium term, particularly if they drive away business and investment.” The Treasury has responded with guidelines for drafting county finance acts.
Many counties are also deliberating on limiting the expansion of tax or fee regimes to ensure an attractive environment for investment, with counties such as Meru and Nakuru even embarking on roadshows and introducing new tax incentives.
In large part due to the many reforms and developments of recent years – from devolution and a streamlined bureaucracy to the discovery of oil and a successful eurobond issue – Kenya’s economy remains one of the most advanced and diversified in Africa. Infrastructure projects, including the railway, roads and ports, are set to bring benefits in the form of lower transports costs and competitiveness as they come on-stream, although there has not been an open discussion of the economic cost-benefit analysis.
With such a favourable environment, expansion is expected to be driven by underlying factors, including demographic growth and increasing household consumption, as well as more stable improvements in key sectors like agriculture, transport, telecommunications and financial services. Kenya is well placed to benefit from the fast-moving integration of the EAC. Indeed, such is the current momentum that the significant reserves of oil and gas, when they do start production, will hardly be needed to fuel the growth.
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