5 key economic sectors that Kenya needs to turn around – World Bank

March 9, 2016
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Sorting out the challenges in agriculture would bring positive spillover effects, raising rural population incomes, increasing food security, improving exports

, Kenya’s economy has experienced a mixed bag of fortunes over the last decade, showing resilience in tumultuous years and sluggish growth in anchor sectors like agriculture and manufacturing.

The stellar performer, according to a World Bank report, is the service sector which contributed 72 percent of the increase in Kenya’s GDP between 2006 and 2013.

The Bank’s Country Economic Memorandum (CEM) report singles out the intersection of (a fairly developed) financial sector and mobile communications as an enabler of other services and a facilitator of trade. An enduring entrepreneurial and innovative spirit has seen a rapid growth of formal business startups, creating job opportunities albeit at a lower than the expected rate.

econ quoteThe economy has also benefited from the relative stable macro-economic environment in the last 5 years significantly reducing the high volatility experienced post-2007.

However, in spite of the consistent growth in GDP, the World Bank report is of the view Kenya’s consumer-led growth has underperformed and adjustments need to be done towards a more inclusive, productive economy.

“Taken as a whole, the past decade’s economic performance can be described as remarkable by Kenyan standards, but in a broader perspective it is not even close to stellar,” states the Country Economic Memorandum report.

The report analyzes key aspects of a country’s economic development with a view of providing an integrated and long-term perspective of the country’s development priorities. But beneath Kenya’s rosy growth numbers is a picture of an out-of-balance economy that needs to adjust in a number of areas to achieve Vision 2030 goals.

Manufacturing

Kenya has been losing its manufacturing competitive edge to other countries due to the high cost of production. For instance, battery maker Eveready and Cadburys moved their production plants to Egypt citing cheaper production costs in the Arab Republic.

“Wages in Kenya are much higher than in peer countries at a similar level of development. Transport, energy, and land costs, which account for half of total costs excluding raw materials and labor, are also likely to be higher compared with competitor economies,” states the economic memorandum.

consumption GDPThe higher-than-average wages only feeds into the consumptive economy that is driving the expenditure side. Meanwhile, Kenyan exporters have been losing market share to Chinese and Indian exporters. In 2006, 11 percent of EAC’s imports came from Kenya and by 2013 the share had fallen to 6 percent. This is happening in the backdrop of emerging government-led industrial parks in Rwanda and Ethiopia luring investors with lower wages, affordable

This is happening in the backdrop of emerging government-led industrial parks in Rwanda and Ethiopia luring investors with lower wages, affordable rents and a conducive business environment. In spite of the growing export-import deficit, the report notes Kenya has the potential to expand and diversify its export products including beer, plastic, packaging and pharmaceuticals.

“The high share of service is not what is peculiar about Kenya or Sub-Saharan African (SSA) in general; it is the low share of manufacturing that differentiates Kenya from other fast-growing, low-and-middle-income economies.”

Agriculture

The backbone of the Kenyan economy joins manufacturing as a perennial underperformer having suffered weather shocks, little value addition and good policies gathering dust in public offices.

Inflation and volatility, as experienced in 2011 global food crisis, saw food inflation increase from 10 to 26 percent.

“In addition, various policy measures are in place that raises the prices of maize and sugar, which are key consumption items for poor households.”

Agriculture constitutes two-thirds of exports and contributes a quarter of Kenya’s GDP as well as providing employment for 7 out of 10 Kenyans in rural regions.  The report outlines why the sector, in spite of sluggish growth, will continue to play a fundamental role in the economy.

Sorting out the challenges in the sector would bring positive spillover effects, raising rural population incomes, increasing food security, improving exports and averting a land stabilizing the economy.

However, there are pockets within the sector like horticulture which have flourished while tea and coffee continue to show promise though more can be done.

Youth Unemployment

The number of young people joining the market is outgrowing the number of jobs available especially in the formal sector. This has led to some analysts term Kenya’s unemployed youth as a ‘ticking time bomb’ that can trigger other social and economic problems.

youth jobsAlthough the country lacks reliable data on official unemployment, the report takes a look at the 2009 – 2013 period when three million joined the working-age population while 2.6 million jobs were created, 90 percent in the informal sector.

The World Bank says although the informal economy cushions Kenya’s unemployment rates, it does not contribute directly to government budgets.

“Agriculture and manufacturing have not been able to create enough jobs for Kenya’s growing working population…improving the ease of doing business is one way towards job creating and higher productivity,” says Diaretou Gaye, World Bank Country Director, Kenya.

Corruption

The CEM report makes reference to the Transparency International’s Corruption Perception Index which ranks Kenya at position 139, faring marginally better only to Cambodia and Bangladesh among the peer group.

“Weak enforcement, red tape and corruption are some of the main culprits for the prevailing informality and low growth and investment in the formal sector,” states the CEM report, adding these factors add to the cost of doing business which ultimately dents the country’s competitive edge.

A 2013 informality survey revealed entrepreneurs see corruption as the third biggest obstacle faced by informal firms. In addition, one in four formal firms faces at least one bribery request per year.

Savings

In 1980s, Kenya’s average saving rate was higher than the saving rates in several peer countries, notes the report. But since then, Ghana, Senegal and Uganda, which had among the lowest savings in the 1980s, have surpassed Kenya in savings.

Tanzania’s savings rate was 23 percent of the Gross National Income in 2012. Kenya’s 12 percent saving rate is too low to achieve Vision 2030 and Second Medium-Term Plan (MTP-2) growth targets.

In the long run, Kenya’s dependence on external financing without collaborating substantial savings may hamper economic growth due to large current account deficits.

“In the long term, oil rents could become a major source for financing investment, but it will be years before a significant amount of oil revenue starts flowing to the budget,” says the report.

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