Connect with us

Kenya

The Big 4 priorities to boost Kenya’s economy

Published

on

Kenya’s economy grew by 4.9 per cent in 2017, recording the slowest margin in five years amid prolonged electoral process and adverse weather. That pace of growth falls far below the 5.9 per cent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

The last time Kenya recorded growth below five per cent was in 2012, also an election year, when the economy expanded by 4.5 per cent.

“The slowdown in the performance of the economy was partly attributable to uncertainty associated with a prolonged electioneering period coupled with adverse effects of weather,” said Treasury and Planning Secretary Henry Rotich.

Kenya’s economy remains resilient due to its diversity; services contributed the highest proportion to GDP growth.

Kenya’s economy grew by 4.9 per cent in 2017, recording the slowest margin in five years amid prolonged electoral process and adverse weather. That pace of growth falls far below the 5.9 per cent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

The last time Kenya recorded growth below five per cent was in 2012, also an election year, when the economy expanded by 4.5 per cent. “The slowdown in the performance of the economy was partly attributable to uncertainty associated with a prolonged electioneering period coupled with adverse effects of weather,” said Treasury and Planning Secretary Henry Rotich.

The KNBS data shows that agriculture, which accounted for 31.5 per cent of the 2017 GDP grew by only 1.6 per cent compared with 5.1 per cent in 2016. All the segments except cut flowers shrunk during the period. Export earnings from cut flower grew by 16.1 per cent to hit Ksh82.2 billion ($819.9 million) in 2017.

Kenya’s economy is expected to grow 5.5 percent this year compared with the estimated 4.9 percent in 2017, thanks to better weather and less political risk after last year’s presidential election, the World Bank said in April.

A severe drought in the first quarter of 2017, political turmoil due to a disputed and then re-run presidential election and sluggish private sector credit growth all helped cut the 2017 economic growth to the lowest in five years, from 5.9 percent the previous year.

Notwithstanding the projected rebound in economic activity, risks are tilted to the downside. The Government of Kenya has outlined four big priority areas for the next five years. Thes eare agricultural and food security, affordable housing, increased share of manufacturing, and universal health coverage.

Support from the public and more importantly the private sector will be required to achieve the big 4. Specific measures to create fiscal room to support the big 4 can include: enhancing domestic revenue mobilization through the rationalization of tax exemptions; slowing the pace of expansion of recurrent spending; and improving the efficiency of spending.

Boosting agricultural productivity and food security will require reallocating more resources to agriculture and improving the efficiency of current spending in the sector.

To eradicate poverty by 2030, Kenya will need a combination of higher growth, more inclusive growth, and growth that is increasingly driven by the private sector and translates into more rapid poverty reduction. Kenya’s finance ministry has also reiterated growth to rebound to 5.5 percent this year but pressure to curb the government’s fiscal deficit could cause it to scale back ambitious infrastructure projects, weighing economic output.

“The dissipation of political uncertainty and the recovery in the global economy is supporting a rebound in business sentiment,” the World Bank said in its latest report on the Kenyan economy. The country’s crop growing areas have been enjoying good rains since March, boosting expectations of improved harvests.

Farming is the biggest sector. But the World Bank said higher oil prices, reduced government investment in infrastructure and still-weak credit growth could curb some of the optimism. Kenya capped commercial lending rates in September 2016 at 4 percentage points above the central bank’s benchmark rate, which now stands at 9.5 percent, in an attempt to limit the cost of borrowing for businesses and individuals.

The central bank said last month the cap probably cut last year’s estimated economic growth rate by 0.4 percentage points because it limits credit to small and medium businesses who are deemed too risky by lenders. The World Bank said its forecast was premised on the potential resolution of the cap issue and a reversal of the decline in credit to the private sector.

Private sector investment’s impact on growth had fallen to -0.7 percentage points of gross domestic product in the four years to 2017, from 1.3 percentage points in the four years from 2013, the bank said in the report. It attributed the drop to the higher government spending, investor nerves over last year’s election and the decline in private sector credit that was made worse by the presence of interest rate caps.

INFLATION

Kenyans also had to contend with steady buildup in inflationary pressure on the back of rising oil and food prices through 2017. The KNBS data shows inflation rose to an average of 8 per cent last year, up from 6.3 per cent the previous year.

“We have lined up several interventions, which together with continuing political stability, good rains and macro-economic environment will lead to better economic performance in 2018,” said Mr. Rotich. “Inflation is expected to ease in 2018 supported by lower food prices due to good rains and improved agriculture,” he added.

After multiple headwinds dampened growth in 2017, a nascent rebound in economic activity in Kenya is gaining momentum. Notwithstanding the projected rebound in economic activity risks are tilted to the downside. The Government of Kenya has outlined four big priority areas for the next five years.

These are agricultural and food security, affordable housing, increased share of manufacturing, and universal health coverage. Support from the public and more importantly the private sector will be required to achieve the big 4.

Specific measures to create fiscal room to support the big 4 can include: enhancing domestic revenue mobilization through the rationalization of tax exemptions; slowing the pace of expansion of recurrent spending; and improving the efficiency of spending.

Boosting agricultural productivity and food security will require re-allocating more resources to agriculture and improving the efficiency of current spending in the sector. To eradicate poverty by 2030, Kenya will need a combination of higher growth, more inclusive growth, and growth that is increasingly driven by the private sector and translates into more rapid poverty reduction.

President Uhuru Kenyatta won re-election in November in a second vote after the first in August was annulled by the Supreme Court citing irregularities. Around 100 people, mainly opposition supporters, were killed mainly by Kenya police during the prolonged election season.

“Despite the slowdown in 2017 our outlook is bright,” Rotich said at the launch of the annual economic survey. “We expect growth to recover to 5.8 percent in 2018 and over the medium term the growth is projected to increase by more than 7 percent.”

Growth slowed to 4.9 percent last year from a revised 5.9 percent in 2016, the statistics office said. Rotich said the projected economic rebound is supported by favourable economic fundamentals including inflation, which has dropped to about 4 percent this year. “The ongoing investments in infrastructure, improved business and factory confidence and strong private consumption are expected to support growth,” he said.

Kenya’s diversified economy is better able to withstand shocks like the commodity price drop that started in 2014 and hit oil-producing African countries such as Nigeria and Angola. But its economy was hobbled by a severe drought in the first quarter of last year that was followed by poor rainfall.

The services sector including tourism grew strongly last year and that helped to offset the slowdown in farming and manufacturing, said Zachary Mwangi, director general of the Kenya National Bureau of Statistics. Tourism is vital for hard currency and jobs and grew 14.7 percent while earnings surged 20 percent, he said.

In contrast, growth in the agriculture sector, which accounts for close to a third of overall output, slid to just 1.6 percent in 2017 from 5.1 percent the year before.

The government says manufacturing is a priority due to its potential to create jobs and it grew at 0.2 percent last year from 2.7 percent the year before. Production of cement, sugar and processed milk slid as firms reeled from the impact of the election and high costs.

Continue Reading
Advertisement
Click to comment

Kenya

Kenya’s economy on sound footing in 2019: Thanks to the political stability

Published

on

After a year that began on the wrong footing due to divisions over the hotly contested and controversial 2017 presidential polls, 2019 could bring with it better economic growth prospects.

Among the key issues that could shape economic conversations and the lives of Kenyans this year are whether a law on interest rate caps will be repealed, the national census, a new currency, and the political climate.

This positive outlook could, however, be affected by the high-octane politics that is gaining momentum – specifically a referendum and 2022 succession politics that could hamper the country’s economic growth.

But with the World Bank having projected Kenya’s economy to hit 6.01 per cent this year from 5.475 per cent recorded in 2018, the Government is upbeat about the oncoming economic prospects.

“Our growth outlook at around six per cent remains stable and so are other macroeconomic indicators like inflation, interest rates, and the currency exchange rates,” Treasury Cabinet Secretary Henry Rotich averred.

“We will continue to monitor the global developments especially trade wars, Brexit, commodity prices and US monetary policy and take appropriate actions to mitigate any negative consequences to our growth,” he said.

Since Uhuru Kenyatta became president, the highest rate at which Kenya’s economy has grown in a year was 5.9 per cent in 2016 and 2013, when Mwai Kibaki retired.

 

Remittance inflows

This year’s growth could be supported by strong remittance inflows and rising household income from agriculture and lower food prices.

“Manufacturing is still recovering and its activities remain sluggish. The sector growth rose from 0.5 per cent in 2017 to 2.7 per cent in 2018, but still remains weak compared with a three-year average of 3.6 per cent over 2013 to 2016,” said the World Bank recently.

Among the key drivers of growth this year will be an improved business environment as well as the easing of the political climate, underpinned by strong agricultural output and a good performance by the service sector.

Further, the Bretton Woods institution projects that with interest rates capping and banks leaning towards government securities, credit is unlikely to grow, especially for small enterprises.

This view has also been shared by the Central Bank of Kenya (CBK) which has consistently said that the ceiling on interest rates charged by banks was denying entrepreneurs access to credit which is stifling economic growth.

However, according to a survey released last week by research firm Trends and Insights for Africa (Tifa), four out of 10 Kenyans, or 44 per cent would like to set up a business next year while 32 per cent will be scouting for jobs.

The drafters of Vision 2030 had insisted that for Kenya to be a medium income economy, its GDP was supposed to grow by more than seven per cent annually for two decades.

If the political environment remains stable, Kenya’s economy will for the first time in a decade hit a six per cent growth rate in 2019. Industry leaders are however afraid that all this could be wiped out by the unpredictable operating environment.

“2019 promises to be a strong year for the sector, specifically if the predictable and stable business environment can be guaranteed in policy formulation and implementation,” Kenya Association of Manufacturers Chief Executive Phyliss Wakiaga revealed.

On the bright side, previous economic growth numbers show that Kenya’s economy has in the last two decades grown its fastest in the second year after a presidential election.

The growth, however, starts to decline in the third year as another election approaches.

In 2004, just a year after Mwai Kibaki had been elected as president Kenya’s economy grew by seven per cent. In 2010 it rebounded to 8.4 after the peace deal between Kibaki and his political nemesis Raila Odinga in the 2007 elections that led to the grand coalition government.

Then in 2015, year after Uhuru had been elected for his first term it hit 5.9 per cent. Thanks to the handshake between Uhuru and Raila, Kenya’s business climate has stabilized, though still struggling in some sectors such as mining which remains on the growth path.

In all real GDP grew an estimated 5.9% in 2018, from 4.9% in 2017, supported by good weather, eased political uncertainties, improved business confidence, and strong private consumption. On the supply side, services accounted for 52.5% of the growth, agriculture for 23.7%, and industry for 23.8%. On the demand side, private consumption was the key driver of growth. The public debt–to-GDP ratio increased considerably over the past five years to 57% at the end of June 2018. Half of public debt is external. The share of loans from non-concessional sources has increased, partly because Kenya issued a $2 billion Eurobond in February 2018. An October 2018 International Monetary Fund debt sustainability analysis elevated the country’s risk of debt stress to moderate.

A tighter fiscal stance reduced the fiscal deficit to an estimated 6.7% of GDP in 2018, with the share of government spending in GDP falling to 23.9% from 28.0% in 2017. To stimulate growth, the Central Bank of Kenya reduced the interest rate to 9% in July 2018 from 9.5% in May. Nonetheless, a law capping interest rates discourages savings, reduces credit access to the private sector (especially small and medium enterprises), and impedes banking sector competition, particularly by reducing smaller banks’ profitability. The exchange rate was more stable in 2018 than in 2017. The current account deficit narrowed to an estimated 5.8% of GDP in 2018 from 6.7% in 2017, thanks to an improved trade balance as a result of increased Kenyan manufacturing exports. Kenya’s gross official reserves reached $8.5 billion (5.6 months of imports) in September 2018— a 7% increase from a year before.

Tailwinds and headwinds

Real GDP is projected to grow by 6.01% in 2019. Domestically, improved business confidence and continued macroeconomic stability will contribute to growth. Externally, tourism and the strengthening global economy will contribute.

The government plans to continue fiscal consolidation to restrain the rising deficit and stabilize public debt by enhancing revenue, rationalizing expenditures through zero base budgeting, and reducing the cost of debt by diversifying funding sources. Inflation is projected to be 5.5% in 2019 due to prudent monetary policy. Kenya also benefits from renewed political momentum (including the 2010 constitution and devolution), a strategic geographic location with sea access, opportunities for private investors, and the discovery of oil, gas, and coal along with continued exploration for other minerals.

Among downside risks are possible difficulties in making fiscal consolidation friendly to growth and in finding affordable finance for the budget deficit caused by tightening global markets. Boosting domestic resource mobilization and enhancing government spending efficiency are critical to restrain public borrowing.

Kenya continues to face the challenges of inadequate infrastructure, high income inequality, and high poverty exacerbated by high unemployment, which varies across locations and groups (such as young people). Kenya is exposed to risks related to external shocks, climate change, and security. The population in extreme poverty (living on less than $1.90 a day) declined from 46% in 2006 to 36% in 2016. But the trajectory is inadequate to eradicate extreme poverty by 2030.

Kenya’s Big Four (B4) economic plan, introduced in 2017, focuses on manufacturing, affordable housing, universal health coverage, and food and nutrition security. It envisages enhancing structural transformation, addressing deep-seated social and economic challenges, and accelerating economic growth to at least 7% a year. By implementing the B4 strategy, Kenya hopes to reduce poverty rapidly and create decent jobs.

 

Continue Reading
Advertisement
Advertisement

Trending