Kenya has maintained economic stability and fiscal discipline even in the face of fiscal pressure from the March 2013 elections, a new devolved system of governance, public sector pay pressure and rising security costs associated with security operations in Somalia. The economy is expected to grow at 5.8-6% this year, even after the temporary shock of the September 17, 2013 terrorist attack in Nairobi, according to projections by the World Bank and the International Monetary Fund (IMF). This will be a significant improvement over the 4.6% gross domestic product (GDP) growth rate it recorded in 2012, and inflation is also expected to remain at single digit. For the first time in recent years, Kenya is likely to match the average growth rate of 6% of its peers in the East African Community and Sub-Saharan Africa, but it will still be significantly short of the Vision 2030 target growth rate of 10%.
Economic prospects in 2013 have remained strong, with low inflation and stable interest rates, though inflation increased to 8.29% in September, from 4.5% in February, after the government imposed value added tax on a wide range of goods that were previously tax free. The shilling also remains fairly stable against major trading currencies, enabling the Central Bank to lower interest rates and induce increased commercial bank lending to the private sector. Foreign exchange reserves stand at US$5.8 billion, or the equivalent of 4.1 months of import cover. Also, the Nairobi Stock Exchange index has risen 14% since the beginning of the year, as domestic and foreign investors flocked into the market for better yields. Public debt remained around 45% of GDP but it is expected to come under pressure from increased government borrowing for infrastructure – which is considered necessary to achieve higher growth and Vision 2030 goals.
Lower interest rates and higher investment are expected to support Kenya’s economic growth in the next two years, says the Bank’s June 2013 Kenya Economic Update. Momentum for growth is being seen in agriculture and manufacturing, supported by more stable energy supplies, while other sectors, including services, and Information and Communications Technology (ICT), that have driven growth in the past three years have weakened. Macroeconomic environment is also stable, though competition for power and resources between the new counties and the national government has increased pressure on public resources.
However, the Bank says the economy is still operating below its potential and remains vulnerable and remains vulnerable to external shocks, which undermine its prospects for growth and poverty reduction. Tourism is weak due to constraints in source markets and the current account to GDP ratio remains at 10%. Net exports remain a drag to growth as import continue to rise due to strong demand for capital goods while exports remain low due to low demand from Kenya’s trading partners in Europe. This can be cushioned by increasing both domestic and foreign savings.
World Bank Group research shows that the government can improve the environment for private sector-led growth by investing more in infrastructure, increasing domestic energy production, removing bottlenecks to doing business and sustaining sound monetary and fiscal policies. Structural reforms, including tax and expenditure measures, can also help to improve the business environment and to attract more foreign direct investment (FDI) particularly to expand manufacturing exports – taking advantage of Kenya’s low labor costs and its coastal location.
The government will also need to address poverty by investing in poverty reduction strategies focused on job creation, enhanced productivity of smallholder farms, strengthening cash transfer programs and targeted public spending programs to improve quality of education, water, sanitation and access to electricity for the poor in the rural areas. Improved poverty monitoring is also key to enable the government to rapidly determine which activities have the greatest impact on improving the livelihoods of the poor.
Such measures will improve prospects for higher growth and enable the economy to increase job opportunities for the over 800,000 youth who enter the job market each year, as well as for shared prosperity and ending extreme poverty.
The Jubilee, a coalition government led by President Uhuru Kenyatta, elected in March 4, 2013 elections under the August 2010 constitution, is facing a major test of implementing the new devolved system of governance. County governors are pushing for a referendum to amend the constitution to increase the share of the national revenue to the 47 counties, from 15% to 40%. They contend that the present allocation is not sufficient for the counties to fund the public services expected of them by the people. But government reports show the counties have not even used the allocated to them, raising issues about their capacity, and also, some have used their allocations on non-priority expenditures. Another referendum proposed by the opposition Coalition for Restoration of Democracy (CORD) led by Raila Odinga, former prime minister, seeks to change Kenya’s electoral system from presidential to parliamentary, to have the president elected by an electoral college rather than directly by the people. The government is also trying to cope with a number of recent crises, including the September 21, 2013 terrorist attack on an upmarket mall in Nairobi, which left 67 dead and 175 injured. Also, a fire on August 7 substantially damaged Nairobi’s Jomo Kenyatta International Airport, disrupting domestic and international flights for weeks before normal flight schedules were restored.
These challenges constrain the pace of democracy, reforms and accountability. The new administration, with 18 cabinet secretaries appointed by the President and publicly vetted by the national assembly, has 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.
There is also measured progress in the implementation of some of the key policy and legislative processes arising from the new constitution, including a reforming judiciary with a new chief justice, attorney general and director of public prosecutions, exercising its independence and stamping its authority. Electoral disputes have been discharged within the timelines set under the constitution, and the head of Ethics and Anti-Corruption Authority recently assumed office. Police reforms are also underway, following the recruitment of an inspector-general, who heads a police force that was previously under two separate administrations.
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 in the past three years, 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.
The June 2013 Kenya Economic Update highlights Kenya’s contrasts and widespread inequalities. While the average Kenyan is healthier, more educated and receives better infrastructure services than a decade ago, it says a large fraction of the population continues to live in fragile conditions with sub-standard access to water, sanitation and energy. The situation is particularly critical in the north and north east, where poverty levels and vulnerability are highest.
Poverty is still quite 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.
The population in need of food, medical and other aid has declined since last year, but remains a significant share of the population. Vulnerability to vagaries of weather (drought and floods) remains high especially in the north and eastern parts of the country, which are also some of the poorest regions.
Kenya’s population increases by an estimated one million a year and is now estimated at 43.2 million. The 2009 population census shows the distribution of the population across the country, with Rift Valley Province being the most populous with 10 million people. Nairobi, the capital, has 3.1 million people, according to the report released by the Ministry of Planning and National Development. 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 other crises induced by climate change. Rural and urban poverty remain a challenge. Analysis of the data from the 2005-2006 Kenya Integrated Household Budget Survey (KIHBS) indicates that national absolute poverty declined from 51% in 1997 to 46.1% in 2005-2006. While this decline in poverty compares well with other Sub-Saharan African countries, it can still be considered high in comparison to neighboring countries such as Tanzania (about 36%) and Uganda (about 31%). In rural areas, overall poverty declined from 53% to 49%, while in urban areas, poverty declined from 49.2% in 1997 to 34% over the same period.
The Kenyan poverty profile also reveals strong regional disparities in the distribution of poverty. According to the 2005/2006 survey, the lowest incidence of rural poverty was in Central province (30.3%), followed by Nyanza (47.9%), Rift Valley (49.7%), Eastern (51.1%), Western (53.2%), Coast (69.7%), and North Eastern province (74.0%). Inequality in Kenya remains high. 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) was estimated at 39% in rural areas and 49% for urban areas (pre-crisis). Income disparities in the rural areas have gone down since 1997, while the disparities in the urban areas have increased slightly. The Commission on Revenue Allocation has allocated a weight of 20% to poverty incidence which is one of the five criteria used in the revenue sharing formula.
There has been additional progress with respect to other dimensions of social development over the past years. For example, school attendance for children aged six to 13 years was 90% in 2003, but has since increased to about 94% in 2008 (with an equal enrollment ratio between boys and girls). In 2004, only about 60% of primary students completed their education compared with about 80% in 2008. School attendance rate for age 14-to-17-year-olds has also shown remarkable improvement from 78% in 2003 to 90% in 2008, with gender parity index of 96%. The transition from primary to secondary and later to tertiary and university education has also improved in recent years due to increased public and private investment in the education sector.
In 2008-09, infant mortality and under five mortality stood at 52 and 74 deaths respectively per 1000 live births, which is an improvement from the 2003 figure of 77 and 115 deaths respectively per 1000 births. Immunization coverage also rose from 75% in 2003 to 81% in 2008.
Access to household services such as electricity, improved drinking water source and improved sanitation has been steadily increasing even though there is still low coverage. According to the Kenya Demographic Health Survey report of 2008-2009, the above services could be accessed by 23%, 47% and 33% of the households respectively. This is a remarkable increase from 16%, 41% and 19% respectively in 2003.
The most pressing challenge for Kenya is to implement its new devolved system of governance, while also strengthening its capacity to cope with domestic and external shocks. Youth unemployment, poverty and vulnerability to climate change remain the most critical development challenges facing Kenya. Recent political and economic developments have stimulated development opportunities for Kenya but concerns remain in critical 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. The 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 current and new devolved structures will continue to exert pressure on the current account and shortfalls will need to be financed by net domestic borrowing.
Last updated October 2013
The Bank’s strategy for Kenya is to help the government to identify long term solutions to national development problems to end extreme poverty and improve shared prosperity by exploiting new opportunities for growth and reducing vulnerability. Devolved governance, which creates a more equitable development model and creates opportunities for new regional growth centers, will be a key aspect of the Bank’s new Country Partnership Framework (CPF) for Kenya.
The Bank’s commitment to Kenya presently amounts to over US$4.5 billion, including US$3.65 billion in 24 national projects and US$881.6 million in eight regional projects. The largest commitments are in infrastructure (transport, energy, water, and telecommunications), which are foundations for reducing the cost of doing business and improving Kenya’s competitiveness in the East African region and globally. The other priority themes include strengthening public sector management and accountability, reducing vulnerability and strengthening communities through investments in agriculture and environment, and investing in people in areas such as, health, youth empowerment and social protection.
The Bank focuses on transparency initiatives (including open data, transparency in the judiciary, and capacity building in the prosecutorial and judicial services); broadening stakeholder involvement, including additional private participation in infrastructure services (e.g. transport corridors and ports); accelerating public financial management reforms; and improving governance in high-priority sectors (e.g. education, HIV/AIDS, health, and roads). Analytic work in such areas as media development, parliamentary and judicial capacity, and police oversight mechanisms will help lay the foundation for the development and governance agenda. At the same time several measures have been introduced to protect Bank-financed projects against corruption, while strengthening country systems. For example, lending by the World Bank in Kenya involves undertaking safeguards and due diligence analysis in areas where corruption risks are perceived to be high, before proceeding with lending. This approach was developed after earlier reviews of some World Bank financed projects confirmed corruption risks.
The International Finance Corporation (IFC)
International Finance Corporation (IFC) in Kenya has a net commitment of US$770.7 million in Kenya, supporting activities including investment and advisory services to help small and medium enterprises, mobilize funding for high-impact sectors of the economy, and improve investment climate. IFC helps develop projects in financial markets, agriculture, infrastructure and telecommunications. Its key investments are in manufacturing, power, transport, education, and banking. IFC’s clients and partners include Kenya Power, Kenya Airways, Diamond Trust Bank, Equity Bank, Bank of Africa, Faulu Kenya, and Nairobi Women’s Hospital.
Aligned with the Government's Vision 2030 development strategy, IFC and the Bank launched the Kenya Investment Climate Program (KICP) in 2007. The program was articulated around regulatory reform, investment generation and trade logistics improvement. At its close in June 2012, KICP had notably assisted the Kenyan government in implementing a business licensing reform which resulted in the simplification or elimination of 694 of 1325 licenses, contributing to aggregate private sector cost savings of US$36.3 million per year over 2008-2012. The reform work has so far led to a reduction in the overall licensing cost of 31.5%, surpassing the 25% target adopted by the government. A successor program, the Kenya Sub-National Investment Climate Program, is under preparation.
IFC also supports entrepreneurship in Kenya through its advisory programs, such as the Small and Medium Enterprise (SME) Solutions Center, SME Development Initiatives, a program to help women entrepreneurs gain access to finance, a credit bureau program, and a program to increase finance for private schools in Kenya. It also manages the Grassroots Business Initiative, a trust fund that works with social enterprises targeting disadvantaged youth and rural and urban poor. Its other activities include supporting curriculum development in business schools on issues such as governance and ethics, through its Global Business School Network program. In 2011, IFC and the World Bank released a report on “Healthy Partnerships”; which studied the relationship between the public and private health sectors in 45 countries in Africa, including Kenya. The report found that if governments actively engage with the private sector in health, the pace of meeting health goals in Sub-Saharan Africa could be accelerated.
As part of joint World Bank/IFC outreach and dialogue with the private sector, IFC will explore additional opportunities for investment in the Kenya’s private sector, to provide training and build awareness and help create governance reform champions.
Multilateral Investment Guarantee Agency (MIGA)
MIGA is providing investment guarantees of US$252 million in support of projects in Kenya’s power, agribusiness and service sectors. It is working closely with the Bank’s International Development Association (IDA) and IFC to help leverage financing for the construction of privately operated power plants and diversify Kenya’s energy mix in line with the government’s least cost power development plan. These projects insured by MIGA include an 84 megawatt private geothermal plant and an 87 megawatt heavy fuel oil plant supported by partial risk guarantees of US$166 million. MIGA is also receiving increasing interest from other investors and sectors in the country.
The Bank has established strong partnerships for knowledge and resources with other development partners, researchers and agencies that contribute to Kenya’s development. Through the Development Partners Group (DPG), it plays a key role in government-donor partner coordination. The DPG, co-chaired by the Bank with a bilateral ambassador, meets monthly to discuss and build consensus on emerging political, economic and social issues. In addition, over a dozen sector coordination groups meet regularly to discuss support for specific areas of the government’s development program. These issues are also discussed in a high level Development Partnership Forum hosted by the Prime Minister and the Minister of Finance to discuss Kenya’s development priorities. The Forum, initiated by the Bank in 2009, brings together ambassadors and heads of development agencies with cabinet officials.
Partnerships with other development partners in public sector investments cut across key projects and sectors. Such agencies include the European Union and European Investment Bank (EIB), the African Development Bank (AfDB), France’s Agence Française de Développement (AFD), United Kingdom’s Department for International Development (DFID), German Development Bank (Kfw), Japan International Cooperation Agency (JICA) and China.
The Bank also partners with the private sector in promoting cutting-edge global technology for development. The Bank’s Open Data and Knowledge resources generate wealth of findings and good practices from its vast research and operations at a global level, which is then shared with client countries and partners. Its partnership with the Kenya government and the private sector in open data has enabled software and content developers to develop innovative information and communications technology (ICT) applications. InfoDev’s incubation program hosted by ICT firms and universities has facilitated numerous innovations, including technology platforms that enable farmers to share current information on weather patterns and market prices of agricultural produce. The Bank’s Knowledge Center and its satellite public information sites share development information on a continuous basis with a multitude of stakeholders including the government, researchers, media, private sector, civil society, youth and faith based organizations. It also partners with think tanks and universities to produce regular economic updates, including the Kenya Economic Update.
The Bank’s Kenya office also holds regular dialogue and consultations on emerging issues with various other stakeholders. A youth development program empowers college and university students to search, interpret and use development information. Additionally, the Bank interacts regularly with Kenya’s vibrant civil society and governance groups, enhancing governance and social accountability that is critical to improving the outcome of development projects. The most active partnerships with civil service organizations focus on governance and accountability, human rights and impunity, democracy and development, media, land issues, public sector performance, human development, HIV/AIDS, women's rights and the environment.
These partnerships enhance dialogue and help build consensus on important development issues, hence, strengthening development effectiveness.
Last updated October 2013
The World Bank’s finance and knowledge partnership with Kenya has made significant contributions to all major economic and social sectors.
Rehabilitation of the Northern Corridor Transport system, the most important trade artery, has since 2004 reduced travel times from the port of Mombasa to Timboroa from 14.5 hours to nine hours. The increased efficiency has greatly facilitated trade and regional integration in the Eastern Africa region, easing the cost of doing business in Kenya and also with its western neighbors—Uganda, Rwanda, South Sudan and eastern Democratic Republic of Congo. The Bank has invested US$460 million in the Northern Corridor Transport Improvement Project since its implementation in June 2004, contributing half of the US$960 million that the government is investing in the project. It has also enhanced aviation safety at Kenya’s international airports and enabled Kenya to rehabilitate and replace infrastructure and public assets damaged during the 2008 post-election crisis. Moreover, it has promoted private sector participation in the management, financing, and maintenance of road assets. Further benefits in the ease of doing business in the region have been achieved through the link of the Northern Corridor project to the East African Trade and Transport Facilitation Project, a US$150.6 million Bank intervention that has helped improve customs clearance and eased traffic congestion at the Kenya-Uganda border. The transport facilitation project will also expedite rail transport from Mombasa port to Uganda and other East African Community (EAC) countries.
These benefits will further be consolidated with the implementation of the Transport Sector Support Project, which was approved by the Bank Board in April 2011 to upgrade over 220 km of roads on the northern and western corridors, improve air transport and support growth of key economic sectors. The project, with US$300 million Bank funding, will also improve business climate in the western region and strengthen regional integration in the EAC by reducing transport bottlenecks on the Tanzania-Kenya-Sudan road corridor.
In the energy sector, the Bank’s contribution connected an estimated 1.75 million additional Kenyans in 350,000 households to electricity between 2009 and 2011. Over 1,200 km of new transmission and distribution lines were constructed during the period. The Bank has invested over US$650 million in the energy sector through three projects – Electricity Expansion, Energy Sector Recovery and Private Sector Power Generation - to scale up energy access, which is critical to growth and reducing the cost of doing business. These programs focus on increasing electricity access from 25% to over 40% of the population in the next decade by scaling up reliable, green energy development to reduce vulnerability to weather dependent hydro and high cost fossil fuels. The Bank was the catalytic donor in the Kenya Electricity Expansion Project, which mobilized a total of US$1.3 billion to develop 280 megawatts of geothermal power and associated infrastructure in the next four years. Also, an innovative combination of Bank, International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) credits and guarantees is supporting thermal, geothermal and wind generation capacity of 600 megawatts.
Bank support through the Water and Sanitation Service Improvement Project has also enabled Kenya to scale up access to improved water and sewerage services. From 2007 through 2011, access to improved water services in Bank-financed project areas increased from 27% to 50%, and access to improved sewerage services from 10% to 20%. The US$150 million project has supported Athi Water Services, Coast Water Services and Lake Victoria North Services boards to provide reliable, affordable and sustainable water supply and sanitation services. It is also providing technical assistance, goods and works to the Water Sector Regulatory Board and the Water Appeals Board.
Kenya has also emerged a leader in the transformative use of information and communication technologies in East Africa and worldwide. Supported by the Bank through the Kenya Transparency and Communications Infrastructure Project (KTCIP), Kenya’s information and communications technology (ICT) sector has become the main driver of economic growth, expanding by 20% on average annually and adding one percentage points annually to GDP growth over the past decade. By December 2011, 26.8 million Kenyans or nearly every adult Kenyan, were using mobile phones, and those with internet access nearly doubled to 14.3 million (37% of the population) from 7.8 million (20% of the population) in only one year from December 2010 to December 2011.
World famous M-pesa and other mobile money applications transacted an estimated US$7 billion (20% of GDP) by end of 2010. The Bank also actively supported Kenya to deploy one of the first major government open data portals among developing countries. In July 2011, President Kibaki launched the Kenya Open Data portal, providing free public access to large digital datasets. In March 2012, the Bank approved additional funding of US$55.1 million for KTCIP, scaling it up to US$169.5 million, to consolidate transformative ICT applications and deepen gains from innovation.
In the health sector, 25.3 million people, half of them women directly benefited from activities supported by the Bank and other development partners under the Health Sector Support Program and half a million children were immunized in the first year, between 2010 and 2011. The government also, with Bank support, intensified the fight against malaria and HIV infections. Distribution of anti-malarial bed-nets contributed to a sharp fall in child and infant mortality, down from 115 to 74 and 77 to 52 per 1,000 respectively between 2003 and 2008-2009.
The Bank has also substantially assisted Kenya to address social challenges through investments in social protection, as well as address the vulnerability of communities in arid and semi-arid areas through investment in disaster preparedness and alternative livelihood opportunities. In response to last year’s Horn of Africa drought emergency which affected 3.7 million Kenyans, the Bank provided resources from its Crisis Response Window to scale up critical interventions in agriculture, health, water resources, social protection, energy, and disaster risk reduction. It further supported the government to conduct a Post Disaster Needs Assessment, which for the first time provided a holistic view of the impact of the 2008-2011 droughts on economic and human development.
The Bank is also engaged in improving value chains and clusters of micro, small and medium enterprises (MSMEs) in key sectors such as coffee and leather. The MSMEs are critical to Kenya’s development, providing livelihoods and jobs for majority of Kenyans.