NAIROBI, December 5, 2012—Kenya’s economy has the potential to achieve a five percent growth rate next year, if elections are credible and transfer of power to a new administration is achieved peacefully, says the latest World Bank analysis on Kenya.
The Kenya Economic Update launched today projects a growth rate of 4.3 percent in 2012, slightly lower than the 4.4 percent of Gross Domestic Product (GDP) realized in 2011, but is optimistic that the economy has stabilized after a rocky start earlier in the year. The December 2012 issue also underlines the need for Kenya to create more jobs for its burgeoning, educated youth population.
“Kenya is heading into an election year with a transformative new constitution but historically, the economy slows down during election periods,” says Johannes Zutt, World Bank Country Director for Kenya. “A peaceful political transition and export-led growth will provide a window of opportunity for the economy to achieve higher growth and create more jobs for the large number of people entering the workforce.”
According to the report, young Kenyans face considerable hardship, discrimination and inequality of opportunity in accessing good quality jobs, even though the ratio of Kenyans engaged in family farms has declined, from two-thirds to less than half of the workforce, in the past two decades due to Kenya’s rapid urbanization.
“Economic instability, weaknesses in infrastructure and pervasive corruption limit business growth and job creation,” says Gabriel Demombynes, the Bank’s Senior Poverty Economist for Kenya and one of the lead authors of the report. “A job creation strategy is needed to move more Kenyans into better wage jobs, and policy makers, especially at local levels, should embrace informal household enterprises as legitimate parts of the Kenyan economy to enable them contribute to increasing productivity.”
The report urges the government to adopt tax and expenditure policies that will create incentives for savings and investment for the economy to continue expanding and create quality jobs. It recommends specific actions for creating high-productivity wage jobs, including investing in transport and electricity, upgrading skills and eliminating job-smothering corruption.
It also underlines the need for Kenya to expand its exports and diversify its markets to mitigate the impact of the recession in the Euro zone, which is Kenya’s largest trading partner and also its key source for the tourism industry. This will be critical for Kenya to reverse its current account deficit, which remains above 10 percent of GDP despite lower oil prices.
“The current account deficit could undermine Kenya’s long term stability and growth prospects,” says John Randa, the Bank’s Economist for Kenya, the other lead author of the report. “Kenya will need to undertake structural reforms to correct external imbalances and also build a stronger foundation for growth.”
Strong recovery to the end of the year, supported by declining inflation and interest rates, will enable the Central Bank to loosen monetary policy to stimulate growth, says the report. But Kenya’s prospects in the longer term will be determined by its capacity to manage political, economic and weather-related shocks, which have become the norm rather than the exception in the past five years. Political violence following the 2007 elections followed by severe drought in the Horn of Africa and a global financial crisis undermined growth prospects during this period.
The Kenya Economic Update is produced by the Bank in collaboration with Economic Round Table members, including the Office of the Prime Minister, the Ministry of Finance, the Ministry of Planning and National Development, the Kenya National Bureau of Statistics, the Kenya Revenue Authority and the National Economic and Social Council and the International Monetary Fund.