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September 19, 2018

Maintaining The Current Economic Growth A Priority For Kenya

local assembly: Associated Battery Manufacturers staff at the firm’s Industrial Area plant in Nairobi
local assembly: Associated Battery Manufacturers staff at the firm’s Industrial Area plant in Nairobi

Kenya has been on an economic growth trajectory from 2009, registering an average annual growth of over five per cent and rising towards six per cent in the last two years. While there is the opportunity to build on the current momentum, it all depends on how both the existing and emerging challenges are addressed.  In 2015, we saw the growth forecasts revised downwards several times, an indication that the momentum was faltering under both internal and external shocks.

The year 2016 therefore marks a defining point; with the prospects to steer the economy upwards or to spiral downwards. Major economic and political uncertainties loom large and concerted effort will be required to successfully navigate through them and to make them a launching pad for creating resilience for further future growth. With only 15 years remaining to the deadline of Vision 2030, and half-way through the manifesto, the economy can ill afford to falter.

Furthermore, the declaration of a middle income country comes with the expectation of being more self-reliant and it may not come as a surprise if the external partners are less supportive in areas that previously relied more on donor funds. The importance of policies and structural transformation agendas that take into account the reduced external dependence is therefore central to achieving sustainable development.

For many people, especially the youth, sustainable development means access to quality education and good jobs. Creating good jobs, which offer opportunities to develop new skills, pay a living wage and offer dignity of work is one of the challenges that Kenya faces this year.

Many youth have been forced to settle for self-employment in the service sector, but the output is often low and prospects for skill development limited. Economic growth needs to accelerate sufficiently fast to both reduce the current unemployment, and keep in tandem with the many youths that are entering the labour market every year.

As highlighted in Foresight Africa, more industry is required to create more jobs in Africa. For the last four decades, industrial development has stalled, with the empty go-downs in former industrial hubs such as Juja and Thika a clear evidence of this. Research has shown that manufacturing is a high-productivity sector that is capable of absorbing large numbers of moderately skilled workers, and its output per person is almost six times that for agriculture. The continued reliance on imported basic products is not only a drain on the foreign currency, but is also a foregone employment opportunity.

More dynamic export oriented policies will need to be created for manufactured exports to take root, especially amidst a more liberalised international trade market. Furthermore, a product manufactured in Kenya ought to be not only cheaper locally than one coming from across the Pacific or the Atlantic, but competitive enough to be exported. The many micro, small and medium enterprises that dot the business profile in Kenya need an environment that will enable them to scale up and graduate to formal enterprises that can produce quality products for export and create formal jobs.

The Kenyan economy will need to build resilience to the economic shocks that emerged in 2015. The depreciation of the Kenya shilling against the US dollar, raising inflation, declining stock market and high interest rates have a negative impact on the economic growth.

The depreciation against the US dollar has made the infrastructure investments plans that rely on imports more expensive and increased the risk that the projects will take longer to implement. This reduces and delays the gains from such investment. It has also made it more expensive to service foreign currency denominated loans, and increased the debt burden on the economy. The negative consequence of this is a push towards higher taxes and more domestic borrowing, with the potential to slow down economic growth further.

On the upside, an export orientation would greatly benefit from a currency depreciation, which would increase the value of exports in terms of local currency. It is therefore an appropriate environment to deliberately push exports.

Raising inflation, partly as a result of increased taxes and partly because of short-term effects such as weather that impacts on food prices would also need to be deliberated addressed. It is unfortunate that when it rains, food prices rise because of difficulties in accesing the market and when it does not rain, food prices likewise rise because of lack of rains!

The persisted high interest rates make it more difficult to access credit while firms have to meet high debt servicing costs at the expense of expansion. This is not an emerging problem, but one that has persisted, only partly tamed in the early 2003 only to re-emerge. The recent diagnosis of a problem of dominance by the Central Bank of Kenya means that this problem can be addressed through regulation. The path to industrialisation and economic growth will require active participation of the financial industry, with interest rates that are sufficiently low and supportive.

In conclusion, while there are opportunities to accelerate the growth momentum, deliberate effort will be need to seize them and navigate the many internal and external shocks that have the capacity to derail progress.

 

 

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