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The Big 4 priorities to boost Kenya’s economy

The Big 4 priorities to boost Kenya’s economy

Kenya’s economy grew by 4.9 percent 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 percent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

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

“The slowdown in the performance of the economy was partly attributable to the 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 percent 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 percent recorded in 2016, data released in April by the Kenya National Bureau of Statistics (KNBS) indicate.

The last time Kenya recorded growth below five percent was in 2012, also an election year, when the economy expanded by 4.5 percent. “The slowdown in the performance of the economy was partly attributable to the 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 percent of the 2017 GDP grew by only 1.6 percent compared with 5.1 percent in 2016. All the segments except cut flowers shrunk during the period. Export earnings from cut flower grew by 16.1 percent 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. 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 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 the 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 the credit to small and medium businesses that 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 percent last year, up from 6.3 percent the previous year.

“We have lined up several interventions, which together with continuing political stability, good rains and the 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 is 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 favorable 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.

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