A year since a new government was elected in March 2013, Kenya has maintained a stable macroeconomic environment despite challenges of financing the new devolved system of governance. The economy is projected to have grown by 5% in 2013, and it is expected to grow by 5.1% in 2014. Medium term prospects are stronger, with the growth in Gross Domestic Product (GDP) projected to improve to around 6%.
Good performance of industry and agriculture, which expanded at 6.7% and 5.6% respectively, contributed to the growth. Inflation remained low due to strong monetary policy, the exchange rate was stable in line with Central Bank targets, and the external account balance improved due to increased remittances. Private sector credit expanded to a record 17.4% in 2013, from 7.7% in 2012, and the equity market also remained resilient last year through the first quarter of 2014. Moreover, Kenya successfully concluded a three-year International Monetary Fund (IMF) extended credit facility program, which disbursed $750 million, helping the government to boost international reserves and to gradually reduce fiscal deficits to lower the public debt burden.
The 2013 economic performance was remarkable as growth dips in election years due to political risk and uncertainty. A stable political environment enabled Kenyans to celebrate 50 years of independence in December 2013 with renewed expectations of better prospects. “There is much for Kenya to celebrate,” says the December 2013 Kenya Economic Update published by the World Bank, which highlights some of the extraordinary economic and social achievements Kenya has recorded since 1963.
However, Kenya remains vulnerable to external and domestic risks, and continues to underperform relative to its potential. Growth remains significantly below the Vision 2030 target rate of 10% and is also short of the 6% average of Kenya’s peers in the East African Community and sub-Saharan Africa. Emerging fiscal pressure from implementation of devolution, financing of programs promised by the Jubilee government during elections and rising public sector wage bill further constrain prospects for growth. Rising interest payments and slow revenue growth compound the situation, though private sector growth, supported by expansion of bank credit to the sector, is expected to underpin growth prospects. The external position is weak, with risks of deteriorating terms of trade, due to high import demand, driven by oil and gas exploration and infrastructure projects. Exports remain stagnant mainly as a result of subdued demand from Kenya’s trading partners and increased vulnerabilities of emerging markets. Furthermore, the external position may continue to weaken due to high petroleum prices and renewed security threats in the region, which have a negative impact on tourism.
The government will need to maintain its commitment to macroeconomic stability to increase the economy’s resilience to external and domestic shocks. It will need to preserve low inflation, rebuild fiscal and foreign exchange buffers and deepen the agenda for structural reforms. Addressing infrastructure bottlenecks, including energy deficit, and improving the business regulatory framework are key to private sector led growth and attracting Foreign Direct Investment. Besides, devolution should enable the government to address regional poverty and inequality challenges.
So much has been achieved in the past half century. Kenyans are living two decades longer, fertility and infant mortality have been cut into half, and school enrolment at primary and secondary level has more than doubled, says the Bank’s Economic Update. GDP per capita has increased eightfold and Kenya’s financial sector is now the third largest, after South Africa’s and Nigeria’s, in sub-Saharan Africa. But so much reflection is needed on how to transform the lives of the majority of Kenyans. Nearly four in 10 Kenyans still live in poverty, maternal mortality is among the highest in Africa, secondary school enrolment is low and learning achievement levels are well below their potential. GDP growth, while solid, has yet to reach the takeoff level necessary to transform Kenya into a modern market economy and change the lives of ordinary Kenyans.
The Jubilee government led by President Uhuru Kenyatta marks one year in office with a commitment to resolve the challenges emerging especially on devolution, security and public expenditure. The government has attempted to fulfil its election promises to Kenyans, including free maternity services at all public health facilities, increasing opportunities for youth and women, and devolving power and resources to reduce regional inequalities.
“Devolution is at the heart of the new constitution and a key vehicle for addressing spatial inequalities,” says the Bank’s Devolution Without Disruption. It promises to transform Kenya through accountable and transparent institutions, inclusive growth and equitable delivery of public services. But sharing of power and resources between the national government and 47 counties continues to be a major challenge, with county governors wielding more power and persistently pushing to raise their share of the national revenue from 15% to 40%. But, the government’s budget office shows the counties are unable to use funds allocated to them, raising issues about their budget and financial management capacity. Audit reports have also questioned the use of funds in some counties on non-priority projects, including travel, vehicles, offices and houses and for the governors.
The government is also experiencing security challenges, which constrain the pace of democracy, reforms and accountability. On September 21, 2013 terrorists attacked an upmarket mall in Nairobi, leaving 67 people dead and 175 injured. The administration has beefed up security following new security threats in recent weeks, and also promised to tackle fundamental issues such as youth unemployment, regional imbalances and land reforms, which pose political risk and insecurity particularly in areas with high poverty levels.
Recent political reforms have strengthened Kenya’s governance record, though it remains mixed. The Bank’s CPIA for Kenya improved from 3.8 in FY11 to 3.9 (the highest in Africa) in FY12 due to significant progress in policies and institutions for growth and poverty reduction. Positive indicators include strong macroeconomic environment, but concerns remain in climate reforms, which are essential for private-sector led growth and job creation.
Kenya’s poverty level is estimated to have declined from 47% in 2005 to between 34% and 42%; however, the last household survey was conducted in 2005-06. A new survey is necessary to update the poverty estimates and inform the government’s poverty reduction strategies.
Poverty and inequalities remain high, but Kenya has the opportunity to eliminate extreme poverty by 2030 in line with the Bank’s global poverty target, if it reduces poverty by two percentage points each year. Such a high rate of poverty reduction is only possible if growth is accompanied by reduction in inequality, to enable the poor benefit, to a disproportionate extent, through new economic opportunities and also by ensuring that safety nets adequately buffer them from vulnerability to shocks.
Kenya’s population increases by an estimated one million a year and is now estimated at 43.2 million. Based on the 2009 population census, demographic trends show that more people are moving to urban areas and the Bank estimates that half of Kenya’s population will live in cities by 2050. Better macro-economic conditions in the past decade helped improve the welfare of Kenyans, but the poor remain vulnerable to drought and climate induced vulnerability. Rural and urban poverty remain a challenge.
The Kenyan poverty profile also reveals strong regional disparities in the distribution of poverty, with the lowest incidence being in the central region and the highest in the northern and eastern arid and semi-arid areas. Inequality remains high, with the distribution of income, measured by the Gini coefficient (a measure of inequality of income distribution, the higher the percentage the higher the level of inequality) estimated at 39% in rural areas and 49% for urban areas. The Commission on Revenue Allocation has adopted a revenue sharing formula with five criteria, including a weight of 20% to poverty incidence.
Progress in other dimensions of social development includes school attendance and enrollment ratio between boys and girls. The transition from primary to secondary and later to tertiary and university education has improved due to increased public and private investment in the education sector. Infant mortality and under five mortality have also improved and immunization coverage increased. Access to household services such as electricity, improved drinking water source and better sanitation, steadily increased, but coverage remains low.
The most pressing challenge for Kenya is to implement its new devolved system of governance, while strengthening its capacity to cope with domestic and external shocks. Youth unemployment, poverty and vulnerability to climate change also remain critical. Recent political and economic developments have stimulated development opportunities but concerns remain in key areas, including food security, governance and corruption.
The economy’s vulnerability to international oil prices, weak exports due to underperforming manufacturing sector, lower agricultural output resulting from drought and declining forex earnings and remittances, frequently exert pressure on the exchange rate and current account. Imported inflation from high fuel and food prices affects investments. A combination of output and employment losses has a direct impact on poverty. Business confidence has improved, after the recent peaceful elections and transfer of power, but recovery will take some time.
The quality of social services, infrastructure and governance remain bottlenecks to Kenya’s ability to achieve shared prosperity. Rising public expenditure demands from the national and devolved governance structures continue to exert pressure on the current account and shortfalls will need to be financed by net domestic borrowing.