Rebalancing Kenya’s economy and deepening regional integration
Nairobi, June 18, 2012—Kenya’s economy is gradually recovering from last year’s shocks and is expected to grow at 5 percent in 2012. But the economy remains vulnerable to domestic and global shocks that may reduce growth to 4.1 percent, says the latest World Bank economic report on Kenya.
The Kenya Economic Update launched in Nairobi today indicates that the economy has stabilized following the actions taken by the government at the end of the third quarter of 2011, which included raising interest rates to bring inflation down.
The economic report, the sixth in a series published by the Bank in Kenya, focuses on the fine line between economic stability and maintaining the growth momentum, with a special focus on the opportunities that the East African Community present to Kenya to mitigate its external vulnerability.
“Kenya’s per capita income has exceeded US$800 for the first time, and Kenyans have an opportunity to enjoy better standards of living as the economy progresses towards middle-income status in the coming years,” says Johannes Zutt, World Bank Country Director for Kenya. “The challenge for the government, particularly in an election year, is to continue to run the economy well, to support private sector efforts to increase manufacturing and exports, and to remove bottlenecks to regional trade, so that Kenya stays on a higher growth path.”
“The return of macroeconomic stability gives hope for 2012 and 2013,” according to the report, which projects that inflation will remain below 10 percent during the second half of 2012, from a high of nearly 20 percent early in the year. Moreover, interest rates are expected to fall and the exchange rate to return to “more competitive levels” that will spur economic activity. The debt level has also fallen below 45 percent of the Gross Domestic Product (GDP).
“Kenya is living beyond its means and it’s time to use policy tools to increase savings and exports” says Jane Kiringai, the Bank’s Senior Economist for Kenya and one of the lead authors of the report. “Structural weaknesses, including a widening current account deficit, pose a significant risk to Kenya’s economic stability. Another oil price shock, poor harvest, or contagion in the Euro zone could easily create renewed economic turbulence and reverse the recent gains.”
Despite these challenges, strong growth of the East African Community (EAC) creates opportunities for Kenya to reduce its vulnerability from external shocks.
“Deepening Kenya’s intra-EAC trade would help reduce its widening current account deficit, cushion it against global turbulence and open the economy to more Foreign Direct Investment,” says Wolfgang Fengler, the Lead Economist for Kenya. “Increased trade in the region will contribute to food security, develop regional production chains in food and manufacturing and open up new markets in services.”
The report highlights the rapid growth of EAC, which is one of the fastest growing regions in the world. The region grew by an average of 5.8 percent in the past decade, recording the second highest growth rate of any economic block. Foreign Direct Investment to the EAC states also increased three-fold during the decade. But the full potential of the region remains untapped and the business climate in the region is still poor due to non tariff barriers and infrastructure bottlenecks.
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 Vision 2030 Delivery Secretariat, the National Economic and Social Council, the Kenya Institute for Public Policy Research and Analysis, and the International Monetary Fund.