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Time for Kenya to Shift Gears to Accelerate Growth and Reduce Poverty

June 17, 2013

World Bank projects a higher growth rate of 5.7% in 2013 supported by high investment and low interest rates 

NAIROBI, June 17, 2013—Lower interest rates and higher investment will support Kenya’s economic growth in the next two years, the World Bank projects in its latest economic analysis on Kenya.

The Kenya Economic Update launched today forecasts a growth rate of 5.7 percent in 2013, which is remarkably higher than the growth rate of 4.7 percent recorded in 2012. This is attributed to a stable macroeconomic environment, the peaceful elections in March 2013, and smooth transition of political power. The Gross Domestic Product (GDP) is expected to improve further to 6.0 percent in 2014.

Kenyans are reaping gains from a smooth election process and sound macroeconomic conditions, but much more remains to be done to achieve the target growth rate of 10 percent envisaged in Vision 2030,” says Diarietou Gaye, World Bank Country Director for Kenya. “The government needs to create an enabling environment for private sector-led growth by continuing to invest in infrastructure, increasing domestic energy production, removing bottlenecks to doing business and sustaining sound monetary and fiscal policies.”

But the June 2013 report points out that the economy is still operating below its potential and remains vulnerable to external shocks, which undermine its prospects for growth and poverty reduction. This can be cushioned by increasing both domestic and foreign savings.

 “The economy needs structural reforms to improve the business environment and for more Foreign Direct Investment flow to Kenya,” says John Randa, the Bank’s Country Economist for Kenya, and one of the lead authors of the report.Such reforms will include tax and expenditure measures that will increase savings and investment to expand manufacturing exports, taking advantage of Kenya’s low labor costs and its coastal location.”

A higher growth rate will enable the economy to increase job opportunities for the burgeoning youth population and continue to reduce poverty, which is estimated to have declined from 47 percent in 2005 to between 34 percent and 42 percent. But it is difficult to have precise poverty numbers because the last household survey was conducted in 2005-6.

“A new survey is necessary to update poverty estimates and inform the government’s poverty reduction strategies,” says Paul Gubbins, the Bank’s Poverty Economist for Kenya, and the other lead author of the report. “Without more frequent surveys, there is a missed opportunity to understand whether economic gains and government policy have generated pathways out of poverty for the poor.”

The report also 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, says, the report, 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 Bank urges the government 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.

The report, the eighth in a semi-annual series, underlines the Bank’s commitment to help Kenya in the challenging task of implementing the new devolved system of governance.

The Kenya Economic Update is produced by the Bank in collaboration with Economic Round Table members, including the Ministry of Finance, the Ministry of Devolution and Planning, the Central Bank of Kenya, the Kenya National Bureau of Statistics, the Kenya Revenue Authority and the National Economic and Social Council and the International Monetary Fund. 

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