KENYA’S ECONOMY REBOUND AND REMAIN ROBUST BY 2025. Kenya’s real gross domestic product (GDP) growth is projected to rise to 5.7% in 2018—up from 4.9% in 2017—and continue to increase steadily to 5.8% in 2019, and 6.0% in 2020, according to the Researchers 18th Kenya Economic Update (KEU)
attributes the rebound to a recovery in agriculture, steady pick-up in industrial activity and continued robust performance of the services sector. The pick-up in Kenya’s economy is also reflected in improved household consumption and a developing recovery in private investment.
Household consumption is supported by strong remittance inflows and improved rains which has led to better harvests and lower food prices. Similarly, private sector investment is buoyed by improving investor sentiment and the availability of previously pent-up investment demand after a challenging 2017. Further, with benign inflationary conditions, a stable exchange rate, and healthy accumulation of reserves, the stable macroeconomic environment has been broadly supportive of the economic recovery. Nonetheless, with private sector credit growth remaining subdued at 4.3% this pick-up is being curtailed by limited access to credit, as well as headwinds from fiscal consolidation.
“The Bank lauds the government for embarking on needed fiscal consolidation to safeguard macroeconomic stability and help crowd in private sector.Further recalibrating the slowdown in expenditures between recurrent and development spending in favor of the former should allow fiscal consolidation to become more growth friendly.”
Since the 2017 announcement of the “Big 4” development agenda, which prioritizes food security, housing, universal health coverage and manufacturing, Kenya has made some progress in instituting policies that crowd-in private sector engagement, particularly within the affordable housing pillar. The legal and regulatory framework for the Kenya Mortgage Refinance Company (KMRC) has been completed, the Stamp Duty Act providing an exemption for first-time home buyers has been signed into law, and standardized forms to register a change in property ownership have been introduced. Further reforms are needed to advance the goals of food security and nutrition, universal health coverage and manufacturing competitiveness, to maximize the inclusiveness of economic growth.
“While progress is being made to advance the “Big 4”, given the ambitious nature of these objectives, it calls for accelerating the pace of structural reforms, particularly in areas that helps crowd in the private sector to advance the “Big 4,” said, SENIOR ECONOMIST AND LEAD AUTHOR OF THE KEU.
The special section of the KEU examines the distributional consequences of government’s spending and taxation measures. The analysis could provide input for designing pro-poor policies and describes the rate at which economic growth translates into poverty reduction.
“Personal income tax in Kenya is progressive with the poorest 40% accounting for 14.3% of market income but less than 1% of direct taxes,” said, SENIOR ECONOMIST AND AUTHOR OF THE SPECIAL SECTION ON FISCAL INCIDENT ANALYSIS. “In contrast, 80% of the tax incidence is borne by the richest 10% of Kenya’s population.”
The special section also examines which benefits of social spending accrues to the poor. For example, cash transfer programs are well-targeted because a large fraction of the benefits is captured by the poor. However, cash transfer schemes in Kenya cover only a small portion of the population and could be expanded further to increase their poverty-reducing effect. However, more robust revenue mobilization would be needed to increase coverage significantly.
Kenya has made significant political, structural and economic reforms that have largely driven sustained economic growth, social development and political gains over the past decade. However, its key development challenges still include poverty, inequality, climate change, continued weak private sector investment and the vulnerability of the economy to internal and external shocks.
Devolution remains the biggest gain from the August 2010 constitution, which ushered in a new political and economic governance system. It is transformative and has promoted greater investments at the grassroots, strengthened accountability and public service delivery at local levels.
While economic activity faltered following the 2008 global economic recession, growth resumed in the last five years reaching 5.7% in 2019 placing Kenya as one of the fastest growing economies in Sub-Saharan Africa. The recent economic expansion has been boosted by a stable macroeconomic environment, positive investor confidence and a resilient services sector.
Looking ahead, medium-term gross domestic product growth (GDP) is expected to rise to 5.9% in 2020 and 6.0% in 2020 underpinned by private consumption, a pick-up in industrial activity and still strong performance in the services sector. Inflation is expected to remain within the government’s target range while the current account deficit is projected to remain manageable. Growth will also be driven by ongoing key investment to support implementation of the Big 4 development agenda and improved business sentiment. Growth could have been stronger in the absence of interest rate caps that continue to derail recovery in private credit growth.
In addition to aligning fostering economic development through the country’s development agenda to the long-term development plan; Vision 2030, the President in December outlined the “Big Four” development priority areas for his final term as President. The Big Four will prioritize manufacturing, universal healthcare, affordable housing and food security. Social Development
Kenya has met some Millennium Development Goals (MDGs) targets, including reduced child mortality, near universal primary school enrolment, and narrowed gender gaps in education. Interventions and increased spending on health and education are paying dividends. While the healthcare system has faced challenges recently, devolved health care and free maternal health care at all public health facilities will improve health care outcomes and develop a more equitable health care system.
Kenya has the potential to be one of Africa’s success stories from its growing youthful population, a dynamic private sector, highly skilled workforce, improved infrastructure, a new constitution, and its pivotal role in East Africa. Addressing the challenges of poverty, inequality, governance, the skills gap between market requirements and the education curriculum, climate change, low investment and low firm productivity to achieve rapid, sustained growth rates that will transform lives of ordinary citizens, will be a major goal for Kenya.