Economy

Kenya’s economy has experienced a series of domestic and external shocks in 2011, dampening growth prospects and reducing the gains from higher economic growth and recovery in 2010. Drought, higher food and fuel prices and electricity shortages are expected to reduce Gross Domestic Product (GDP) growth by 1%. The World Bank now projects a growth rate of 4.0-4.5 % for 2011, lower than the 5.6% recorded in 2010, but still higher than the long-term average growth rate. High food and fuel prices are also threatening some macroeconomic fundamentals, having resulted in higher inflation—16% in August 2011—and a declining exchange rate.

High global food prices have contributed to the domestic food crisis and agricultural policies are also to blame. In July 2011, Kenyans paid a record US$45 per 90-kg bag of maize—double the cost half a year ago and nearly 70% above world market prices. A high price policy maintained by the state-controlled national cereals board benefits a few rich large-scale farmers while hurting the poor, who pay higher prices for maize than under a free market system.

Drought in north and eastern Kenya has caused a social and humanitarian crisis, but  economic impacts are unlikely to be substantial, as this region contributes only about 5% of GDP. Moreover, unlike in 2009, the crisis is still limited to the arid and semi-arid lands.  As long as the drought does not affect the “bread basket” in the Rift Valley or further reduce electricity production, the Bank expects Kenya to be shielded from a more severe economic downturn.

Despite these shocks, the growth momentum remains strong underpinned by structural reforms, a new constitution and a dynamic private sector, according to latest economic analysis by the Bank and the International Monetary Fund (IMF). A strong record of macroeconomic policy is also expected to manage the temporary shocks, which have also depressed the stock market.

In 2010, growth exceeded earlier forecast and was strong across all sectors, according to the Bank’s Kenya Economic Update for June 2011. The recovery was supported by a stable economic environment accelerated infrastructure investment, rebound in agriculture, industrial production, a booming financial sector and implementation of the government’s fiscal stimulus.

But in 2011, a sharp rise in oil prices due to instability in the Middle East and North Africa has increased Kenya’s import bill and the current account deficit has widened. Kenya is also experiencing a drought, the worst in half a century in the Horn of Africa, and the food supply deficit has necessitated the importation of maize at a time when global food prices have peaked. The Kenya shilling has depreciated by 15 percent  against the US$ putting additional pressure on the prices of imported goods and  the combined effects of the high food and fuel prices and the weak shilling have translated into higher inflation..Moreover, fiscal and monetary policy responses to the shocks have seen a spike in interest rates and increase in domestic debt at a time when fiscal consolidation is essential.

The combined effect of the weaker shilling and the high global prices are imparting pressure on domestic prices and in August 2011, food inflation stood at 24 percent and overall inflation at 16.7 percent, compared to 3.2 percent and 5.5 percent, respectively in 2010. Low income households are impacted most. For instance, in July 2011, inflation for low income households was 16 percent compared to 7.8 percent for high income households.. The real exchange rate of the Kenya Shilling against the dollar, euro and other currencies also remained broadly stable but the nominal exchange has depreciated against the major international currencies and reached the lowest level for the decade.

The economic recovery in 2010, after a series of shocks including post election violence, drought and global food and financial crises in 2008 and 2009, was broad based, with agriculture expanding at 5 percent, industry at 7.6 percent and services at a moderate 4 percent.  The economy also benefited from the government’s fiscal stimulus mainly targeted at infrastructure and agriculture. Favorable weather conditions contributed to good agricultural output (with lower food prices) and more reliable hydro energy, which stimulated manufacturing. Good weather also contributed to high volumes of tea, which also benefited from high global prices. However, coffee output recovered more slowly despite an increase in global coffee prices, while the horticulture sector contracted due to Europe’s slow recovery and the impact of the volcanic ash, which disrupted access to the European markets. The services sector recorded a moderate growth of 4 percent in 2010. The sector has been driving growth in the past decade due to remarkable growth of the Information and Communication Technologies (ICT) and financial services. ICT and finance, together with wholesale and retail trade, contributed significantly to the expansion of the sector.  

Political Developments

The political space is vibrant with increasing focus on next year’s general election and the possible outcome of confirmation hearings at the International Criminal Court (ICC) for six suspects of the 2007/8 post election violence, who include a cabinet minister and senior civil servants. The government, with parliament’s endorsement, has appointed a new chief justice, attorney general and director of public prosecutions under a new constitution which Kenyans approved with a 67 percent majority vote in a referendum on August 4, 2010 and promulgated by President Kibaki on Aug. 27, 2010.  Emerging opportunities in other constitutional offices including the police, and the expanded devolved governance system that includes county governors is also generating considerable interest as the government deepens implementation of the constitution.

The government’s focus is on the policy and legislative processes that are necessary to have the constitution fully implemented.  Already, 47 devolved counties have been established and commissions to oversee the implementation of the constitution, electoral boundaries and elections have been created.

The new constitution has empowered parliament to exercise its mandate independent of executive influence, but there is disquiet about some recent developments including paralysis of the Kenya Anti-Corruption Commission, which will be reconstituted under a new Ethics and Anti-Corruption Act. Members of parliament have also pushed through a motion to have Treasury pay their tax arrears demanded by the revenue authority under the new constitution, and have also sanctioned price control of essential consumer goods under a new legislation which the President has signed into law.

The new constitution is one of the long-term issues that the Grand Coalition Government committed itself to when it was sworn in on April 17, 2008, with Mr. Mwai Kibaki from the Party of National Unity (PNU) as president and Mr. Raila Odinga from the Orange Democratic Party (ODM) as prime minister. The coalition was established under a National Accord and Reconciliation Agreement with an equally shared portfolio balance between PNU and ODM following a political crisis and violence that followed the announcement of the results of the presidential, parliamentary and local government elections of Dec. 28, 2007. The constitution will enable the government to deal with other long-term issues, including judicial, electoral and land reforms.

Social Developments

Drought has affected large parts of Kenya, leaving 3.7 million people in need of food and other aid. The affected population is nearly 10% of Kenya’s population, estimated at 40 million.

Population increases by an estimated one million a year. The last population census in 2009, released on August 31, 2010, recorded Kenya's population 38.61 million, an increase of 35 percent over the last decade.  The report shows the distribution of the population across the country, with Rift Valley Province being the most populous with 10.1 million people. Nairobi, the capital, has 3.1 million people, according to the report released by the Ministry of Planning and National Development.  The government ordered a repeat census in eight districts after inconsistencies were noted in the population data. In areas of northern Kenya in particular, the rate of population increase appeared to be higher than what birth and death rates would support, and age and sex profiles deviated from normal.

While the prevailing macro-economic conditions between 2003 and 2008 helped improve the welfare of Kenyans, the poor remain vulnerability to drought and other crises induced by climate change. Rural and urban poverty remain a challenge. Recent analysis of the data from the 2005 to 2006 Kenya Integrated Household Budget Survey (KIHBS) indicates that national absolute poverty declined from 52.3 percent in 1997 to 46.1 percent in 2005 to 2006. While this decline in poverty compares well with other Sub Saharan African countries, it can still be considered high in comparison to neighboring countries such as Tanzania (about 36 percent) and Uganda (about 31 percent). In rural areas, overall poverty declined from 52.9 percent to 49.1 percent, while in urban areas, poverty declined from 49.2 percent in 1997 to 38.8 percent over the same period.

The Kenyan poverty profile also reveals strong regional disparities in the distribution of poverty. According to the 2005 to 2006 survey, the lowest incidence of rural poverty was in Central province (30.3 percent), followed by Nyanza (47.9 percent), Rift Valley (49.7 percent), Eastern (51.1 percent), Western (53.2 percent), Coast (69.7 percent), and North Easter province (74.0 percent). Inequality in Kenya remains high. The distribution of income, measured by the Gini coefficient (a measure of inequality of income distribution—the higher the percentage the higher the level of inequality) was estimated at 39 percent in rural areas and 49 percent for urban areas (pre-crisis). Income disparities in the rural areas have gone down since 1997, while the disparities in the urban areas have increased slightly.

There has been additional progress with respect to other dimensions of social development over the past years. For example, net primary education enrollment was only 80 percent in 2003, but has since increased to about 90 percent in 2008 (with an equal enrollment ratio between boys and girls). In 2004, only about 60 percent of primary students completed their education compared with about 80 percent in 2008. The transition from primary to secondary and later to tertiary and university education has also improved in recent years due to increased public and private investment in the education sector.

Development Challenges

The drought in Kenya and other countries in the Horn of Africa has increased poverty levels and compounded development challenges. Recent political and economic developments have stimulated development opportunities for Kenya but concerns remain in critical areas, including food security, governance and corruption. High oil prices due to instability in the Middle East and North Africa, weak exports due to underperforming manufacturing sector, lower agricultural output resulting from drought and declining tourism earnings and remittances, have exerted pressure on the exchange rate and current account.  Imported inflation from high fuel and food prices affects investments, and business confidence remains muted due to prolonged differences within the grand coalition. The combination of output and employment losses has a direct impact on poverty.

Many problems resulting from the successive crises will take time to resolve. These include (i) damage to physical assets, (ii) the displacement of about 300,000 people (about 1 percent of the population); (iii) the loss of confidence among investors and tourists; and (iv) damage to social capital. Unrelated to the post election violence, the global financial crisis increased inflation and the trade deficit. Looming global slowdown is another risk and Kenya’s economic policies will need to factor these into the overall policy management framework.

Kenya’s external account situation seems to be manageable but vulnerable due to rising public expenditure demands. Shortfalls in finance will be financed by net domestic borrowing including long term infrastructure bonds, and privatization receipts.

 

The Bank’s strategy for Kenya is to support the government’s Vision 2030 and with the new constitution, the Bank is considering expanding support towards implementation of key areas including devolution and other critical areas such as land and judicial reforms that have an impact on growth, equity and development. This will expand and deepen the Bank’s commitment to Kenya in line with the Bank’s Country Partnership Strategy (CPS) and the Africa Strategy. The CPS, which was endorsed by the Board in April 2010, supports the key pillars of the government’s Vision 2030 development strategy to accelerate sustainable growth, reduce inequality, and manage resource scarcity. It builds on the Bank’s Country Assistance Strategy (CAS) for 2004 to 2008. It is aligned with the Bank’s Africa Strategy, which focuses on competitiveness and employment with governance as the foundation.

The Bank’s commitment to Kenya presently amounts to over US$2.6 billion, including over US$2.28 billion in 23 national projects and US$348.5 million in five regional projects. The largest commitments are in infrastructure (transport, energy, water, and telecommunications), which are critical to reducing the cost of doing business and improving Kenya’s competitiveness in the East African region and globally. The other priority themes include strengthening public sector management and accountability, reducing vulnerability and strengthening communities  through investments in agriculture and environment, and investing in people—in areas such as, health, youth empowerment and social protection.

The Bank focuses on transparency initiatives (including open data, transparency in the judiciary, and capacity building in the prosecutorial and judicial services); broadening stakeholder involvement, including additional private participation in infrastructure services (e.g. transport corridors and ports); accelerating public financial management reforms; and improving governance in high-priority sectors (e.g. education, HIV/AIDS, health, and roads). Analytic work in such areas as media development, parliamentary and judicial capacity, and police oversight mechanisms will help lay the foundation for the development and governance agenda. At the same time several measures have been introduced to protect Bank-financed projects against corruption, while strengthening country systems. For example, lending by the World Bank in Kenya involves undertaking safeguards and due diligence analysis in areas where corruption risks are high, before proceeding with lending. This approach was developed after earlier reviews of some World Bank financed projects confirmed corruption risks.

The International Finance Corporation (IFC)

IFC’s activities in Kenya range from direct investment to advisory services that enhance access to finance for Small and Medium-Size Enterprises (SMEs) and that improve the investment climate.  Within the context of the Strategic Initiative for Africa, IFC’s activities in Kenya focus on pro-active project development especially in financial markets, agribusiness, infrastructure and telecommunications. IFC’s committed portfolio in Kenya stands at about US$170 million and is one of the largest in Sub Saharan Africa. It consists of projects in the manufacturing and services, agribusiness, tourism, education, telecommunications, power and financial sectors.

IFC is offering support through several technical assistance programs including the following: the Small and Medium-Size Enterprise (SME) Solutions Center; SME Development Initiatives; a program to facilitate women entrepreneurs’ access to finance through local banks; a program to develop credit bureaus; and a program to facilitate better access to finance for private schools in Kenya. It also manages the Grassroots Business Initiative (GBI), a trust fund working with several social enterprises in Kenya that target disadvantaged youth and rural and urban poor.

IFC is also supporting curriculum development in business schools, including on issues of governance and ethics, through its Global Business School Network program. IFC will partner with the World Bank’s International Development Association (IDA) to prepare the Corporate Governance ROSC (Report on the Observance of Standards and Codes), a review of the corporate governance of state-owned enterprises, and additional work on governance in the financial sector.

As part of joint World Bank/IFC outreach and dialogue with the private sector, IFC will explore additional opportunities for company-level programs, especially among MSMEs, to provide training and build awareness, address problems in particular companies, and help create governance reform champions.

Multilateral Investment Guarantee Agency (MIGA)

MIGA is providing guarantees for several projects in Kenya including for a 45 megawatt private geothermal power plant. It is also receiving increasing interest from other investors and sectors in the country. 

 

The World Bank’s strategy in Kenya has intensified support to projects and programs that will improve economic competitiveness, reduce regional inequalities and strengthen climate change and mitigation interventions. Kenya Transport Sector Support Project approved by the Bank Board in April 2011 will upgrade over 220 km of roads on the northern and western corridors, improve air transport and support growth of key economic sectors. The project, with US$300 million Bank funding, will also improve business climate in the western region and strengthen regional integration in the East African Community by reducing transport bottlenecks on the Tanzania-Kenya-Sudan road corridor.

Kenya has significantly increased efficiency in road transport along the Northern Corridor transport system following the implementation since June 2004 of a Bank-financed US$460 million Northern Corridor Transport Improvement Project. The Bank’s finance contributes to half of the US$960 million that the government is investing in the Northern Corridor, an important artery that also serves Kenya’s neighbors—Uganda, Rwanda, Southern Sudan and Eastern Democratic Republic of Congo. The project has facilitated trade and regional integration within the Eastern Africa region and enabled Kenya to rehabilitate and replace infrastructure and public assets damaged during the 2008 post election crisis. It has also enhanced aviation safety at Kenya’s international airports and promoted private sector participation in the management, financing, and maintenance of road assets. Further benefits in the ease of doing business in the region have been achieved through the link of the Northern Corridor project to the East African Transport and Trade Facilitation Project, a US$150.6 million Bank intervention that has helped improve customs clearance at the Kenya-Uganda border.  The transport facilitation project will also expedite rail transport from Mombasa port through Mombasa to Uganda and other EAC countries.

Kenya Informal Settlements Improvement Project, a US$100 million project approved in March 2011, will improve living conditions of Kenyans in informal urban settlements, strengthen the security of tenure and improve physical infrastructure in informal settlements in the large municipalities. It will also improve regional competitiveness and address urban conflicts in the largest cities, which are facing challenges of rapidly increasing population. The project will complement the activities of the Kenya Municipal Program, a US$100 million credit approved by the Board in May 2010 to improve service delivery in Kenya’s municipalities. The municipal program is supporting government efforts to improve service delivery and the economic viability of Kenya’s largest 15 municipalities. It will strengthen their local governance, institutions and physical infrastructure to increase business opportunities in the regions in line with the new constitution, which has a strong focus on devolved governance and development.  

The Bank has over the years also supported Kenya’s efforts to increase electricity access to Kenyans in urban and rural areas. The Bank has invested US$330 million in the Kenya Electricity Expansion Project, a US$1.4 billion investment by the government, Bank and other development partners which is increasing consumer access and facilitating expansion of geothermal power generation as part of Kenya’s green energy development strategy.  The project is part of the government’s strategy to accelerate infrastructure development to strengthen foundations for growth and competitiveness and is building on the Kenya - Energy Sector Recovery Project, which the Bank has supported since 2004 with an investment of US$160 million to increase geothermal generation, improve electricity distribution and implement electrification programs to support economic growth and reduce regional disparities. The investment in energy, with a greater focus on clean energy development, supports Kenya’s efforts to reduce the cost of doing business by reducing power outages, which are a major constraint to private sector growth and job creation. It also builds on critical reforms, including private sector participation in energy development, to increase the efficiency and supply of electricity. The Bank’s continued investment in geothermal development, and emerging potential in wind energy, will enable Kenyan to increase supply of reliable, clean energy and reduce dependency on unreliable hydro power and expensive fossil fuel.

The Bank has also substantially assisted Kenya to address social challenges through investments in health and social protection, as well as address the vulnerability of communities in arid and semi-arid areas through investment in disaster preparedness and alternative livelihood opportunities. It is also engaged in improving value chains and clusters of micro, small and medium enterprises in key sectors such as coffee and leather. The MSMEs are critical to Kenya’s development, providing livelihoods and jobs for majority of Kenyans.

 

The Bank’s Knowledge resources  generate wealth of findings and good practices from its vast research and operations at a global level, which is then shared with client countries and partners. In Kenya, the Bank’s Knowledge Center shares development information on a continuous basis with different stakeholders including the government, media, private sector, civil society, youth and faith based organizations. The Bank has facilitated the government’s partnership with private sector to develop an open data portal, which is being used by software and content developers to develop innovative ICT applications. It also partners with think tanks and universities to produce regular economic updates, including the Kenya Economic Update.

The Bank’s Kenya office also holds regular dialogue and consultations on topical issues with various stakeholders. A youth development program empowers college and university students to search, interpret and use development information. Besides, the Bank interacts regularly with Civil Society and governance groups, enhancing Social Accountability that is critical to improving the outcome of development projects.

The World Bank works in partnership with other development partners to increase development effectiveness. In Kenya, the Bank provides a platform for the development community to engage with the government and ensure resources are utilized more efficiently. Since 2003, the donors have strengthened harmonization and coordination of their development activities through the Harmonization, Alignment and Coordination (HAC) group, whose thrust is to increase the efficiency and effectiveness of aid and reduce transaction costs to the government in line with the objectives of the Rome Declaration of February 2003.

The Bank’s partnership with other development partners in public sector investments cuts across key projects and sectors. These include the European Union and European Investment Bank (EIB), the African Development Bank (AfDB), France’s Agence Francaise de Developpement (AFD), Britain’s Department for International Development (DFID), German’s KFW, Japan International Cooperation Agency (JICA) and China.