Kenya

Economy

Kenya entered 2013 from an improving economic position with low inflation and stable interest rates. By end-February, inflation was down to 4.5%, from a high of 18% in early 2012, and the shilling remained stable (at Sh85=US$1) against major trading currencies. This enabled the Central Bank to lower interest rates to 9.5%, compared to a peak of 20% in mid-2012. Peaceful national elections in March 2013 and a smooth transition of power renewed  business confidence, strengthening prospects for the economy to achieve a growth rate of five percent in 2013, compared to 4.3% in 2012.

But Kenya is still underperforming its peers and the economy remains out of balance with sharp differences in sectoral performance, says the latest World Bank economic analysis. Macroeconomic management, the financial sector and the Information and Communications Technology (ICT) sectors remain very strong, but the port of Mombasa and agriculture are weak, says the Bank analysis in February 2013, which builds on the key findings of the Bank’s December 2012 Kenya Economic Update. The economy remains vulnerable to external shocks, as the current account deficit is above 10% of gross domestic product (GDP), despite global fuel prices moderating in recent months. Service exports have increased but goods exports remain weak. Short-term capital inflows have helped stabilize the exchange rate, but heightened vulnerability to external shocks. Moreover, the real exchange rate is 34% stronger than a decade ago, constraining economic competitiveness.

Growth in 2013 will mainly be driven by recovery in agriculture and more stable energy supplies due to good rains, compensating a slowdown in tourism. Energizing Kenya’s export engine will be key to creating jobs for the 800,000 Kenyans who enter the labor force every year. Bank analysis shows that Kenya is undergoing a long-term shift out of family farming, with less than half of working Kenyans being engaged on family farms today compared to two-thirds two decades ago. With the formal sector creating only 50,000 jobs, most jobs will need to be generated by the informal sector. Stronger job growth, the Bank says, will result only if Kenya improves infrastructure and business climate environment for export industries and boosts household productivity by accepting informal businesses as legitimate parts of the economy.

The Bank urges the new administration to focus its policy on several key areas, including social equity, quality education and better management of water resources to reduce vulnerability. Enhancing competitiveness through macroeconomic and political stability, infrastructure expansion (energy, roads, port and rail services) and overhaul of the state monopoly on maize and cereals sector is also critical.  Moreover, the new administration should strengthen institutional reforms in devolution, judicial transformation and public financial management. 

Kenya should also maintain prudent macroeconomic performance and improve its growth rate closer to the average of its peers in Africa and East African Community (EAC), whose growth averages of 5.3% and six percent respectively. It should reduce non-tariff barriers to trade to benefit from emerging trade and investment opportunities in the EAC to improve its food and energy security.

Political Developments

Kenyans went to the polls on March 4, 2013 and elected a new president, together with a host of new leaders, including governors, senators and members of the national assembly, in accordance with the August 2010 constitution. The election conducted by the Independent Electoral and Boundaries Commission registered one of the highest voter turnouts in Kenyan history and was also widely regarded to be free and transparent, with only isolated incidences of electoral violence.

Kenya’s fourth President, Uhuru Kenyatta, was the first elected under the transformative new constitution which Kenyans approved with a 67% majority in a referendum and promulgated by former President Mwai Kibaki. The constitution devolves power and accountability to 47 counties in a devolution program described as one of the most ambitious in the world. The expanded devolved governance model promises Kenyans a more equitable development model and it creates opportunities for new growth centers.

A new central government with a trimmer structure of 18 ministries has been established. Cabinet secretaries appointed by the President to head the ministries will be confirmed after vetting by the national assembly. The new administration 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 notable 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. The Supreme Court effectively discharged the presidential election dispute in April 2013, upholding the election of the president and his deputy. The high court in September 2012 completed one of the long outstanding cases of corruption and abuse of 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 3.6 in FY 2009 to 3.8 in FY2011. Some of the positive indicators include a strong media, civil society and a reforming judiciary but limited success in prosecution of long-standing grand corruption cases remains a setback to better governance.

Social Developments

Recent heavy rains have affected several parts of Kenya but improved prospects for the large number of Kenyans affected by drought in previous years. The Horn of Africa drought emergency in 2011 devastated over 3.7 million Kenyans, but the number declined to 2.2 million last year. The population in need of food, medical and other aid continues to decline, though it 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. The government revised population based on the 2009 census to 39.6 million, an increase of over 35% in the past decade. The population report shows the distribution of the population across the country, with Rift Valley Province being the most populous with around 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.

Development Challenges

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 sometime.

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 May 2013

The Bank’s strategy for Kenya is to help the government identify long term solutions to national development problems and exploit new opportunities for growth to reduce poverty and vulnerability. The Bank’s Country Partnership Strategy (CPS) Progress Report discussed by the Bank’s Board in May 2012 integrated the changes that have taken place in the three pillars of the FY10-FY13 Country Partnership Strategy for Kenya, which was endorsed by the Board in April 2010. The CPS pillars—unleashing Kenya’s growth potential; reducing inequality and social exclusion; and addressing resource constraints and environmental challenges—underline the Bank’s endeavor to deepen investment and knowledge in support of the key pillars of the government’s Vision 2030 development strategy to accelerate sustainable growth, reduce inequality, and manage resource scarcity. With the new constitution under implementation, the Bank is expanding support towards implementation of key areas including devolution and other critical areas such as land and judicial reforms that have an impact on growth, equity and development.

The Bank’s commitment to Kenya presently amounts to over US$4.2 billion, including US$3.3 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 supports 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. In the fiscal year (FY) ending June 2012, IFC invested US$380 million in various areas, including 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, the Kenya Investment Climate Program (KICP) was launched 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$210.7 million in support of four projects in Kenya. 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 under 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. Agreements for the heavy fuel project were signed with the government in August 2012. MIGA is also receiving increasing interest from other investors and sectors in the country.

Partners

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. In August 2012, it held two important public consultations, one on the review of the Bank’s Procurement Policy, and the other on the reform of Investment Lending. 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 May 2013

The World Bank’s finance and knowledge partnership with Kenya has made significant contributions to all major economic and social sectors.

Transportation

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.

Energy

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.

Water

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.

ICT

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.

Health

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.

Last updated May 2013