63657 Kenya at work Energizing the economy and creating jobs Kenya at work Energizing the economy and creating jobs TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS i FOREWORD ii ACKNOWLEDGEMENTS iii MAIN MESSAGES AND KEY RECOMMENDATIONS iv EXECUTIVE SUMMARY v THE STATE OF KENYA’S ECONOMY 1 1. Economic performance in 2012 2 1.1 An economy still standing 2 1.2 Monetary policy was tight in 2012 but it has started to ease 6 1.3 Kenya’s fiscal position remains strong 9 1.4 The external account remains under pressure 11 2. 2013 and beyond 16 2.1 Growth Prospects 16 2.2 Risks to outlook 17 2.3 A policy agenda for the next government 19 2.4 Energizing the economy for job creation 20 SPECIAL FOCUS: CREATING JOBS 23 3. The jobs landscape 24 3.1 Why jobs matter 24 3.2 The changing face of jobs 25 4. Challenges facing youth in the job market 31 5. How can Kenya spur job creation? 37 5.1 The supply side: does the workforce have the skills needed for good jobs? 38 5.2 The demand side: constraints to job creation by employers 40 5.3 Raising productivity of non-farm self-employment 43 5.4 Creating good jobs: The way forward 45 ANNEXES Annex 1: Macroeconomic environment 50 Annex 2: GDP growth rates 2008-2012 Kenya, SSA and EAC 50 Annex 3: Kenya annual GDP 51 Annex 4: Broad sectors half year growth rates (%) 51 Annex 5: Quarterly growth rates (%) 52 Annex 6: Inflation 53 Annex 7: Tea production and exports 54 Annex 8: Coffee production and exports 55 Annex 9: Horticulture exports 56 Annex 10: Local electricity generation by source (million KWh) 57 Annex 11: Soft drinks, sugar, galvanised sheets and cement production 58 Annex 12: Tourism arrivals 59 Annex 13: Exchange rate 61 Annex 14: Interest rate 62 Annex 15: Credit to private sector 63 Annex 16: Money aggregate 65 Annex 17: Mobile payments 67 Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) 68 Annex 19: Foreign investors participation (in/out flows) - KES millions 70 Annex 20: Nominal and real exchange rate 71 Annex 21: ICT penetration 72 Annex 22: Budget implementation 72 Annex 23: Fiscal position 73 Annex 24: 12-months cumulative balance of payments (US$ millions) 74 Annex 25: Growth outlook 76 Annex 26: Defining and measuring employment from census data 77 Annex 27: Response categories to primary activity question in census data 77 Annex 28: Standard definitions of the working age population, labor force, the employed and 78 unemployed Annex 29: Defining family farming, non-farm self-employment and wage work from Census data 78 Annex 30: Age pyramids showing activity, urban and rural in 2009 79 Annex 31: Unemployment and other measures of joblessness 80 Annex 32: Measures of joblessness 80 Annex 33: All Kenya-Unemployment and inactivity rates overall, by age, sex and urban/rural 80 setting, 2009 Annex 34: Males and females-Unemployment and inactivity rates overall, by age, sex and 81 urban/rural setting, 2009 Annex 35: Urban and rural-Unemployment and inactivity rates overall, by age, sex and 81 urban/rural setting, 2009 Annex 36: Urban males and rural males-Unemployment and inactivity rates overall, by age, 82 sex and urban/rural setting, 2009 Annex 37: Urban females and rural females-Unemployment and inactivity rates overall, by age, 82 sex and urban/rural setting, 2009 LIST OF TABLES Table 1.1: Fiscal position as percent of GDP 10 Table 2.1: Macroeconomic Indicators 2008-2014 16 Table 2.2: Traditionally, Kenya’s growth is lower in election and post-election years 19 Table 5.1: The “Job cost” of bribes in Kenya 43 LIST OF FIGURES Figure 1: The economy in 2012: A mirror image of 2011 v Figure 2: Wage jobs and self-employment have overtaken family farming as the predominant viii Figure 1.1: Kenya’s sluggish growth in 2011/12 2 Figure 1.2: Kenya’s growth rate remains among the lowest in East Africa 2 Figure 1.3: Kenya experienced low growth in the first half of 2012 3 Figure 1.4: Leading Economic Indicators in the Agricultural sector 2012 3 Figure 1.5: Adequate rainfall increased hydro power generation … less expensive thermal power 4 into the grid in 2012 Figure 1.6: 2012 was a difficult year-more cement, less soda and less galvanised sheets 4 Figure 1.7: The services sector felt the hardest impact from tight monetary policy 5 Figure 1.8: The number of tourist declined by 2% in the first 8 months mainly as a result 5 a drop in MIA (20%) Figure 1.9: Mobile revolution is continuing and its impact in the financial sector 5 Figure 1.10: Overall Inflation has declined but CBK still needs to keep an eye on core inflation 6 Figure 1.11: Short term Interest rates have responded to monetary policy signals but 7 uncertainty remains Figure 1.12: As lending rates increased as a result of policy tightening, credit growth declined 8 across all sectors Figure 1.13: Monetary aggregates growth sloweddown in 2012 8 Figure 1.14: Real Estate and construction sectors received half of the private credit in 2012 8 Figure 1.15: As much as food and transport are the drivers of overall inflation, growth in 9 private sector credit is a significant factor Figure 1.16: NSE activity is picking up as foreign participation in it remains significant 9 Figure 1.17: The fisical defecit has been growing moderately ... and helping to finance the 10 expansion in development spending Figure 1.18: Budget execution remains challenging especially in infrastructure 11 Figure 1.19: Kenya’s public debt is still sustainable but it needs to build more fiscal space 11 Figure 1.20: Kenya external account continues to deteriorate 12 Figure 1.21: The capacity of Kenya’s earnings to finance its external demand is deteriorating 13 Figure 1.22: Kenya receives significant flows to finance its external account balance 14 Figure 1.23: Exchange rates have stabilized 14 Figure 1.24: The real appreciation of the shilling is eroding Kenya’s export competitiveness 15 Figure 1.25: Remittances have increased significantly in 2012 15 Figure 2.1: Growth outlook for 2013-2014 16 Figure 2.2: CBR decreased following eased monetary policy 17 Figure 2.3: Kenya’s current account is out of balance, even when compared to the SSA average 19 Figure 2.4: Even though Kenya’s growth is favourably in East Africa, its capital base is relative 21 to that of South Africa Figure 2.5: The savings investments gap drives Kenya’s current account defecit 21 Figure 3.1: The continuing demographic transition in Kenya 25 Figure 3.2: The coming bulge in the working age population 26 Figure 3.3: Kenya’s urban population is growing rapidly 26 Figure 3.4: Migration is primarily from highly populated rural areas to major urban centers 27 Figure 3.5: Through ups and downs since independence, economy has shifted from agriculture 27 to services Figure 3.6: Wage jobs and self-employment outside agriculture have increased, while employment 28 on family farms has remained constant Figure 3.7: Major job categories by gender and urban-rural in 2009 28 Figure 3.8: The percent of Kenyans Working on family farms has fallen for every age group 28 Figure 3.9: Words associated with the most widely held jobs in Kenya 29 Figure 3.10: Most non-wage jobs are in agriculture, while wage jobs are in a diverse set of sectors 30 Figure 3.11: Modern wage employment by sector, 2011 30 Figure 3.12: Breakdown of Kenya’s working age population by employment status 30 Figure 4.1: High inactivity rates fall for young people as they age 32 Figure 5.1: Kenya’s education dividend 38 Figure 5.2: More educated Kenyans more likely to have wage jobs 38 Figure 5.3: The returns to education are high for postsecondary education but low 39 for primary education Figure 5.4: Poor students are much less likely to pass basic literacy and numeracy exams 40 Figure 5.6: Weak transport and electricity are principal constraints to job creation 42 Figure 5.7: Kenya’s firms are much more likely to face demands for bribes 42 Figure 5.8: With accelerated wage job growth, most Kenyans could be in wage work by 2030 46 LIST OF BOXES Box 5.1: Reinvigorating family farming 39 ABBREVIATIONS AND ACRONYMS AAK Africa Alliance of Kenya CBK Central Bank of Kenya CBR Central Bank Rate CCK Communications Commission of Kenya CEO Chief Executive Officer CPI Consumer Price Index EAC East African Community FDI Foreign Direct Investment GDP Gross Domestic Product ICT Information and Communications Technology IEBC Independent Electoral and Boundaries Commission IMF International Monetary Fund JKIA Jomo Kenyatta International Airport KEU Kenya Economic Update KNBS Kenya National Bureau of Statistics KRA Kenya Revenue Authority MIA Moi International Airport MIC Middle Income Country MTP Medium Term Plan NEER Nominal Effective Exchange Rate NSE Nairobi Securities Exchange NYSE New York Stock Exchange OECD Organization for Economic Co-operation and Development PAYE Pay As You Earn RCA Revealed Comparative Advantage REER Real Effective Exchange Rate SME Small & Medium Enterprises SSA Sub-Saharan Africa TIVET Technical, Industrial, Vocational, and Entrepreneurship Training TVVP Technical and Vocational Vouchers Program UN United Nations US United States of America VAT Value Added Tax WB World Bank WDR World Development Report December 2012 | Edition No. 7 i FOREWORD I t is my pleasure to present to you the seventh edition of the World Bank’s Kenya Economic Update. As 2012 comes to a close, Kenya’s economy stabilized after a rocky start. The Central Bank’s tight monetary policy in the first half of the year effectively brought inflation under control and stabilized the exchange rate. But this came at a cost, as growth slowed to 3.4 percent in the first half of the year. We expect stronger growth in the second half, and for 2012 the economy is predicted to grow at 4.3 percent, slightly less than the 4.4 percent growth that it achieved in 2011. This report has three main messages. First, while the economy is stabilizing, Kenya is heading into an election year, and that may impact growth. Historically, Kenya’s economy has slowed during election periods, but Kenya could grow at 5 percent in 2013, provided that the next election and the subsequent transfer of power to a new administration are both achieved peacefully. Second, Kenya will need to continue expanding its exports and diversifying its markets so as to reduce the impact of the recession in the Euro zone, which is one of Kenya’s major trading partners and a key source for its tourism industry. Furthermore, export growth is crucial if Kenya is to begin reversing its significant current account deficit, which could undermine its long-term stability and growth prospects. Third, Kenya needs to create more jobs to cater for the large number of people entering the work force. Kenya is on the verge of a significant demographic opportunity, as the working-age population is increasing faster than the number of dependents, both young and old. But this opportunity will yield a growth dividend only if Kenya is able to create jobs for the youth who are entering the workforce. That is why this KEU focuses on “Kenya at Work”. Our analysis shows that the best way for Kenya to increase the number of higher-level wage jobs, and to absorb its growing work force, is to expand the manufacturing and industrial sectors, which are geared towards exports. The World Bank remains committed to helping Kenyans as they embark on a challenging 2013, when, for the first time since the new constitution was passed in 2010, Kenya will operate a devolved form of government. The Bank’s series of Economic Updates, which we publish in a new edition every six months, have become our leading vehicle to analyze development trends in Kenya, and to contribute to the implementation of the Bank’s strategy for Sub-Saharan Africa, which puts a special emphasis on knowledge and partnerships. With these reports, we aim to support all those who want to improve economic management in Kenya. As in the past, we are proud to have worked with many key Kenyan stakeholders during the preparation of this report. We hope that you too will join us in debating policy issues that are topical in Kenya today, and in making your contribution to helping Kenya to grow, to achieve a permanent reduction in poverty, and to bring shared prosperity to all Kenyans. Johannes Zutt Country Director for Kenya World Bank ii December 2012 | Edition No. 7 ACKNOWLEDGEMENTS T his seventh edition of the Kenya Economic Update was prepared by a team led by John Randa and Gabriel Demombynes together with Angelique Umutesi and Paul Gubbins. The team was supervised by Wolfgang Fengler. The core team consisted of Jane Kiringai, Louise Fox, Roger Sullivan, Allen Denis, Leonardo Garrido, Jane Muthigani, Ian Mills, Laban Maiyo, Lucy Wariara and Carol Wambugu. The report benefited from insights of several peer reviewers including Zeljko Bogetic, Dena Ringold, Dr. Nehemiah Ngeno and Paul Cook, as well as comments from William Wiseman and Cornelia Tesliuc. The team also received guidance from Paolo Zacchia and Johannes Zutt. Partnership with key Kenyan policy makers was instrumental in the production of this report. On November 19, 2012, a draft of the report was presented at the Quarterly Economic Roundtable. The meeting was attended by senior officials from the Ministry of Finance, the Prime Minister’s office, the Kenya National Bureau of Statistics, the Kenya Revenue Authority, the International Monetary Fund, and the National Executive and Social Council. December 2012 | Edition No. 7 iii MAIN MESSAGES AND KEY RECOMMENDATIONS Main Messages • Kenya will enter 2013 from an improving economic position. While growth will reach an estimated 4.3 percent in 2012, Kenya is well positioned to achieve 5 percent in 2013, as declining inflation will allow the Central Bank to loosen monetary policy. • Kenya remains vulnerable to shocks. In four of the last five years, the country experienced political, economic or weather-related shocks, and often a combination of these shocks (the exception was 2010). The current account deficit, which remains above 10 percent of GDP despite lower oil prices, makes Kenya’s external position particularly vulnerable to increasing oil prices. Historically, Kenya has also been vulnerable to election-related shocks, and there will be increased attention on the conduct of the 2013 elections, given the post-election violence of 2007/08. • Amidst many transitions taking place in Kenya, among the most profound is the long-term shift out of family farming. Twenty years ago, two-thirds of working Kenyans were on family farms; today it is less than half. Wage workers and the non-farm self-employed are growing at the same time as the country is undergoing a demographic transition, a scaling-up of education, and urbanization. • How Kenya manages these changes will determine if the economy will grow at higher levels and boost its citizens out of poverty. A job creation strategy can help more Kenyans move into good wage jobs. While seeking to pave the way for more wage jobs, policymakers—particularly at the local level—can simultaneously help boost the productivity of informal household enterprises, by accepting them as legitimate parts of the Kenyan economy. Key Recommendations to Energize the Economy • The Central Bank of Kenya (CBK) will have some room to stimulate growth through loosening monetary policy. The CBK has lowered key interest rates over the last several months to encourage investment and economic growth. So far, this policy has succeeded, as economic activity has increased without pushing up prices. The CBK should continue these policies in the first quarter of 2013, as investors will likely delay major projects while waiting for the outcome of the elections. Consumption and services will likely fill the gap left by investors, driven by election season spending. • Kenya needs to adopt tax and expenditure policies that increase savings and investment. Kenya’s growth has been driven by consumption, and savings at 13 percent of GDP are inadequate. Kenya’s GDP growth has mostly come from growth in the services sector, whereas countries with similar levels of development have often taken advantage of low labor costs, and the ability to locate manufacturing near seaports aggressively to expand exports. Kenya has all the necessary factors for export-led growth, but too many internal obstacles prevent exports from expanding more rapidly. • Maintaining macroeconomic stability is the single greatest foundation for a job creation strategy. An economy that is free from shocks, or manages its shocks well, creates an environment that nourishes investment and leads to an increase in jobs as the economy expands. Similarly, severe shocks to the economy, in particular those associated with political violence, can lead to a loss of jobs, as foreign investment flees or remains on the sidelines, and productive capacity shrinks. Key Recommendations for Creating Jobs • While seeking to boost the creation of high-productivity wage jobs, policymakers can also support the non-farm self-employed sector. As more Kenyans move out of family farming, even as wage work expands, the number of the Kenyans working in low-productivity self-employment will grow. The government can support them by encouraging local authorities to accept their enterprises as part of the legitimate economy, provide urban space for them to operate, and discourage the pervasive harassment that such enterprises often face from local authorities. • Creating the right incentives for better-paying wage jobs means stimulating manufacturing and industrial growth. Kenya is at a strategic crossroads in the types of jobs the economy will create over the next ten years. If it adopts export-led growth policies, the manufacturing and industrial sectors will expand, creating large numbers of jobs requiring high levels of skills and paying good wages. This in turn will lead to growth in the services sector (financial and IT) also generating jobs that pay well. • The level and quality of education has a significant pay-off in terms of jobs and earnings. Education opens up greater possibilities of wage employment and higher earnings. The current provision of public education, however, is of uneven quality, with rural areas likely to have much poorer facilities and outcomes. The government needs to improve the quality of primary education across the board, and expand the opportunities for secondary education, so that it is accessible to all Kenyans, regardless of their socioeconomic standing. EXECUTIVE SUMMARY K enya withstood another difficult year in 2012 as policy tightening and weaker global demand slowed economic activity. With decisive fiscal and monetary policies, the government managed to restore confidence in Kenya’s medium term prospects. 2013 promises to be a better year. Yet hard realities remain ―Kenya’s growth rate is still below its potential and its peers, external imbalances remain which threaten its future growth, and the pace of economic growth is not generating enough modern sector wage jobs. With the passage of the new constitution in 2010 and its implementation, stronger institutions are emerging, putting Kenya on a sound footing ready to take off. In the very short term, what remains to be done is for Kenya to deliver a credible and peaceful election in March 2013, and thereafter a smooth transfer of power. In the medium term, Kenya will need to start building a stronger foundation for growth, and undertake structural reforms to correct the external imbalances. To generate more jobs for the burgeoning educated youth population, Kenya will also need to reduce the transaction cost for firms, by reducing job-smothering corruption and the cost of doing business (particularly in transport and energy). Kenya’s economy: A gradual return Economically, 2012 has been almost a mirror to stability image of 2011. Last year the economy started out strongly, but by mid-year, high fuel and food prices K enya will enter 2013 from an improving economic position. During 2012, inflation declined sharply, the exchange rate stabilized and led to a rapid rise in inflation, a weakened exchange rate, and ultimately a radical increase in interest rates towards the end of the year. Tightened debt levels remained sustainable. But creating monetary policy, together with an easing in global this strong macroeconomic foundation came at food and fuel prices, have brought inflation under a cost. Projected growth will not meet earlier control and stabilized the economy in 2012. But expectations of 5 percent. For 2012, the World the high interest rate regime cooled the economy Bank now estimates that GDP will grow at 4.3 and resulted in the low growth of 3.5 percent in percent, slightly less than the 4.4 percent achieved the first half of 2012 (Figure 1). With the decline in 2011. A strong recovery at the end of the year in inflation and interest rates (with an appropriate and increased consumption driven by pre-election lag), the economy is set for a strong recovery at spending makes it possible for Kenya to achieve 5 the end of the year, and is expected to return to percent growth in 2013—if the elections remain its natural growth potential of at least 5 percent in peaceful. 2013. Figure 1: The economy in 2012: A mirror image of 2011 25.0 105.0 Quarterly GDP growth-reacting to policy with lags 7.0 20.0 100.0 Stronger recovery 6.0 expected in Q3 Tightened Monetary Policy and Q4 of 2012 15.0 95.0 lowered GDP Growth Inflati on rate (%) GDP Growth (%) 5.0 KES/US$ 10.0 90.0 4.0 Beginning of 3.0 5.0 agressive 85.0 montary policy 2.0 tightening by the Central Bank 0.0 80.0 1.0 Mar Mar Jan Feb Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Apr May Jun Jul Aug Sept Oct 0.0 2011 2012 1 2 3 4 1 2 3 4 Inflation Exchange rate 2011 2012 Source: World Bank analysis based on KNBS and CBK data December 2012 | Edition No. 7 v Executive Summary Over the last five years, shocks and economic 2013 and beyond volatility have become the norm for Kenya, rather than the exception. Since the 2007 elections, the only year when Kenya grew above 5 percent was K enya’s capacity to mitigate shocks—political and economic—will be the single most important determinant of whether East Africa’s largest 2010. This was also the only year when Kenya did not experience either internal or external shocks. economy will achieve sustained high growth for In 2008 and 2009, the post-election violence the remainder of this decade. It is unlikely that and a severe drought brought the economy to Kenya will digress to the poor performance of the a standstill. In 2011 and 2012, another drought 1980s and 1990s, but it is possible that the country and macroeconomic instability exerted its toll will continue with sluggish growth rates of around 4 on the economy, although in both these years percent. This will be enough to create some degree the economy grew relatively robustly at 4.3-4.4 of economic stability, but too little to achieve the percent. economic transformation that would bring more and better jobs to Kenyans, as well as more rapid As a result, Kenya has been following, not leading, poverty reduction. Africa’s growth momentum. Despite Kenya’s good location, strong human resources and a vibrant The conduct of the national elections in 2013 will private sector, its level of income is determine international perceptions of Kenya only half of Africa’s average. With for the years to come, and greatly around US$ 800, Kenya’s average influence Kenya’s medium-term per capita income is still about 50 economic prospects. The World If violence accompanies Bank maintains its growth projection percent higher than its key EAC- neighbors Tanzania, Uganda and the 2013 elections, of 5 percent, assuming that the Rwanda, but only half of Africa’s Kenya’s image as a elections proceed peacefully and average of US$ 1,600. Africa’s maturing democracy don’t disrupt economic activity. growth momentum has already would be tarnished for If violence accompanies the 2013 propelled 22 economies above the a long time elections, Kenya’s image as a US$ 1000 Middle Income threshold. maturing democracy would be Kenya is only ranked 24th, although it could be one tarnished for a long time. Investors and tourists of Africa’s next economies to reach Middle Income may take their business to other African countries status. instead of Kenya. Moreover, Kenya could join the ranks of other unstable African countries, such as Kenya has the potential to be one of Africa’s Democratic Republic of Congo or Cote d’Ivoire, best performing economies. Most of Africa is and the distance between it and other emerging experiencing a renaissance and has achieved economies such as India and Indonesia would strong growth rates since 2000. Kenya has increase. In this worst-case scenario, growth would benefitted from Africa’s growth momentum stagnate at between 3 and 4 percent. through trade and its natural position as a hub for East Africa and beyond. Many international Kenya is undergoing a number of long-term companies are choosing Kenya as their regional structural shifts and challenges. Like the rest of headquarters. Africa, Kenya has started to catch-up with the rest vi December 2012 | Edition No. 7 Executive Summary of the world, but it has not yet achieved economic to obtain productive increases from smallholder transformation. Exports remain weak and the agriculture. current account deficit is growing ever larger, ending 2012 with a projected record deficit of US$ Kenya is at the beginning of several transitions 4 billion (11.5 percent of GDP). that are reshaping the social and economic fundamentals of the country. The management The strength of Kenya’s export engine will not of three interrelated trends and opportunities will only determine its economic prospects, but also largely determine if Kenya’s economy will grow at the opportunities for more and better jobs. In higher levels and create sufficient jobs: Asia, manufacturing has absorbed millions of • Demographic opportunity. In the past decade, workers with basic skills and a strong work ethic, adults outnumbered children and this trend creating the East Asian miracle. Kenya could be at will accelerate for the next decades. By 2050, the center of an “East African miracle” if it further Kenya’s workforce will exceed the number upgrades infrastructure, enhances competition of dependents by two to one, providing an and continues to enhance the skill levels of its enormous opportunity for wealth creation. population. In the next decade, China alone will shed some 100 million jobs in light manufacturing • Education dividend. After accelerating access (especially textiles, leather and agro-processing), to primary education in the 1990s, Kenya is at providing new opportunities for job the beginning of a great expansion creation in Africa as a whole, and in secondary education. By 2030, Kenya specifically. the number of adults in Kenya who have completed secondary school Like the rest of Africa, is expected to triple, from 6 million Agriculture will play a critical Kenya has started to today to almost 18 million. By role in Kenya’s economic catch-up with the rest of then, there will be more Kenyans transformation and employment creation. The agricultural sector the world, but it has not with a secondary school education is the natural starting point for a yet achieved economic and university degree, than those country’s industrial revolution. transformation with primary education only. This Kenya has already demonstrated will creating significant economic in tea and horticulture—two of its top exports— opportunities, as the returns on secondary that it can compete globally. Food processing education are substantially higher than the is another sector where the country can use returns on primary education. its natural base in agriculture to reach the next • Urbanization. Kenya’s cities are growing by level of competitiveness. A more productive three quarters of a million inhabitants each agriculture sector will also mean that there will year. In almost every country of the world, be fewer Kenyans working in it. Higher agricultural urbanization is closely associated with higher productivity will thus reinforce the forces of standards of living. Despite many social urbanization and Kenya’s economic transition problems, urbanization is creating many new towards manufacturing and services. At the same job opportunities, especially for the poor. Only time, family farms will remain the main source of in urbanizing countries does labor live in close income for most poor Kenyans during these years proximity to factories and industries, providing of economic transition. Kenya will need to invest opportunities for export growth and a source of in rural infrastructure and address land reform demand for an expanding domestic market. December 2012 | Edition No. 7 vii Executive Summary Generating more and higher value jobs issues head-on, if it is to provide employment opportunities to all Kenyans, not just those who T he nature of jobs in Kenya is evolving as a result of social and economic forces. In 1989, the large majority of Kenyans were working come from the upper income strata. The key question going forward is how will Kenya on family farms. The number working in family spur job creation and create broad opportunity? agriculture grew slightly through 1999, and has Over the long term, Kenyans will continue to shift remained constant since. Meanwhile, the growth out of family farming. The challenge in the coming in the numbers of individuals who are non-farm decades will be to generate more “good jobs,” self-employed or holding wage jobs has increased, which will be largely highly-productive wage jobs. reflecting the steady growth in the services sector. Without the right policies in place, the economy As of the 2009 census, 14.3 million Kenyans were will create fewer such jobs, and the bulk of Kenyans working, with 6.5 million in family farming, 2.7 will be stuck in poorly paid self-employment and million in non-farm self-employment, and 5.1 low-end wage jobs. million in wage jobs. Among those with wage jobs, approximately 2 million were in jobs considered to The policies for job creation are very closely linked be in the “modern sector” (Figure 2). to the factors that would make Kenya’s business Figure 2: Wage jobs and self-employment have overtaken climate more attractive and the economy as a family farming as the predominant source of employment in Kenya whole more successful. The report highlights four 8 key elements to a wage job creation strategy for Kenya: (i) achieving political and macroeconomic 7 stability; (ii) continuing to invest in transport and electricity; (iii) eliminating job-smothering People (millions) 6 corruption; and (iv) upgrading skills and making 5 schools work for all Kenyans, not just the well- off. The private sector has indicated that the 4 Government needs to act on the above elements for the private sector to make substantial new 3 investments in manufacturing and industry, and in 1989 1999 Year 2009 the process, generate new high wage jobs. While Wage work & non−farm self−employment Family Farming the Government has had a mixed track record to Source: World Bank analysis of Kenya census data date, there are signs that it is taking most of these elements seriously. Although high youth unemployment and inactivity rates are in part transitional, focus group The management of shocks will remain a key factor interviews with young Kenyans, indicate that they for the job prospects of Kenyans. The Government have legitimate concerns about their needs to better manage the limited job opportunities. Many find economic and political shocks which that nepotism, tribalism, demands hampered Kenya’s recent growth for bribes, and sexual harassment Public investment performance and at the same time, are major barriers to obtaining a has been increasing improve the competitiveness of the job. Young people coming from after years of neglect economy. In particular, government wealthier and connected families are especially in road actions to reduce impediments seen as having large advantages in infrastructure to increased exports, including finding work, regardless of skills and addressing bottlenecks at the port qualifications. Kenya will need to adopt proactive of Mombasa, will help to address the current labor practices that address many of these account deficit. Equally important is the peaceful viii December 2012 | Edition No. 7 Executive Summary transfer of power to bolster Kenya’s image as an corruption seriously, and individuals not only lose increasingly stable democracy. These, in addition their jobs, but also go to jail for corrupt behavior. to implementing policies that discourage nepotism and tribalism in hiring practices, would go a long Kenya needs to continue to make education a way in improving job prospects for the youth. priority and focus on the quality of education, not just the quantity. Kenya has made good progress New investments in transport and electricity in providing universal primary education and has will spur manufacturing and industrial growth, greatly increased the availability of secondary creating more jobs. The private sector faces education. Kenya will need to continue to make limitations because of the poor significant investments in education, national road network, and not just in expanding access, but because the power supply is also in upgrading quality. Finally, inadequate and expensive. The The World Bank Kenya needs to make special effort government has been catching up estimates that if to ensure that education outcomes after years of neglecting its roads the private sector match the skills the private sector infrastructure. It is also making could redirect the needs, as it also expands to meet substantial investments in energy. money it now spends new opportunities. The government needs to continue on corruption to with infrastructure investments, Economic performance and job creating jobs, it could accelerating them where critical creation will be central themes as create 250,000 jobs, Kenya enters a decisive year of its bottlenecks exist, such as in the electrical grid. The private sector sufficient to hire most history. This decade can still become frequently has to rely on its own unemployed urban of one of the most successful in generators, which are expensive to Kenyans between the the country’s history. Peaceful buy and operate. The government age of 15 and 34 elections, continued investments needs to adopt an aggressive in infrastructure, and a renewed infrastructure program to provide the building fight against corruption, would not only make the blocks for the private sector in order to efficiently economy grow at higher levels but be even better expand its operations. for the creation of jobs. Structural forces are in Kenya’s favor. Most of Africa is on a sustained growth The Government needs to get serious about job- momentum, and Kenya has been following and smothering corruption. Kenya’s corruption acts as a benefitting from this momentum, given its natural chokehold on the private sector. Most transactions role as a hub for East and Central Africa. Like other involving government, from obtaining contracts emerging economies, Kenya is also benefitting from to paying taxes, seem to have a corrupt element. a beginning demographic transition, increasing The World Bank estimates that if the private levels of education and rapid urbanization―all of sector could redirect the money it now spends on which are also generating new challenges. This is corruption to creating jobs, it could create 250,000 why under normal circumstances, Kenya’s economy jobs, sufficient to hire most unemployed urban should grow at 5 percent in 2013 and at higher Kenyans between the age of 15 and 34. In addition levels thereafter. Such higher growth rates would young people seeking jobs often have to pay bribes propel Kenya into Middle Income status within a to get them, a practice that can discourage would decade, and help it to reap the benefits of these be entrants to the labor force. It will be easier to structural factors which are trending in its favor. stop petty corruption once Government takes December 2012 | Edition No. 7 ix The State of Kenya’s Economy The State of Kenya’s Economy 1. Economic performance in 2012 T he World Bank estimates Kenya’s GDP will grow by 4.3 percent in 2012, around the same level as in 2011, when the economy grew by 4.4 percent. After a severe macroeconomic shock at the end of 2011 when inflation was almost hitting 20 percent, the government took decisive action and increased interest rates to stabilize the currency and help reduce inflation. The side effect of these measures is lower growth in 2012. By the second half of 2012, macroeconomic stability has returned and inflation will end the year below 5 percent. This positions Kenya well for stronger growth in 2013, which the World Bank projects at 5.0 percent driven by aggregate consumption related to the elections in the first half and a strong rebound in foreign and domestic investment in the second half, assuming that power transfers peacefully and a new administration outlines a growth-oriented economic agenda. 1.1 An economy still standing since 2008, Kenya’s average growth has only been 4 K percent, lower than Sub-Saharan Africa (excluding enya’s growth in 2012 has been sluggish. Following the macroeconomic challenges at South Africa), which grew close to 5 percent and the end of 2011 when inflation reached 20 percent substantially lower than its East African neighbors and the exchange rate depreciated to a record low Uganda, Tanzania, and Rwanda, which together of KES 107 (per US$), the Central Bank helped to grew at an average of 6.8 percent (Figure 1.2). cool the economy by sharply rising interest rates. These measures were successful in stabilizing the The Central Bank of Kenya (CBK) tightened exchange rate (at KES 84 per US$ for most of 2012) monetary policy in the first half of 2012, to and slowing down inflation which has reached a contain inflationary pressure and moderate credit new low of 4.1 percent end October 2012. growth. Demand for credit in all sectors fell, as investors and businesses curtailed their activities. The price for these important macroeconomic In addition, Kenya exported fewer goods to Europe measures is lower growth in 2012, projected as the economic situation there weakened. Fewer at 4.3 percent. With interest rates at 18 percent tourists visited Kenya, in part a response to the through until September 2012, credit expansion global economic slowdown, but also out of concern stalled and the economy slowed down to 3.4 over security issues between Kenya and Somalia. percent in the first half of 2012. This means that Figure 1.2: Kenya’s growth rate remains among Figure 1.1: Kenya’s sluggish growth in 2011/12 the lowest in East Africa GDP growth rate 2008-2012 7.0 6.6 9 6.0 8 5.2 4.8 7 % average growth rate 5.0 4.3 4.4 4.2 6 % growth 4.0 3.4 5 3.0 4 2.0 3 1.4 2 1.0 1 0.0 0 H1 H2 H1 H2 H1 H2 H1 H2 Kenya SSA (excluding Uganda Tanzania Rwanda South Africa) 2009 2010 2011 2012 Source: World Bank computation based on KNBS data Source: IMF Africa Regional Economic Outlook, October 2012 2 December 2012 | Edition No. 7 The State of Kenya’s Economy Agricultural growth lagged behind growth in the sharply in 2012, as a result of good weather. industrial and services sector in the first half of Coffee production rose by 58 percent and exports 2012. It grew by 2.0 percent in the first half year of increased by 32 percent in volume. However, the 2012, compared to 2.1 percent in 2011, reflecting a value of coffee exports increased by only 21 percent lackluster performance in the tea and horticulture in face of a 40 percent decline in international subsectors (Figure 1.3). Tea production and export prices. value declined by 6.5 and 4.5 percent respectively in the first eight months of 2012, as a result of frost The industrial sector turned in a relatively strong earlier in the year and disputes between exporters performance in the first half of 2012, growing and the Tea Board over a new levy which affected by 4.3 percent compared to 3.6 percent in 2011. export sales.1 Horticulture exports declined by 3.5 Electricity and water output grew substantially by percent in volume, but values increased marginally 11.9 percent in the first half of 2012, compared to by 1.1 percent in the first eight months of 2012. 0.6 percent in the same period in 2011. Hydropower Horticulture exports and prices have picked up generation increased by 27 percent in the first 8 slightly in the last few months as the European months of 2012 following good rainfall, while market stabilized. Coffee production increased thermal power generation declined 22 percent Figure 1.3: Kenya experienced low growth (Figure 1.5). Consumers paid less for electricity in the first half of 2012 in 2012 as lower cost hydropower replaced more expensive thermal power in the electrical grid. The 6.0 manufacturing subsector performed better than 5.2 5.0 4.6 4.7 4.8 it had in 2011, growing by 3.4 percent compared Half year (H1) growth rates (%) 4.3 4.3 4.3 4.1 to 3.2 percent in 2011. However, the construction 4.0 3.6 3.4 subsector growth declined from 6.0 percent in the 3.0 first half of 2011, to 2.2 percent in the first half 2012. 2.0 2.1 2.0 Higher interest rates, following tighter monetary policy, pushed up construction costs. Overall, the 1.0 industrial sector benefited from the stabilized 0.0 exchange rate, cheaper electricity costs as more 2010 2011 2012 hydropower became available, lower prices for Agriculture Industry Services GDP imported oil and increased manufactured exports Source: World Bank computation based on KNBS data to the EAC. Figure 1.4: Leading Economic indicators in the Agricultural sector 2012 Tea Exports (2011-2012) Horticulture Exports (2011-2012) 10,000 10,000 9,000 9,000 KES (million) KES (millions) 8,000 8,000 7,000 7,000 6,000 6,000 5,000 5,000 Jan Feb Mar Apr May Jun July Jan Feb Mar Apr May Jun July August Sept 2011 2012 2011 2012 Source: World Bank computation based on KNBS data 1 In January 2012 the Minister for Agriculture introduced an ad-valorem tea levy equivalent to one percent of the tea value at auction. December 2012 | Edition No. 7 3 The State of Kenya’s Economy Figure 1.5: Adequate rainfall increased hydro power generation … less expensive thermal power into the grid in 2012 Thermo power generation Hydro power generation 250 400 200 300 KWh (million) KWh (million) 150 200 100 100 50 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Jan Feb Mar Apr May Jun Jul Aug Sep 2011 2012 2011 2012 Source: World Bank computation based on KNBS data Figure 1.6: 2012 was a difficult year-more cement, less soda and less galvanised sheets Services grew less rapidly at 4.1 percent, Cement production compared to 5.1 percent in the first half of 2011. 390,000 Tightened monetary policy significantly affected 370,000 the performance of the wholesale and retail trade 350,000 subsectors, which grew by 5.3 percent, compared Metric tonnes 330,000 to 7.2 percent in 2011. Financial intermediation 310,000 growth declined from 10.3 percent in 2011, to 5.0 290,000 percent in 2012, while hotels and restaurants saw 270,000 their growth fall from 5.0 percent to 2.1 percent. 250,000 Jan Feb Mar Apr May Jun Jul Aug Sep The number of tourists to Kenya declined by 2 2011 2012 percent until end August (from 829,000 in 2011 to Production of soft drinks 812,000 in 2012). Tourists’ arrivals at Jomo Kenyatta 40 35 International Airport increased marginally by 1.8 30 percent, but arrivals at Mombasa’s international 25 airport declined significantly by 19.3 percent. '000 litres 20 Security concerns following Kenya’s incursion into 15 Somalia contributed to the decline in tourism. 10 Transport and communication once again proved 5 to be resilient, growing by 5.4 percent compared 0 Jan Feb Mar Apr May Jun Jul Aug with 4.1 percent growth in 2011 (Figure 1.7). 2011 2012* The ICT revolution in Kenya is continuing. Mobile Production of galvanised sheets 30,000 subscriptions increased by 28 percent in 2012. By 25,000 July 2012, there were almost 30 million mobile subscribers, more than the adult population Metric tonnes 20,000 above 15 years old (24.6 million). Internet users 15,000 increased by 81.7 percent to 7.7 million subscribers 10,000 in June 2012, and more than 50 percent of the 5,000 adult population now has access to internet. 0 Jan Feb Mar Apr May Jun Jul Aug The number of mobile subscribers enrolled to 2011 2012* use mobile money grew by 12 percent to 19.5 Source: World Bank computation based on KNBS data 4 December 2012 | Edition No. 7 The State of Kenya’s Economy Figure 1.7: The services sector felt the hardest impact from tight monetary policy Figure 1.8: The number of tourist declined by 2 percent Total tourists arrivals 12.0 160,000 10.3 Half year credit growth rates (%) 10.0 140,000 8.0 7.2 120,000 Number of tourists 100,000 6.0 5.3 5.4 5.0 5.0 4.1 80,000 4.0 3.6 2.4 60,000 2.1 2.0 40,000 0.0 20,000 Wholesale and Hotels and Transport and Financial Real estate, retail trade restaurants communication intermediation renting, 0 business services Jan Feb Mar Apr May Jun Jul Aug H1 2011 H1 2012 2011 2012 Source: World Bank computation based on CBK data Source: World Bank computation based on KNBS data million in June 2012, compared to 17.4 million a to high international oil prices, a weakened shilling year earlier. Kenyans deposited US$ 8 billion into which made import prices go up and high electricity the mobile money service, M-Pesa, between July costs driven by higher costs of generation from 2011 and June 2012. This represented a 38 percent thermal as opposed to hydro power. The situation increase over the previous year, up from US$ 5.8 has reversed in 2012 as a bumper harvest of billion. These numbers are truly staggering, and food has kept prices low, the exchange rate has show the untapped potential of mobile money. The stabilized from a peak of KES 107 (to the US$) value of mobile money transactions has more than to KES 85, and adequate rainfall has led to more doubled since 2010, from KES 49.4 billion to KES generation of power from cheaper hydro, rather 129.3 billion in 2012 (Figure 1.9). than thermal sources. All these factors, combined with tight monetary policy, have led to a low Inflation has dropped significantly in response to inflation environment. Overall inflation declined tight monetary policy and substantial declines in from 19 percent in October 2011, to 4.1 percent in food and international oil prices. High inflation October 2012. Food inflation fell from 26 percent rates in 2011 were driven by poor harvests in the in October 2011, to 1.4 percent in October 2012, agricultural sector which drove prices higher. In while transport inflation declined over the same addition high inflation environment was attributed period from 26 percent to 2.8 percent. In addition, Figure 1.9: Mobile revolution is continuing and its impact in the financial sector ICT penetration Mobile money payments 35 140 130.7 30 29.7 120 Number of persons (Millions) 25 24.6 100 20 19.5 80 15 60 14 49.9 48.9 10 40 20.8 20 19.7 5 9.7 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2012* 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2010 2011 2012 Population >15yrs Mobile subscriptions Number of customers Transaction Value Mobile money customers Internet users in millions (KES millions) (KES billions) Source: World Bank computation based on CCK and CBK December 2012 | Edition No. 7 5 The State of Kenya’s Economy food prices have stabilized as Kenya has benefited income group expenditures, increased by 15 and from the lifting of maize export bans by neighboring 13 percent respectively in the same period. Second, Tanzania and Uganda. both borrowers and savers lost during this period. As monetary policy tightened and the Central Bank Core inflation, which excludes food and energy increased its policy rate from 6 to 18 percent, the prices, declined prompting the Central Bank commercial banks increased their lending rates of Kenya to start easing monetary policy. from about 14 percent up to 30 percent without Core inflation rose to a peak of 11.8 percent in any significant increases in savings rate (Figure November 2011, mainly as a result of depreciation 1.12). Most borrowers who had variable borrowing of the exchange rate, high M3 growth (20.7 rates struggled to keep up repayment, while high percent in October, 2011) and high private sector inflation rates eroded the returns on savings, which credit growth (36 percent in October 2011). Tight averaged less than 5 percent. Third, wholesale and monetary policy, which began in October last year, retail traders suffered low demand for their goods stabilized the shilling against other world currencies as aggregate demand weakened. And fourth, the and lowered M3 growth (to 14.2 percent in July uptake for real estate declined significantly, as 2012) along with credit growth to the private sector developers who had bank loans could not service (to 7.8 percent in September 2012). As a result, their loans as demand for real estate plummeted. core inflation declined to 7 percent in October 2012. Core inflation constituted 58 percent of the 1.2 Monetary policy was tight in 2012 but overall inflation rate in October 2012, while food it has started to ease and energy each contributed 11.6 and 30.4 percent respectively (Figure 1.10). The effects of high inflation were felt T he Central Bank’s aggressive monetary policy intervention achieved its objectives. The strong policy interventions to stabilize the exchange rate disproportionately in the economy. There are a and anchor market expectations that started in the number of reasons for this. First, the low income last quarter of 2011 and continued in 2012, yielded groups were hit hardest in the 12 months to the expected results. Interest rates in the money October 2012, with their inflation averaging 12.8 market increased in response to the steep hike of percent, while inflation for those in the middle and Central Bank Rate. This led to a number of outcomes. high income groups averaged 10.3 and 8.1 percent First, yields on Kenya’s shilling denominated assets respectively. This is because food and transport become more attractive to international investors, prices, which comprise a larger proportion of low leading to huge short term inflows. The inflows Figure 1.10: Overall Inflation has declined but CBK still needs to keep an eye on core inflation Inflation drivers Contribution to overall inflation 30 28.0 26.2 1 25 0.8 20 19.7 0.6 Percent Percent 15 11.8 0.4 10 7.0 0.2 5 4.1 2.8 0 1.4 Jul Jul Jul Jan Jan Jan Jun Jun Jun Apr Oct Apr Oct Apr Feb Sep Feb Sep Feb Sep Dec Dec Aug Nov Aug Nov Aug Mar Mar Mar May May May 0 Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 2010 2011 2012 2010 2011 2012 Food Inflation Transport Inflation Core Inflation Overall Inflation Food Energy Core Source: World Bank computation based on KNBS data 6 December 2012 | Edition No. 7 The State of Kenya’s Economy increased the supply of dollars into the market, causes of the large current account deficit, and which helped to stabilize the shilling. Second, the the fiscal risks associated with devolution. The high lending rates charged by the commercial CBK’s forceful actions to tighten monetary policy banks helped to curb domestic aggregate demand, calmed the markets and began restoring investor as consumers found it expensive to borrow to confidence in the economy. consume. High lending rates also increased the cost of capital, and investments had to be postponed With macroeconomic stability restored, the because of reduced margins. Third, the decisive Central Bank has started easing monetary policy action taken by the Central Bank to stabilize the to support economic activity. The CBK has begun economy, although it came late, helped strengthen to ease monetary policy by reducing the CBR by its credibility. 700 basis points by November 2012 to stand at 11 percent. Interbank and 91 day Treasury bill The strong and relentless effort to curb rates peaked at 28.9 percent in late 2011 and inflationary pressure, reduce general demand have gradually declined, with the Interbank rate and anchor inflation expectation yielded fruits. registering 9 percent and the 91 day Treasury bill Inflation declined from about 20 percent to below rate, 10.9 percent, in August 2012 (Figure 1.11). 5 percent. The exchange rate stabilized from KES 107 to the US$ to KES 85. Volatility in the exchange CBK sharply reduced the growth of monetary rate and money markets subsided. aggregates in a bid to fight inflation and anchor inflation expectation. By tightening monetary Money market rates fluctuated significantly in the policy, CBK mopped up excess liquidity in the second half of 2011, as macroeconomic conditions banking system through open market operations. deteriorated and investors remained uncertain The CBK’s actions slowed the growth of narrow about government’s policy direction (Figure 1.11). money (“M0” and “M1”), from 16.2 and 19.6 Among the many issues driving market uncertainty, percent respectively in October 2011, to 3.6 and 2.3 the most significant included concerns about percent in mid-2012. As a result, growth of broad inflation and the ability of the authorities to anchor money (“M3”) also contracted from 20.7 percent inflation expectations, fluctuations in the exchange to 14.2 percent during the same period. Foreign rate driven by concerns about current account currency deposits initially increased sharply as financing, the Government’s ability to address the uncertainty drove down investor confidence, but Figure 1.11: Short term Interest rates have responded to monetary policy signals but uncertainty remains Interbank interest rate volatility 35 Interbank rate above 91 day Treasure bill 60 rate - Inverted relationship depicted 30 55 50 25 45 The money market is stabilizing 20 40 but uncertainty remains Percent 91 day Treasurey bill rate above the interbank rate - a clear relationship 35 Percent 15 30 10 25 20 5 15 0 10 5 Aug-09 Oct-09 Dec-09 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Apr-11 Aug-11 Oct-11 Apr-12 Aug-12 Feb-10 Feb-11 Jun-11 Dec-11 Feb-12 Jun-12 0 2008 2008 2009 2009 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011 2011 2011 2012 2012 2012 2012 Interbank 91 day Tbill CBR Source: World Bank computation based on CBK data December 2012 | Edition No. 7 7 The State of Kenya’s Economy Figure 1.12: As lending rates increased as a result of policy tightening, credit growth declined across all sectors Lending rates increased with monetary policy tightening Credit growth declined in all sectors of the economy in 2012 Start of monetary 7.7 25.0 policy easing Total 36.3 Start of monetary 20.0 policy tightening Mining & quarrying Transport & communication Agriculture 15.0 Percent Business services Trade 10.0 Private households Manufacturing 5.0 Consumer durables Other activities 0.0 Finance and insurance Real estate Jan Feb Mar Apr May Jul Aug Oct Nov Dec Jan Feb Mar Apr May Jul Aug Sep Sep Jun Jun Jan Feb Mar Apr May Jul Aug Oct Nov Dec Sep Jun Building & construction 2010 2011 2012 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Percent Savings Average deposit rate % CBR Interest rate spread Overall weighted lending rate Sep-12 Sep-11 Source: World Bank computation based on CBK data declined rapidly as CBK’s policies began to take Figure 1.13: Monetary aggregates growth hold, calming the markets and stabilizing the slowed down in 2012 exchange rate (Figure 1.13). 60 Foreign currency deposits grew sharply as a result of uncertainty before CBK took decisive monetary policy action 50 Access to private sector credit has spurred an increase in domestic consumption and GDP, but 40 Growth rate (%) has also added to inflationary pressure. Kenya has 30 seen substantial growth in private sector credit 20 since 2003, as the government reduced its reliance on borrowing from the domestic market. With 10 less crowding out by the government, there was a 0 sharp increase in financial savings, leading to lower Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 -10 interest rates and increased lending. In addition, a more accommodative monetary policy encouraged M0 growth M1 growth M2 growth FCD growth a boom in borrowing by the private sector in 2008- Source: World Bank computation based on CBK data 2010. However, high credit growth is associated Figure 1.14: Real Estate and construction sectors received with inflationary pressure as shown in Figure 1.15. half of the private credit in 2012 Real estate 35.9% Activity in the equities market is picking up very Building & constructi on 15.5% strongly. The equities market is becoming more Manufacturing 12.5% attractive to investors as inflation declines, the Other acti viti es 11.6% exchange rate stabilizes and corporate earnings Private households 11.0% improve. Yields on government securities have Trade 7.1% declined with the easing of monetary policy and Consumer durables 6.6% with government’s decision to seek international Finance and insurance 6.0% sources for some of its funding. In addition, investing Business services 0.9% in real estate has become less attractive due to Agriculture 0.5% speculative increases in land values, and the rising Mining & quarrying -3.7% cost of construction materials. Consequently, the Transport & communicati on -3.7% Nairobi Securities Exchange (NSE) has increased by Source: World Bank computation based on CBK data Note: Allocation of private credit (KES 88.7 b) to sectors during monetary policy tightening period September 2011 - September 2012 8 December 2012 | Edition No. 7 The State of Kenya’s Economy Figure 1.15: As much as food and transport are the drivers of overall September 2011 and September 2012, total credit inflation, growth in private sector credit is a significant factor to the private sector amounted to KES 88.7 billion, 40 compared to KES 305.7 billion the previous year 35 (71 percent decline). Real estate, building and 30 construction received 50 percent (KES 46 billion) 25 of the credit given out by commercial banks, while Percentage growth 20 the manufacturing and trade sectors received 15 12 and 7 percent respectively. Transport and 10 communication, business services and agriculture 5 subsectors made net repayments to the banking 0 sector during this period (Figure 1.14). May-04 May-09 Mar-05 Nov-06 Mar-10 Nov-11 Aug-05 Dec-08 Aug-10 Dec-03 Sep-12 Sep-07 Feb-08 Apr-07 Oct-04 Oct-09 Apr-12 Jan-06 Jun-06 Jun-11 Jan-11 Jul-08 1.3 Kenya’s fiscal position remains strong T Private sector credit Overall inflation Source: World Bank computation based on CBK and KNBS data he government’s overall fiscal balance deteriorated in 2011/12 as a result of weak 25 percent since December 2011, hitting the 4000 economic environment, but Kenya’s fiscal mark in October 2012 for the first time since June position remained strong. In 2011/2012, the 2011. Foreign interest in Kenyan equities remains overall fiscal deficit deteriorated to 5.6 percent of strong, with foreign investment accounting for an GDP compared to 4.5 percent in 2010/2011 mainly average of 47 percent of equity ownership on the on account of increased spending on development Nairobi Stock Exchange (Figure 1.16). expenditure on infrastructure projects, which rose from 7.9 percent to 9.1 percent of GDP. The As monetary policy tightened, credit growth primary deficit (which excludes interest payments) to all sectors contracted significantly. Credit for also deteriorated from 1.8 percent in 2010/11 to agriculture grew by only 3.6 percent in July 2012, 2.8 percent in 2011/12. Total government revenue compared to 38 percent in 2011; manufacturing declined from 23.9 percent of GDP to 22.6 percent. credit grew by 19.3 percent, compared to 38.6 Government expenditure declined marginally from percent the previous year; trade credit grew by 29.1 percent of GDP in 2010/11 to 28.7 percent in 10.5 percent, compared to 40.1 percent growth in 2011/12 mainly as a result of reduced recurrent 2011; and credit for transport and communication spending which dropped from 21.3 percent to declined in 2012 by 2.9 percent, compared to 28.5 19.6 percent in the same period (Figure 1.17 and percent growth in 2011 (Figure 1.12). Between Figure 1.16: NSE activity is picking up as foreign participation in it remains significant 7,000 16,000 % of total foreign turnover to total equity market 80 6,000 14,000 70 12,000 5,000 60 10,000 4,000 Dow Jones 50 NSE index 8,000 3,000 6,000 40 2,000 4,000 30 1,000 2,000 20 0 0 10 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 0 Jul-12 Jul-11 Oct-11 Apr-12 Jun-12 Aug-12 Jun-11 Sep-11 Jan-12 Jan-11 Apr-11 Aug-11 Nov-11 Dec-11 Feb-12 Mar-12 Feb-11 Mar-11 May-11 May-12 NSE index, end-month Dow Jones Source: World Bank computation based on AAK, CBK and NSE December 2012 | Edition No. 7 9 The State of Kenya’s Economy Table 1.1: Fiscal position as percent of GDP 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 Government revenue 21.5 20.5 21.6 22.0 21.8 21.5 23.9 23.9 Government expenditure 22.6 25.2 24.3 27.2 26.6 25.2 29.5 29.1 Recurrent expenditure 19.0 20.2 17.8 20.5 19.5 20.8 21.3 19.6 Development expenditure 3.5 5.0 6.5 6.7 7.2 8.7 7.9 9.1 Overall balance incl. grants 0.1 -3.4 -1.8 -3.9 -4.0 -2.6 -4.4 -4.5 Primary balance incl. grants 2.4 -0.7 0.7 -1.5 -1.7 -1.8 -1.8 -2.8 Source: World Bank computation based on Ministry of Finance, Quarterly Budget and Economic Review Table 1.1). Foreign financing of the 2011/12 budget Delays in recovering VAT refunds from the Kenya increased by 2 percent of GDP, as the government Revenue Authority (KRA) are hurting businesses found it attractive to go to the international money and manufacturers. Firms are entitled to refunds markets where it successfully arranged a syndicated on input taxes that KRA collects on zero rated goods loan with a group of commercial banks. As a result, and physical capital. However, firms complain about domestic financing declined by 1 percentage point. the lengthy period of the refund process, noting that it impacts the already high costs of doing Revenue collection remained robust despite weak business in Kenya. It takes an average of six months aggregate demand. Domestic revenue achieved to recover VAT refunds from KRA, a process that 96.4 percent of its target in 2011, with KES 707 lobbyists say is accumulating at a rate of KES 1.5 billion collected against a target of KES 733 billion. billion per year, and has reached an unpaid total of Domestic VAT collections which provide a good KES 6 billion. The cost to the firm of waiting for the barometer for aggregate demand underperformed refund increases depending on the amount due, by 38 percent, yielding KES 80.4 billion against a length of the delay and interest on working capital. target of KES 111 billion, while income tax on The VAT (2012) bill currently before parliament, if individuals (PAYE) and other income taxes exceeded adopted, will resolve this problem. targets by 9 and 5 percent respectively. Figure 1.17: The fisical defecit has been growing moderately ... and helping to finance the expansion in development spending 35 Development spending has more than doubled as share of GDP since 2004/05 while recurrent spending has been capped 29.5 29.1 28.7 30 25.2 25 23.9 24.0 25 21.5 22.6 20 20 19.6 Percent of GDP Percent of GDP 19.0 15 15 10 10 9.1 5 5 0 3.4 0 -5 -2.6 5 6 7 9 -4.4 -4.5 00 00 00 08 00 10 11 12 -5.6 4/2 5/2 6/2 /20 8/2 20 /20 /20 00 07 / 10 -10 2004-2009 2009/2010 2010/2011 2011/2012 00 00 00 09 11 2 2 2 20 2 2 20 20 Government Government Overall balance revenue expenditure inluding grants Recurrent expenditure Development expenditure Source: World Bank computation based on Ministry of Finance data 10 December 2012 | Edition No. 7 The State of Kenya’s Economy The government still faces serious challenges in Kenya’s public debt position improved in 2012 as implementing the budget. The current absorption a result of better economic management. Public capacity levels are still very low. In the revised debt declined as percentage of GDP from 48.3 expenditure estimates for 2011/12, Parliament percent in 2010/11 to 44.6 percent in 2011/12, approved KES 961 billion for expenditures by mainly as a result of flexibility of fiscal policy ministries and departments, but they only spent when there were revenue shortfalls in 2011. The KES 696 billion, roughly a 72 percent absorptive government was able to cut recurrent spending rate. Recurrent expenditure’s absorptive rate was without compromising development spending to 84 percent compared 55 percent for development ride over revenue shortfall. Domestic debt declined spending (Figure 1.18). Donor disbursement was not from 27.4 percent of GDP in 2010/11, to 26 percent any better with only a 46.6 percent disbursement as the government substituted foreign borrowing rate. In the revised expenditure estimates, the to domestic borrowing when the local bond market Government planned for donors to spend KES 183 was under-performing and domestic interest rates billion but only KES 85b was disbursed. were not favorable due to macroeconomic stability. External debt declined from 25.9 percent to 23.4 Figure 1.18: Budget execution remains challenging especially in infrastructure percent in the same period, mainly as a result of exchange rate appreciation in 2011/12. 120.0 111.2 100.0 Kenya needs to build additional fiscal space to 80.0 absorb future shocks. Even though net total public KES billion 60.0 debt has declined from 48.3 percent in 2010/11 40.0 28.6 14.2 22.1 25.9 18.8 28.4 to 44.6 percent in 2010/11, Kenya is prone to 20.0 14.1 1.4 numerous shocks. The government must therefore 0.0 (0.1) continue its fiscal consolidation to build more space (20.0) to absorb future shocks. The fiscal space created Agriculture and Rural Development Trade Tourism and Industry Physical Infrastructure Environment Water and Irrigation Human Resource Development Research Innovation and Technology Governance, Justice, Law and Order Public Administration Programs Special National Security in 2007/08 helped Kenya to ride the quadruple shocks of 2008/10. Additional fiscal space will also give comfort and confidence to the private Source: World Bank computation based on office of the Controller investors who might be worried about the huge of Budget, 2012 current account deficit should it start to unwind. Figure 1.19: Kenya’s public debt is still sustainable but it needs to build more fiscal space 1.4 The external account remains under pressure 60 50 T he Kenyan economy continues to be out of balance. The external account remains vulnerable to movements in international oil 48.3 40 42.60 42.2 44.9 44.6 prices and global demand conditions. International 39.50 27.4 23.50 23.3 26.9 26 crude oil prices averaged US$ 109.5 per barrel in 21.90 30 the first nine months of 2012, compared to US$ 20 106.2 in 2011. The share of oil in Kenya’s total imports remains at about 25 percent, with a value 10 23.30 22.60 24.2 23.2 25.9 23.4 of just over US$ 4 billion in 2011. This is more 0 than the value of Kenya’s top seven merchandise 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 exports. Tightening monetary policy reduced the External debt Domestic debt Total public debt (Net) growth of merchandise imports from 19.5 percent Source: World Bank computation based on Ministry of Finance, Quarterly Budget and Economic Review in 2011 down to 10.1 percent in 2012. However, December 2012 | Edition No. 7 11 The State of Kenya’s Economy Figure 1.20: Kenya external account continues to deteriorate 2000 Effect of the slowdown 0 4000 Consumption boom in the Euro zone 1000 20 US$ 2.7b 2000 0 40 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Jun-03 Sep-03 Jun-04 Jun-05 Jun-06 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Sep-04 Sep 05 Sep-06 Jun-07 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 US$ million US$ million Jul-05 Jul-10 Jan-03 Jan-08 Jun-03 Jun-08 Oct-01 Oct-06 Oct-11 Apr-04 Apr-09 Sep-04 Feb-05 Sep-09 Feb-10 Dec-00 Dec-05 Dec-10 Aug-02 Aug-07 Aug-12 Nov-03 Nov-08 Mar-02 Mar-07 Mar-12 May-01 May-06 May-11 -1000 60 Impact of oil -2000 on current account -2000 80 -4000 US$ 4.3 -3000 100 -6000 -4000 120 US$ 6.8 -8000 -5000 140 Current account CAB excluding oil imports Crude oil Balance of trade Current account Current transfers account (US$ million) (US$ million) Source: World Bank computation based on CBK data export growth also declined from 11.1 percent to over the same period, drove the deterioration in 2.9 percent, and services exports were down from the current account. Current transfers also declined 21.9 percent to 3.1 percent. This can be explained from US$ 3.1 billion to US$ 2.8 billion (Annex 24). by high domestic prices, higher costs of production and weak external demand which combined to Monetary policy managed to slow import slow the growth of Kenya’s exports. The drop in demand but the trade deficit remained. Imports growth in services exports is explained by current for the year up to September 2012 grew by 10 transfers, which declined by 9.6 percent, compared percent, down from 23 percent growth in 2011, to growth of 35.6 percent in 2011. However, non- with merchandise imports exceeding exports over factor services grew by 19.7 percent in 2012 from this period (Figure 1.21). Imports of oil grew by 8 1.6 percent in 2011 (Annex 24). percent, down from 53 percent growth in 2011, and imports of manufactured goods grew by 5 The current account deficit continues to percent, down from 27 percent in 2011. Imports deteriorate, driven by significant growth in of machinery and transport equipment grew by 11 machinery imports. While in 2011 the current percent in comparison with a 3 percent decline in account was being driven by a higher oil bill, in 2012 2011. the main driver of the current account deficit is the growth in machinery imports to support oil and gas Merchandise exports continue to perform poorly exploration. The current account deficit increased when compared to imports. Exports over the 12 from US$ 3.3 billion in December 2011, to US$ months ending in September 2012 grew by only 4.3 billion in September 2012 (Figure 1.20). As a 2.9 percent, compared with merchandise imports, share of GDP, the current account deficit increased which grew by 10.1 percent (Annex 24). Tea exports marginally from 9.8 percent in December 2011 marginally increased by 2.2 percent compared to 10.5 percent in September 2012. Excluding oil to 2011 following poor weather at the beginning imports, the current account balance deteriorated of the season and a dispute between the Tea by US$ 600 million from a surplus of US$ 434 million Board and producers over a tea levy. Horticultural in December 2011, to a deficit of US$ 192 million exports contracted by 6.5 percent in the face of in mid-2012. The deficit in the balance of trade and weak demand in the Eurozone area, although the non-factor services, which deteriorated from US$ situation began improving in the second half of 6.4 billion (18.9 percent of GDP) to US$ 6.9 billion 2012. There was some good news as exports of raw 12 December 2012 | Edition No. 7 The State of Kenya’s Economy materials and chemicals posted some significant result, the overall balance of payments improved growth rates with the former growing by 39 percent significantly from a deficit of US$ 43 million in and the latter 5 percent. December 2011, to a surplus of US$ 1.3 billion in September 2012 (Annex 24). The gap between Kenya’s exports and imports has widened considerably since 2003. Kenya’s exports The Kenya shilling has stabilized but risks of goods and services were able to pay for 87 percent remain. As part of its tight monetary policy, the of imports in the first half of 2003, however, this fell CBK increased the CBR by 11 percentage points, to just 57 percent in 2012. Excluding oil, which is a increasing the returns on assets denominated in major component of its imports, Kenya’s exports Kenya shillings and attracting short terms flows into of goods and services could cater for 109 percent Kenya. The increased supply of dollars in Kenya’s of its imports in 2003, but in 2012 Kenya’s exports foreign exchange market led to an appreciation could only cover 79 percent of its non-oil imports, of the shilling, which had fallen quite dramatically a 30 percentage point reduction. Government over several months in the second half of 2011. The policies need to urgently address Kenya’s poor shilling appreciated from a peak of KES 101.3 to the performance in the external sector. US$ in October 2011, to KES 86.7 in December, and has remained relatively stable in 2012. By end of Kenya continues to attract considerable capital September, 2012 the shilling had appreciated by and financial net inflows, which help to finance 3.1 percent against the US$. The exchange rate the huge current deficit. The capital and financial volatility Kenya experienced in the second half of account increased by US$ 2.2 billion from US$ 3.3 2011 has subsided (Figure 1.23). billion to US$ 5.5 billion between December 2011 and September 2012. About US$ 880 million of Nominal bilateral exchange rates have been the incremental financing came in form of official stable with a minimal bias towards depreciation flows i.e bilateral loans for projects. Within the in the last decade. The shilling has depreciated by same period, short term flows increased by US$ 19 percent cumulatively between 2000 and 2012, 600 million, while errors and omissions increased representing an annual depreciation of 1.6 percent. by the same amount. Other capital inflows have Given the higher price differences between Kenya responded to Kenya’s attractive interest rate regime and its trading partners, the shilling should have and relatively stable foreign exchange rate. As a a higher nominal depreciation. The good news is Figure 1.21: The capacity of Kenya’s earnings to finance its external demand is deteriorating Percent 14000 Merchandise imports payment has outpaced exports earnings 100 120 90 110 109 Exports to import ratio (percent) Exports cover (Exports/imports) 12000 80 100 10000 70 90 88 US$ (million) 8000 60 80 78 50 6000 40 70 4000 30 60 57 20 2000 50 10 0 0 40 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Exports (fob) Imports w/o oil Exports cover Export cover (oil and services incl.) Export cover (w/o oil but with services) Source: World Bank computation based on CBK data December 2012 | Edition No. 7 13 The State of Kenya’s Economy Figure 1.22: Kenya receives significant flows to finance its external account balance Movements in the Financial Account between Dec 2011 and Sept 2012 4500 4000 Short term, Net Errors 1918 and Omissions (NEO) 1110 3500 US$ (millions) 3000 105 2500 Commercial Banks (net) 378 2000 Private, medium and -279 1500 long-term -103 1000 Official, medium and 891 500 long-term 880 0 2009 2010 2011 2012 -500 0 500 1000 1500 2000 2500 (September) US$ (millions) Short term (incl. portfolio flows) Net Errors and Omissions (NEO) September 2011-September 2012 December 2011-September 2012 Source: World Bank computation based on CBK data that exchange rates are market determined with 2008, Kenya’s competitiveness has deteriorated by no interferences from the Central Bank. The 30 percent since 2003. forex market in Kenya remains very thin, with few market participants, and as such, susceptible The growing strength of the Kenyan shilling against to large swings in both intraday markets and its trading partners is eroding Kenya’s export within a month. The average daily market trading competitiveness and encouraging imports. The averaged only about US$ 300 million in 2011, a trade weighted real exchange rate has appreciated relatively small amount. Large purchases of forex, to 35 percent since January 2003, while the trade for example to buy fertilizer or petroleum, subjects weighted nominal exchange rate depreciated by the shilling to large swings on the days the deal 14 percent in the same period (Figure 1.24). As a is completed. Since Kenya has an open capital result, Kenya’s domestic prices are higher relative account, volatility in the international currency to her trading partners, making its goods less markets and geo-political disturbances are passed competitive in international markets. This trend is through into the domestic currency market. In not helpful for Kenya, which needs a trade strategy addition, the trade weighted exchange rate, shown that stimulates exports, and leads to employment below in Figure 1.24, indicates that despite the opportunities for millions of unemployed youth. nominal depreciation of the exchange rate since Figure 1.23: Exchange rates have stabilized US Dollar vollatility 180 (%) Ksh exchange rate vs other currencies Period of excess 160 3.5 macroeconomic Volatility of the Ksh against the US$ 140 volatility in 2011 3 120 2.5 Exchange rate market 100 has stabalised 2 80 60 1.5 40 1 20 0.5 0 0 Apr-07 Apr-08 Apr-10 Apr-11 Apr-12 Apr-09 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 May-11 May-12 Mar-11 Mar-12 Nov-11 Aug-11 Aug-11 Aug-12 Dec-11 Feb-11 Apr-11 Sep-11 Feb-12 Apr-12 Sep-12 Oct-11 Jun-11 Jun-12 Jan-11 Jan-12 Jul-11 Jul-12 Jul-12 USD UK pound Euro Source: World Bank computation based on CBK data 14 December 2012 | Edition No. 7 The State of Kenya’s Economy Remittances have increased significantly in 2012 to many factors, including efforts by the CBK and compared to 2011. Remittances increased by 39 commercial banks to facilitate transfers into Kenya percent in the first nine months of 2012, from an for investments in government securities or real average of KES 65 million per month to KES 94 million estate. Inflows might also be associated with the monthly (Figure 1.25). The increase is attributed run-up to the national elections. Figure 1.24: The real appreciation of the shilling is eroding Kenya’s export competitiveness Figure 1.25: Remittances have increased significantly in 2012 Between January 2003 and July 2012, the trade weighted Kenya shilling exchange rate has appreciated 35 percent 120 150 in real terms while depreciated by 14 percent nominal terms 140 100 130 120 80 KES million 110 60 100 14 90 40 80 70 35 20 60 0 50 y ry ch ril ay ne ly st r be ar Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Apr-03 Oct-03 Apr-04 Oct-04 Jan-11 Apr-05 Oct-05 Jan-12 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Ju gu ua Ap M ar Ju nu em Au M br Ja pt Fe Se NEER REER 2011 2012 Source: World Bank computation based on CBK data Source: World Bank computation based on CBK data December 2012 | Edition No. 7 15 The State of Kenya’s Economy 2. 2013 and beyond 2.1 Growth Prospects kicks in. Domestic investment should increase as T political risks diminish, and a projected moderate he World Bank estimates that Kenya’s improvement in the global economy will boost economy will grow by 4.3 percent in 2012 exports. Kenya’s growth outlook matches Sub- and 5.0 percent in 2013. These estimates are Saharan Africa’s projected growth of 4.9 percent in lower than those made earlier in the year, and 2013 (excluding South Africa),2 but continues to lag reflect the difficulties the economy has faced in behind the estimated growth rates for the EAC of 2012. However, this performance still reflects the 5.5 percent in 2012 and 6.1 percent in 2013. underlying strength of the economy, and both estimates have the economy performing better With inflation no longer a significant threat, the than Kenya’s economic growth over the last decade, Central Bank has additional monetary policy which averaged 3.9 percent. GDP growth could space to stimulate aggregate demand and growth reach 5.6 percent in 2013 in a high case scenario in 2013. The tight monetary policy environment in or remain at 4.1 percent in the low case (Figure the first three quarters of 2012 saw a significant 2.1). The baseline scenario of 5.0 percent assumes reduction in private sector credit growth. During this peaceful elections and transfer of power in the first period, the weighted lending rates of commercial quarter of 2013, followed by a pick-up in aggregate banks averaged 19.7 percent, compared to 14.8 domestic demand as private sector credit growth percent the previous year, and rates on overdrafts loans, which are the main source of working Figure 2.1: Growth Outlook for 2013-2014 capital for most firms, rose to 19.8 percent from 14.6 percent in 2011. Consequently, credit growth 7 contracted by more than 20 percentage points to 13.8 percent in September 2012, compared to 36 6 5.8 High 5.6 percent previously. These developments along with elevated prices, which reduced aggregate demand, Per cent growth 5.0 5.1 Baseline 5 and the sluggish global economy contributed to 4 4.3 4.1 Kenya’s reduced growth in 2012. To stimulate 3.7 Low economic activity the Central Bank has started 3 easing monetary policy, lowering the Central Bank Rate (CBR) to 11 percent from a high point 2 of 18 percent. Commercial banks have started to 2011 2012 2013 2014 respond to CBK’s action and have started reducing Source: World Bank computation their average lending rates. Table 2.1: Macroeconomic Indicators 2008-2014 2008 2009 2010 2011* 2012** 2013*** 2014*** GDP 1.5 2.6 5.8 4.4 4.3 4.5 5.1 Private Consumption -1.3 5.0 7.2 2.8 4.2 5.4 6.5 Government Consumption 2.5 3.8 9.2 10.6 4.7 4.6 3.7 Gross Fixed Investment 8.8 5.5 5.0 16.1 5.6 6.3 4.6 Exports, GNFS 7.5 -7.0 6.1 8.9 3.1 5.9 6.5 Imports, GNFS 6.6 -0.2 3.0 8.6 3.3 5.8 6.3 Source: World Bank computation * Preliminary ** Estimate *** Forecasts 2 Growth rate in 2013 for oil importing countries in SSA (excluding South Africa) is 5.6 percent. 16 December 2012 | Edition No. 7 The State of Kenya’s Economy Figure 2.2: CBR decreased following eased monetary policy by global energy companies in Kenya. To date, the discovery of oil and gas in Turkana County has 25 Monetary policy space - the gap between actual CBR and CBR indicates the leaverage which the Central Bank attracted interest from foreign investors, with has to stimulate the economy 20 all 46 exploration blocks in 4 sedimentary basins (Lamu, Mandera, Anza and Tertiary Rift) occupying 15 485,000 square kilometers, having been leased to approximately 20 companies. Under the production 10 Actual CBR sharing contract, the Government’s participation movements will amount to 20 percent during the exploration Overall 5 Inflation phase and could be the same or higher upon Simulated CBR which reflects Inflationary Presure and domestic capacity utilisation commencement of development and production. 0 Ju 0 Ju 2 Oc 12 De 12 12 Ap 10 Au 10 Oc 10 De 10 Fe 10 Ap 11 Ju 1 Au 11 Oc 11 De 11 Fe 11 Ap 12 Au 12 As the economy strengthens, Kenya will be able to r-1 r-1 r-1 b- n- g- t- c- b- n- g- t- c- b- n- g- t- c- Fe Source: World Bank computation based on CBK data create additional fiscal space to cushion it against future shocks. Debt has increased to about 45 Aggregate demand will pick up in 2013 due to percent of GDP in 2011/12 from 40 percent in reduced cost of money and election-related 2006/7. This debt level is sustainable, but if it goes spending. The World Bank expects an acceleration much higher, it would undermine Kenya’s ability to in private consumption during the first half of next finance larger fiscal deficits without creating undue year, as a result of the election cycle. Spending pressure on the economy. Kenya’s peers have will begin in earnest in the first quarter of 2013, lower debt levels, and its private investors would with the nomination stage of the national election likely become concerned about high levels of debt cycle and will continue through the elections and for fear it would trigger inflationary and exchange run-offs if applicable. Domestic investment will rate pressures, and because of the ensuing be off to a slow start in 2013, but we expect to volatility in the money and capital markets. Lower see a sharp pickup in the second half, assuming debt levels would calm these fears. Consolidation a peaceful political transition and pro-growth of the fiscal space ought to be possible without economic agenda, as investors position themselves compromising on infrastructure spending which to work with the next government. Despite the has been a bottleneck on growth. Ways to rebuild drag of negative net exports, domestic demand the fiscal buffers include carefully monitoring the will continue to power Kenya’s GDP growth, with new wage and salary structures related to the public investment linked to infrastructure playing constitutionally mandated devolution process, a leading role. Going forward into 2013-14, it managing and rationalizing the number of county appears that macroeconomic policies will remain staff, passing the VAT bill currently in Parliament, generally accommodative as the government tries and implementing the civil servants pension act to to balance fighting inflation and supporting growth, reduce the contingent liability of the government. and as the supply side constraints particularly in agriculture ease as a result of projected levels 2.2 Risks to outlook of adequate rainfall, following recent periods of prolonged drought. The discovery of oil and gas reserves in Kenya K enya will need to manage a number of risks if it is to achieve baseline growth projections. Chief among these are: (i) the impacts of continued will attract high FDI flows to finance exploration sluggish performance in the Euro Zone and the starting in 2013. Large but yet to be verified, oil possible fiscal cliff in the US; (ii) the potential impact reserves in Turkana and gas reserves off Kenya’s of monetary policies that are too accommodative coast are expected to lead to substantial investment and possible disturbances in the commodity December 2012 | Edition No. 7 17 The State of Kenya’s Economy markets; (iii) the need to balance between fighting the short term flows which have supported the inflation and supporting growth; (iv) possible shilling. Second, pressures are building up in the fluctuations in the foreign exchange rate and other international grain market. Should Kenya have a economic disturbances; (v) the current account food deficit, the cost of imports might worsen the deficit; (vi) uncertainty associated with the run-up external account. Finally, economic performance to 2013 elections and political transition to a new is dependent on the amount of rainfall. Below government; and (vii) the potential fiscal risk arising normal rainfall could create inflationary pressures from the constitutionally mandated devolution of as Kenya turns to the external market to secure power to 47 county governments. sufficient supplies of grain. Uncertainties related to deteriorating economic Balancing between the need to fight inflation conditions in Europe and possibilities of a fiscal and to support growth. The macroeconomic cliff in the USA would slow Kenya’s economic uncertainty experienced in 2011 was mainly performance if they materialize. Kenya relies attributed to delay in tightening monetary on Europe as a market for its exports, a source policy after the 2008/10 CBK stimulus to support for its tourism industry, and as a economic growth. The key lesson major provider of foreign direct learned through the 2011 crisis is the investment. A prolonged recession need for policymakers to react fast in Europe would spill over into Kenya relies on Europe to anchor market expectations and Kenya, affecting demand for its as a market for its prioritize the fight of inflation over exports, particularly horticulture, exports, a source for its the role of supporting growth. Even and the supply of FDI, which would tourism industry, and though inflationary risk has waned, otherwise flow into the country as a major provider the monetary policy space available to finance numerous investment of foreign direct should be used judiciously, so as not opportunities in the post-election to unsettle the exchange rate and investment era. The number of European financial markets. Experience from tourist visitors to Kenya would also decline under other countries shows that Central Bank’s policy this scenario. Finally, the potential of the fiscal cliff instruments are not good tools in supporting GDP in the USA would ripple through the international growth. markets if it materializes, impacting FDI, tourism and Kenya’s exports. If any of the above developments The high level of Kenya’s current account deficit materialize, Kenya’s growth rate in 2013 would remains a concern as any exogenous shocks in likely fall to the low case scenario. 2013 could heighten macroeconomic instability. The current account deficit stood at 10 percent in Domestic factors, including accommodative 2012, the same level as in 2011 despite monetary monetary policies and disturbances in the policy action. As previously discussed, Kenya’s commodity markets, could create inflationary current account deficit (when oil is excluded as pressures. First, as the CBK uses its monetary space part of imports) has been increasing since 2010 to boost economic activities, it needs to move as a result of sluggish global demand for Kenya’s carefully to ensure that monetary policy action exports. does not disturb the foreign exchange market. As discussed elsewhere in this report, the current Kenya faces elevated risks as it heads towards the account deficit is still at an unsustainable level, March 2013 elections and the political transition and any sharp drop in interest rates could trigger thereafter. As Kenyans go to the polls in 2013, excess volatility in the foreign exchange market, they will be very conscious of the December 2007 unmooring inflation expectations and reversing elections, which were followed by a short but 18 December 2012 | Edition No. 7 The State of Kenya’s Economy convulsive period of violence, in which a number stakeholders; (ii) the integration of local authorities of people were killed and over 100,000 persons staff with those civil servants whose national became internally displaced. Significant reforms functions have been decentralized to the counties have taken place since 2008 as the government, without threatening the public service wage bill; following the adoption of the new Constitution and (iii) emerging demands among public servants in 2010, has put into place new institutions of for higher wages. governance or strengthened existing ones. The newly created Independent Electoral and Boundary 2.3 A policy agenda for the next government I Commission (IEBC) appears to have a firm hand in n the last 10 years, Kenya has managed to lay running the elections, and is capable of ensuring a strong foundation for Kenya’s future growth. that they are fair and transparently conducted. The The challenge for the next administration would justice sector has become much stronger, with the be to reduce the volatility of growth, restructure appointment of a new Chief Justice and the careful the economy to generate more jobs as it grows, vetting of existing judges that is currently underway. and for economic growth to be more inclusive. A Although the possibilities for electoral violence are number of challenges still exists which the new reduced, it is worth noting that Kenya’s growth administration needs to tackle. performance has suffered during election years (both before and after the elections). Over the past First, compared to other countries in SSA, as well three decades, Kenya has had its lowest growth as emerging and newly industrialized economies, periods―on average about one percentage point Kenya’s current account is significantly out of below the long term average―in or just following balance and needs urgent attention. The current an election year (Table 2.2). account balance in an average emerging and newly Table 2.2: Traditionally, Kenya’s growth is lower in election industrialized country is in surplus, meaning it and post-election years exports more than it imports (Figure 2.3). Kenya’s Average growth current account last recorded a surplus in 2004. rate (%) Since then, the current account has deteriorated All years 1980-2011 3.5 and has registered deficits, thoroughly undermining Election years 2.4 Kenya’s path towards industrialization. Post-election years 2.7 Figure 2.3: Kenya’s current account is out of balance, even Non-election years 3.9 when compared to the SSA average Source: World Bank computation based on Kenya Economic Update (no. 5): 10 Navigating the storm, delivering the promise, December 2011 The implementation of the new constitution will 5 Current account % of GDP lead to the creation of 47 new counties after the 0 2013 general elections, posing significant fiscal risks to the Government, if adequate and timely -5 measures are not taken. There are a number of issues associated with devolution, which have fiscal -10 implications and need to be sorted out, including: (i) the slow progress in attaining agreement on 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 -15 vertical and horizontal sharing between Treasury, Kenya Newly industrialized Asian economies the Commission on Revenue Allocation and other Emerging and developing economies Sub-Saharan Africa Source: World Bank computation December 2012 | Edition No. 7 19 The State of Kenya’s Economy Second, foreign direct investment and Fifth, real exchange rate measurements indicate development assistance will be critical in helping that Kenyan goods are losing their competitive Kenya finance its development agenda. Kenya edge in international markets. The price and needs to provide reliable energy to its industrial trade adjusted exchange rate shows significant sector at competitive rates. It needs roads appreciation of about 30 percent since 2003. That to connect its cities with both domestic and significant appreciation of the shilling discourages international markets, and it needs more fiber exports, but encourages consumption of foreign optic connections to facilitate commerce. These goods thereby worsening the current account. are huge investments which need big injections of capital into the economy. Government funds are Lastly, the Kenyan economy is underperforming constrained and cannot be relied upon to deliver compared to its peers. Kenya needs to undertake such costly investments. Foreign direct investment structural reforms to unleash its potential. The and donor assistance will be critical in closing the second MTP 2013-2018 should articulate that gaps in the capital development budget. Kenya’s growth needs to be more balanced, credit growth needs to be restrained, and current Third, the savings investment gap needs to be account deficits reduced, as exports assume a more addressed. Savings have consistently lagged prominent role. Even though this growth strategy behind investment. Since Kenya has a prudent fiscal might lead to more muted growth than before, policy, the current account deficit in Kenya is more the impact of future recessions will be much less indicative of a consumption binge. As such, it also deep and only recur over a longer horizon, average implies low savings rather than high investment, growth will be faster than the domestic demand led as GDP growth has relied more on domestic boom and bust growth that Kenya has experienced expenditure and less on exports. For a country in recent years. The strength of Kenya’s economy of Kenya’s potential with significant investment will depend on how well the government is able opportunities, the low level of domestic savings to maintain a flexible exchange rate regime, constrains investment and is one of the underlying provide for a higher degree of economic openness, causes of the current account deficit. continue to support export diversification, and encourage growth and innovation in the financial Fourth, even though public debt has decreased sector, all actions that will make a country with a to within tolerable levels, a debt level below 40 persistent current account deficit less vulnerable percent of GDP would provide a comfortable to economic reversals. cushion to improve confidence levels in the financial markets, and expand the fiscal space 2.4 Energizing the economy for job creation to ride out any future shocks. Kenya’s debt levels are still high compared to debt levels in emerging economies and newly industrialized economies. K enya needs to formulate and undertake a structural reform agenda aimed at overcoming binding constraints to economic activity. Experience has shown that the economy is Accelerating Kenya’s GDP growth and sustaining prone to both external and exogenous shocks, it (avoiding hills and valleys) cannot be taken for brought about by such developments as spikes in granted. Kenya needs to strike a delicate balance international oil prices or negative spill overs from between providing adequate stimulus for fueling Kenya’s trading partners and drought. Public debt and sustaining growth of output and employment, levels will be lower if the economy expands faster while maintaining the necessary macro stability. than the rate of its debt accumulation. Whatever the strategy for high, sustained and 20 December 2012 | Edition No. 7 The State of Kenya’s Economy inclusive growth, enhancing physical (and human) Figure 2.4: Even though Kenya’s growth is favourably in East capital formation will play a central role, considering Africa, its capital base is relative to that of South Africa the huge gaps in satisfying infrastructure.3 8 Kenya 7 Even though Kenya has experienced higher growth Rati o physical capital stock / ZAF (%) 6 Tanzania from 2003 onwards, the economy is not generating Uganda sufficient amounts of better paid, modern jobs, 5 Rwanda at a sufficiently rapid pace, especially for the 4 younger and generally better educated working 3 Ethiopia age cohort. According the official government 2 data, modern wage jobs are growing at much 1 slower rate, just above 6 percent of those entering working age.4 This raises concerns regarding the 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 inclusiveness and sustainability of the growth process, and is creating a problem that is only Source: World Bank computation likely to become more widespread as a result of largely stagnant, which has resulted in widening the ongoing demographic transition. current account deficits. Gross national savings, have remained at around 15 percent of GDP in Fiscal incentives to encourage investors to build the 2000s, and have been sustained by net foreign capital stocks to provide workers with adequate transfers, mainly in the form of official development machinery, equipment and other inputs for assistance, which remain at around 4 percent of value added generation to increase workers’ GDP. To the extent that current account deficits productivity is necessary to enhance Kenya’s are financed by the accumulation of net foreign growth foundation. Even though the value of liabilities mainly short term flows, there exists capital stock per unit of labor force has steadily a perceived upper bound regarding the value of increased throughout the 2000s, there remain investment that can be financed by sources other substantive gaps relative to the most equipped than national savings.5 countries of the region. Furthermore, the ongoing demographic transition that determines a faster Figure 2.5: The savings investments gap drives Kenya’s increase in working age population and labor current account defecit force, relative to population growth; together 50 with the process of structural transformation, 40 whereby subsistence agricultural workers shift Percent of GDP (Current $ data) 30 towards modern, more capital intensive sectors; 20 will naturally increase, everything else equal, the 10 demand of physical capital per person relative to 0 GDP. -10 Kenya’s domestic savings is low, constraining -20 physical capital formation. Enhancing physical -30 1986 1998 2010 1980 1982 1984 1988 1990 1992 1994 1996 2000 2002 2004 2006 2008 capital formation requires adequate financing. While the ratio of investment to GDP have Investment/Y GNS/Y CAB/Y Net ODA/Y increased since 2000, savings ratios have remained Source: World Bank computation 3 According to World Bank’s Africa Infrastructure Country Diagnostic (2010) Kenya’s infrastructure spending needs are -at 4 US$ billions per year for the period 2006-2015 among the highest in Africa. Relative to the size of its economy, that spending amounts to a 21 percent of [2007’s] GDP. Investment alone absorbs around 15 percent of GDP, comparable to what China invested in infrastructure during the mid-2000s. 4 Data from various issues of the Economic Survey (Kenya National Bureau of Statistics). 5 There exists a limit in the current account deficits a country can run over the medium to long term, for which its net foreign asset position is stabilized so that no substantial changes in the RER are required ( see Lee, Milesi-F., Ostry, Prati, & Ricci, 2008). December 2012 | Edition No. 7 21 The State of Kenya’s Economy The problem of insufficient employment of activities that rely on the availability of human generation relative to growth in the labor force capital. is a multi-dimensional problem, resulting from many complex social and economic interactions Kenya’s demographic transition presents an in the Kenyan society. How many jobs are created opportunity to boost its savings, investment when the economy grows depends on a number of and employment in the medium term. There factors: (i) the pattern of growth which determines is no reason to believe that savings ratios will the degree at which labor demand increases remain stagnant in Kenya over the medium and with value addition (output). For example in long term. In fact, there are few reasons, derived the agricultural sector, tea picking can be done from experiences elsewhere, to believe that such manually (which generates more jobs) or by tea ratios may increase in the medium to long term, harvesting machine, which does not generate as this is because: (i) as poverty falls and per capita many jobs. (ii) Improvements in productivity, this income increases, Kenyans will be able to save results from the provision of complementary factors an increasing proportion of their income; (ii) as of production (such as public infrastructure). (iii) the fraction of working age population relative to Better macroeconomic management and business young and elderly population that is characteristic environment. (iv) Domestic savings―Increased of a demographic transition increases, the savings availability of savings and access to financing ratio is also expected to increase, following ideas can accelerate capital formation for output and for the life cycle hypothesis;6 and (iii) as businesses employment generation. (v) Education and skills― grow and a higher fraction of enterprises become opportunities for Kenyans to continue and enhance formalized, their contribution to government their education and build-up relevant skills can revenues and savings tend also to increase. trigger an environment suitable for the emergence 6 See Modigliani (1966). 22 December 2012 | Edition No. 7 Special Focus: Creating Jobs Special Focus: Creating Jobs 3. The jobs landscape T he nature of work in Kenya is changing. In the past twenty years, Kenyans have moved away from family farming towards jobs that pay wages or to start small businesses outside of agriculture. As this transition continues for new and larger generations of Kenyan workers, their future will be determined by whether the country succeeds in generating good jobs. Today, young Kenyans face considerable hardship, discrimination and inequality of opportunity in accessing good jobs. Meanwhile, economic instability, weaknesses in infrastructure and pervasive corruption limit business growth and job creation. The analyses in this report point to a job creation strategy focused on boosting industrial activity and wage jobs through better management of economic and political shocks, new investments in transport and electricity and serious action to reduce corruption. 3.1 Why jobs matter “I like to be successful—some kind of J business. At least somewhere I will be obs are essential to the well-being of Kenyans, earning my own money so that I can be able and the typical profile of a job is changing. to support my own kid. So at least I won’t be Twenty years ago, most Kenyans of all ages a burden to anyone. Yeah. Coz you know it worked on family farms. Today, young Kenyans is not that easy. When you know you have are more likely to be working in wage jobs or in a kid and your sister as well. And the other self-employment outside agriculture. This change kid has to go to school. So if I can at least is part of the larger transformation taking place, have something [to] live a good life, so if only that is renewing the aspirations for a generation of I can get something I can have a successful Kenyans and bringing new meaning to the concept business that is what I want” (unemployed of work. woman in Nairobi) Kenyans look to their government to help create There are three ways to think about why jobs jobs. The 2011 Afrobarometer survey asked are important. These include living standards, Kenyans what they saw as the most important productivity, and social cohesion.7 problems facing this country that government should address. “Unemployment” was the second First, on an individual level, jobs are what most common response, after “management of determine living standards. Fundamentally, people the economy.” work to make a living—to earn either cash income or food on which to survive. For most people, work Like people everywhere, Kenyans want good jobs is the main source of income, and people escape to ensure a better future for themselves and their from or fall into poverty because family members families. In a focus group study conducted for this get or lose a job. Higher yields in agriculture, report, Kenyans described their hopes for good access to small off-farm activities, and transitions jobs: to wage employment are milestones on the path to “I aspire a better future with a well-paying prosperity. As earnings increase, individual choices job as a senior driver (earning above 15,000 expand—household members can choose to stay shillings) so that I can afford all basic needs, out of the labor force or to work fewer hours and own a house and [provide] better schools for dedicate more time to education, to retirement, or my children” (employed man in peri-urban to family. area of Mombasa) 7 This framework is used by the World Development Report on Jobs (World Bank 2012). 24 December 2012 | Edition No. 7 Special Focus: Creating Jobs Second, on an economy-wide level, jobs are towns and cities; and (iii) a sector shift in output about productivity. Economic growth happens and employment from agriculture to industry and as jobs become more productive, but also as services. the economy creates more productive jobs and less productive jobs disappear. New goods, new Kenya is in the middle of a demographic transition methods of production and transportation, and with an ongoing drop in both death and birth new markets may ultimately drive these gains, but rates. During the 1960s, the typical Kenyan mother they materialize through a constant restructuring could expect to have 8 children and see at least 1 and reallocation of resources, including labor. and often more not surviving to the fifth birthday. Child death rates have since fallen by more than Third, jobs matter for social cohesion. Jobs half, and the average Kenyan woman now has fewer influence how people view themselves, how they than 5 children (Figure 3.1). At the same time, interact with others, and how they perceive their Kenyan adults are living longer. The consequences stake in society. Unemployment and job loss are of these trends are two-fold: an overall decline in associated with lower levels of both trust and civic population growth rates, and an increasing share engagement. Countries that can generate “good of the population in the working ages (Figure 3.2). jobs” for a wide swath of citizens, may be better Today, more than 55 percent of the population able to avoid the social fragmentation and violence is between 15 and 64 years of age—up from 47 that can accompany economic change. percent in 1990. 3.2 The changing face of jobs These shifts are creating an opportunity known T he nature of jobs in Kenya is evolving, as the country experiences the long-run change common to every country that has moved up the as the demographic dividend. The proportion of the population who are of working age is steadily increasing. This means that the dependency ratio— ladder of economic development. Sometimes the number of children and elderly supported by called structural transformation, this change each working age person—is dropping. In other brings both new challenges and opportunities to countries, this bulge of people of working age has the country. Structural transformation has three generated a period of high growth. It is contingent, components: (i) the demographic transition as however, on creating new jobs to absorb the bulge death and then birth rates fall; (ii) migration to of potential workers.8 Figure 3.1: The continuing demographic transition in Kenya Under−5 Mortality Fer tility Population Growth 200 3.8 8.0 Under−5 deaths per 1000 live bir ths 180 3.6 Annual population growth (%) 7.5 Average births per women 160 3.4 7.0 140 6.5 3.2 120 6.0 3.0 100 5.5 2.8 5.0 80 2.6 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 Year Year Year Source: World Bank computation based on World Development Indicators 8 For a full discussion of Kenya’s demographic dividend see Kenya Economic Update, Turning the Tide in Turbulent Times, June 2011. December 2012 | Edition No. 7 25 Special Focus: Creating Jobs Figure 3.2: The coming bulge in the working age population 2010 2050 Over−65 1.1m (3%) 5m (6%) Workers (15−64) 22m (55%) 60m (62%) Children (0−14) 17m (42%) 31m (32%) Dependency ratio 82 61 Females Males m=million Source: World Bank computation based on UN projections The second component of Kenya’s structural The country’s urbanization fundamentally reflects transformation occurs as people migrate from a quest for opportunity, as Kenyans move to rural areas to towns and cities. Kenya is still an the towns and cities seeking jobs and better overwhelmingly rural country, with more than 2 lives for themselves and their families. A map of out of 3 Kenyans living in the countryside. At the year-to-year migration based on the 2009 census same time, the country is urbanizing, and the shows that the overwhelmingly flows are to and nexus of job generation is increasingly towns and from Nairobi, and to a lesser extent other cities, cities. Over the last 20 years, the urban population principally Mombasa and Kisumu (Figure 3.4). grew more than twice as fast as the country overall (Figure 3.3). The increase in the urban population The shift out of agriculture into services and reflects both the growing density of towns and industry comprises the third element of Kenya’s cities, and the conversion of previously rural areas structural transformation. The shift is seen clearly into towns following higher rural densities. in the overall pattern of GDP changes in Kenya Figure 3.3: Kenya’s urban population is growing rapidly (Figure 3.5). Since independence, the Kenyan 40 economy has experienced ups and downs, with an initial period of rapid growth through the mid- 1970s, followed by stagnation up until the turn of 30 the millennium, and then growth during the most Population (millions) 27.1 recent decade. Over that long period, farming’s 20 importance in the Kenyan economy has fallen, 18.9 and agriculture now accounts for just 25 percent 10 12.4 of GDP, down from 40 percent at independence. The decline in the share of agriculture has been 0 3.7 mirrored by an increase in the services sector. In 1989 Year 2009 many countries, the structural transformation Rural Urban has involved a shift to manufacturing. In Kenya, Source: World Bank computation based on Kenya census data however, the share of industry—which includes Notes: The increase in the urban population reflects a combination of growth manufacturing as well as mining, construction, in the population of areas previously designated as urban, as well as the classification of areas as urban that were previously considered rural. In electricity, water, and gas—has remained stable particular, in 2009, people living in “peri-urban” areas—which previously would have been considered rural—were considered to be urban residents. at just 20 percent of output while manufacturing Thus part of the apparent increase in the urban population reflects a change in the definition of urban has consistently constituted about half of industrial 26 December 2012 | Edition No. 7 Special Focus: Creating Jobs Figure 3.4: Migration is primarily from highly populated rural areas to major urban centers UASIN GISHU BUSIA KAKAMEGA LAIKIPIA NANDI MERU VIHIGA SIAYA KISUMU THARAKA KERICHO NYANDARUA NYERI NAKURU KIRINYAGA HOMA BAY EMBU NYAMIRA BOMET KISII MURANG'A MIGORI KIAMBU NAROK NAIROBI MACHAKOS KITUI KAJIADO MAKUENI Source: World Bank computation based on Kenya census data Note: Lines show flows of migration between 2008 and 2009, and the thickness of lines is proportional to the number of migrants output, and remained stagnant throughout the last is whatever someone does to make a living. Using decade. the census data, jobs can be divided into three main categories: family farming, non-agricultural A change in the composition of jobs has self-employment, and wage work.9 At the time accompanied the shift in GDP. Employment can of the 1989 census, the large bulk of Kenyans were take many different forms. When some people working on family farms. The number working in think of a job they may imagine wage employment family agriculture grew slightly through 1999 and in the modern sector, such as an engineer with a then remained constant. Meanwhile, the growth in mobile telecommunications company in Nairobi, a the numbers of non-agricultural self-employed and line worker with a cut flower firm in Naivasha, or a those holding wage jobs reflects the steady growth worker at the port in Mombasa. More broadly, a job in the services sector (Figure 3.6). Figure 3.5: Through ups and downs since independence, economy has shifted from agriculture to services GDP per capita Sectoral share of GDP 60 57 450 GDP per capita (Constant 2000 US$) 50 Share of GDP (%) 400 44 40 38 350 30 25 300 20 18 18 250 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 Year Year Industry Agriculture Services Source: World Bank computation based on World Development Indicators and Kenya National Bureau of Statistics data 9 See Annex 1 for a detailed description of how these categories are defined. Non-agricultural firm owners are included in the non-farm self-employment category. December 2012 | Edition No. 7 27 Special Focus: Creating Jobs Figure 3.6: Wage jobs and self-employment outside agriculture have increased, while employment on family farms Figure 3.7: Major job categories by gender and has remained constant urban-rural in 2009 15 12 5.1 9 10 People (millions) 3.5 2.2 People (millions) 2.7 3.4 1.5 1.7 6 1.7 1.9 5 0.9 1.3 1.4 5.7 2.9 6.2 6.5 3 4.5 3.8 2.7 1.2 0 0.8 0 1989 1999 2009 Female Male Rural Urban Year Family farming Non−farm self−employment Wage work Family farming Non-farm self-employment Wage work Source: World Bank computation based on Kenya census data Source: World Bank computation based on Kenya census data Men are much more likely than women to hold Figure 3.8: The percent of Kenyans Working on family farms has fallen for every age group wage jobs, and women are more likely to work 90 on family farms. Figure 3.7 shows breakdowns of employment in 2009 by gender and urban vs. rural 80 areas. Twice as many men as women hold wage 70 % of Employed jobs, and more men work principally in wage jobs than on family farms. Likewise, more than twice 60 as many women as men report that their principal 50 activity is family farming. Rates of non-farm self- employment are roughly equal for men and women. 40 The urban-rural breakdown shows that even in 30 areas designated as urban, a significant number 15−19 20−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 (17 percent) report that they are working in family Age group 2009 1999 1989 farming. Additionally, while urban residents are Source: World Bank computation based on Kenya census data much more likely to work in wage jobs or non-farm self-employment, rural areas are home to most Despite the relative decline of agriculture, farming (55 percent) of the non-farm self-employed and a is still the dominant way of life for much of the significant fraction (42 percent) of wage workers. population. Figure 3.9 shows the most common words associated with jobs based on an analysis of Kenyans of every age have shifted out of family the 2005-06 Kenya Integrated Household Budget farming. The pattern of work on family farms Survey, with the size of the words proportional to follows a U-shaped pattern. Among those working, how many have jobs involving those words. The the very young (age 15-19) are most likely to be figure on top shows such a “word cloud” for all working on family farms. These numbers decline jobs. The largest words reflect the dominance of significantly for workers in their 20s and gradually agriculture and related activities. Below that are increase for workers 30 and older. In 1989, a word clouds for wage jobs and for non-farm self- majority of working Kenyans at every age worked employment. Farmhands comprise the largest on family farms, but by 2009, only very young single category of wage jobs. Other prominent workers and those above 50 had majorities of their categories are service related, such as domestic age group working on family farms (Figure 3.8). workers, while smaller categories include the 28 December 2012 | Edition No. 7 Special Focus: Creating Jobs Figure 3.9: Words associated with the most widely held jobs in Kenya ALL JOBS WAGE JOBS NON-FARM SELF-EMPLOYMENT Source: World Bank computation based on the 2005-06 Kenya Integrated Household Budget Survey words engineering and technical in reference sectors, including agriculture and fishing. Non-farm to the industrial sector. Street vendors make self-employment is principally commerce—largely up the largest single category in non-farm self- street vendors and other retail sales—but also employment, which also includes skilled trades like includes a substantial number in other services as dressmakers and butchers. well as manufacturing. The overwhelming majority of non-wage jobs In Kenya, approximately two out of five wage are in agriculture, while wage jobs are spread jobs are modern (or formal). These modern wage across sectors. Figure 3.10 shows a breakdown jobs are a subset of overall wage employment and of the three major job categories by sector. The correspond to what many would view as a “good agriculture and fishing sector consists of some job.” The Economic Survey produced by the Kenya wage work, but mainly (non-wage) family farming. National Bureau of Statistics (KNBS) estimates Work in other sectors is broken down into wage that total modern sector wage employment was work and self-employment. Similar to the word 2.1 million in 2011 (compared to 5.2 million total cloud, this figure illustrates the great diversity in wage jobs recorded in the 2009 census). These wage work. Almost all public sector jobs are wage figures are based on firm surveys conducted by jobs, but wage jobs are also found across other KNBS. Modern wage jobs include approximately December 2012 | Edition No. 7 29 Special Focus: Creating Jobs Figure 3.10: Most non-wage jobs are in agriculture, while Figure 3.11: Most modern wage jobs are in services wage jobs are in a diverse set of sectors and in the public sector Public Sector Electricity and Utilities Mining Public Sector 681 Financial, Insurance and Real Estate Construction Manufacturing Transpor tation, Storage and Communication Other Services Services 806 Commerce Industry 348 Agriculture and Fishing Agriculture 293 0 200 400 600 800 Wage work Non-farm self-employed Family farming People (thousands) Source: World Bank computation based on Kenya census data Source: World Bank computation based on Kenya National Bureau of Note: Economic sectors are shown on the vertical access. Areas are Statistics, 2012 Economic Survey proportional to the number of jobs in each combination of economic sector and job category (wage work, non-farm self-employed, family farming.) 800,000 in services, 350,000 in industry, 290,000 fierce, and modern sector jobs will remain constant in agriculture, and 680,000 in the public sector and possibly fall as a share of overall employment. (Figure 3.11). An overall picture of Kenya’s working age According to the Economic Survey figures, modern population is given in Figure 3.12. This figure sector wage jobs are increasing by about 50,000 summarizes information combined from the 2009 per year, while the working age population by census and the Economic Survey publication. The approximately 800,000 per year. In other words, at overall total of 20.6 million Kenyans of working age the current rate of job creation in the modern sector, (age 15-64) is based on census data from 2009. barely 6 percent of those entering working age are Given the ongoing growth of the population, as of finding modern wage jobs. At this rate of modern 2012, the number of Kenyans of working age has sector job creation, competition for such jobs is increased to approximately 23 million. Figure 3.12: Breakdown of Kenya’s working age population by employment status Working Age Population: 20.6m Employed: Other : 14.3m 6.3m Family Non farm Wage work: Inactive: Students: Homemakers: Other : Farming: self−employed: 5.1m 1.6m 2.7m 1.9m 0.1m 6.5m 2.7m Informal: Modern: 3.1m 2.0m Private: Public: 1.3m 0.7m Source: World Bank computation based on 2009 Kenya census data and on 2012 Economic Survey 30 December 2012 | Edition No. 7 Special Focus: Creating Jobs 4. Challenges facing youth in the job market T he scarcity of “good jobs” and modern sector wage jobs in particular means that many young Kenyans have difficulty finding work. Youth large numbers of people are not in wage jobs, and consequently a broader “inactivity rate” measure may be more useful. The unemployment unemployment is seen as a major concern in rate is highly sensitive to whether people consider Kenya. There is a perception that inactive youth are themselves to be “seeking work.” However, the particularly at risk for being recruited into criminal concept of seeking work is not well-defined for activity. High youth unemployment also raises the people whose main work option is unpaid work concern that young people who are currently out on a family farm or non-wage self-employment. of work may face limited longterm job prospects. A broader measure is the “inactivity rate,” the Consequently, policymakers have often highlighted fraction of the population that is neither studying the need to reduce youth unemployment. nor working in any form (including in housework). Inactivity rates in Kenya are substantially higher Unemployment is almost entirely an urban than conventional unemployment rates. The phenomenon, while underemployment is more overall inactivity rate for Kenya is 8 percent— widespread and more prevalent in rural areas. twice the unemployment rate. The inactivity rate Overall unemployment rates (for all ages) using the is particularly high for Kenyans age 20-24 in urban conventional definition are not extremely high. The areas: 15.6 percent.10 unemployment rate is conventionally defined as the percentage of the labor force that is seeking work. Inactivity rates fall as individuals grow older. Using The labor force consists of the sum of those who multiple censuses, it is possible to track groups by have jobs and those who are looking for work. Using their birth cohort over time. In 1999, inactivity this standard definition applied to the 2009 census rates for those 20-24 were nearly 15 percent. By data, 7 percent of urban adults are unemployed, 2009, the inactivity rate for those same individuals, compared to 2.5 percent of adults in rural areas. In then 30-34, had fallen by more than half to 7 rural areas, unemployment rates are low, because percent (Figure 3.13). Similarly, although inactivity most of those without other jobs are working rates were high for Kenyans 20-24 in 1989, the on family farms. Rather than unemployment, in same group had much lower inactivity rates when rural areas the more common phenomenon is observed 10 years later. If past trends continue, the underemployment—people working at below their inactivity rate of those 20-24 in 2009 will fall from productive potential. 11.6 percent to approximately 6 percent by 2019. These patterns are similar to those seen elsewhere: Unemployment rates are highest for young globally, youth unemployment rates are typically people, especially those in urban areas. The 2-2.5 times those of adults. overall unemployment rate for Kenyans age 20- 24 (rural and urban combined) is 8.1 percent. The This suggests that youth unemployment is high as unemployment rate for urban residents age 20-24 Kenyans transition from school to work but after is 13.2 percent. There is no difference by gender; some time, most of them find work. In previous unemployment rates are identical for urban men generations, inactivity rates for young people have and women in this age group. dropped as they aged. Based on a recent focus group study of young men and women, described The conventional measure of unemployment below, it appears quite normal for youth leaving can understate the extent of the problem when secondary school to spend one or more years at 10 See Annex 33 to 37 for a full breakdown of both unemployment and inactivity rates by age, gender, and urban/rural is given. December 2012 | Edition No. 7 31 Special Focus: Creating Jobs Figure 4.1: High inactivity rates fall for young people prostitution here is very high. If I don’t get I as they age will try tomorrow. How can I survive on 100 Inactivity rates by census year and cohort 16 20−24 shillings yet the child needs education, and 14 with the free education he will need books, % of cohor t that is inactive 12 20−24 food, clothes? It is a bad trade because we 20−24 10 fear diseases and others will beat you or 8 steal from you. It’s not something we want 6 30−34 to do, but we are forced by circumstances.” 30−34 30−34 4 (unemployed 30 year old woman, peri- 2 urban Mombasa) 0 1989 1999 2009 2019 “I say that I have some mix up, and mostly (projected) Year I am stressed when I don’t have money and Born: 1965−1969 1975−1979 1985−1989 I have to look for ways to get money. There Source: World Bank computation based on Kenya census data. The 2019 inactivity rate is projected based on past trends was a time I had started practicing conning. Lack of work actually forces us to steal even home before going to college, or if college does chickens from home because we are hungry.” not look likely, to look for wage work or work in (unemployed man in peri-urban area of the informal sector. In this time they usually live at Nairobi) home or on the farm doing chores and odd jobs. By the time the next census occurs, ten years later, The qualitative interviews show that defining most will have either attended college or received whether someone is employed is often not some other training, and found employment of one black-and-white. Many of those who described kind or another. The current generation is likely to themselves as unemployed in the initial screening repeat the same pattern. for the focus groups revealed during the discussion that they had some part-time income-earning Although high youth unemployment and activity. This shows that many of those who report inactivity rates are in part transitional, focus group themselves to be unemployed or inactive in survey interviews with young Kenyans indicate that they and census data may be more properly considered have legitimate concerns about their limited underemployed. A large proportion of those job opportunities. The remainder of this section working also have secondary jobs. is based principally on interviews conducted in October 2012 with Kenyans age 20-30, including “I am a broker so I work on the highway, if a mix of employed and unemployed young men I get people who want to sell say cereals or and women from a variety of walks of life in both diesel I get a buyer for them. Also if a lorry rural and urban areas around Nairobi, Nakuru, and breaks down and they want people to offload Mombasa. In these interviews, young Kenyans cargo and load it to another vehicle we are illustrate the obstacles they face in obtaining jobs there. Being a hustler you do not select the and how unemployment may lead to prostitution, type of work you do, just what brings you drug dealing, and other criminal behavior. some daily bread. Oh yes and I also do DJ part time.” (unemployed man in rural Nakuru) “Since that 100 shillings [I earn doing odd jobs] is not enough I will say I am a woman, I “I am a hair dresser and beautician, will go out there and get a man who will give specializing in beauty. I also hawk, when the me 500 shillings or 1000 shillings on a lucky business is low, I also sell second hand toys.” day and I will sleep with him. That is why (employed woman in rural Nakuru) 32 December 2012 | Edition No. 7 Special Focus: Creating Jobs Respondents were very conscious of the value Most job seekers felt that it was a waste of time that education has in improving their job and resources to apply and attend interviews if one opportunities. Many had to drop out of school did not know someone to push her or him through. early for lack of money to cover school costs, or in the case of women because of pregnancy. “The main problem when we try to get these Many hoped to get more education but ended up jobs even when you have the qualifications entering the job market instead. that is required is that if you do not know someone you cannot get a job, they just “I first dropped out of school at Form 2. My employ their own and sometimes those dad could not afford to pay my school fees who get the jobs are not even qualified.” and that of my brother, so when he passed (unemployed man in rural Nakuru) and because he was a boy, I was told to first drop out of school so that my brother could “If you want to get a job in Kenya you should be taken to Form 1. I went to stay with my either have a godfather or a relative in your Auntie, helping her to sell clothes.” (employed area. It is very difficult to get a job if you do woman in peri-urban area of Mombasa) not know someone. When I finished Form 4 I went to stay with my parents in Nyahururu The most common theme in the focus group where I did my driving course … Then a friend discussions—among both the employed and the told me that there was a supermarket that unemployed—was the challenge of breaking into needed some drivers and all they needed was the job market for young Kenyans. Many find a driving license and a form of good conduct that nepotism, tribalism, demands for bribes, and from the police … When I went for a test sexual harassment are major barriers to obtaining drive the supervisor was very impressed by a job. Young people coming from wealthier and my driving, and I thought I had got the job. connected families are seen as having large But I was not even shortlisted. I pleaded with advantages in finding work, regardless of skills and them but they kicked me out. Then I came qualifications: to learn later that the staff had brought their own relatives. I was very disappointed. “There is a low class, low income earners, if I rarely go for those interviews any more.” you come from that family bracket, generally (unemployed man in urban Nakuru) known as mwanachi wa kawaida [the general public] it is hard to get a job because you do The youth whose parents were more connected not have the means but those who came from and had a wider network of influential relatives rich families, they sail through because they and friends were more likely than their have the means and connections so they can counterparts to get jobs. None of the respondents corrupt their way through.” (unemployed interviewed had accessed the job market without man in urban Nakuru) a helping hand. Nepotism is seen as a great obstacle to job “When people say that its God [who provides access. Most respondents felt that it was almost job opportunities for them], I don’t think it is impossible to access the labor market if one did God. Your name must be there. Somebody not know someone to connect him or her to the needs to take your papers before you go for job environment, and this was cited as the obstacle the interview.” (unemployed woman, urban that prevented the unemployed from getting jobs. Nairobi) December 2012 | Edition No. 7 33 Special Focus: Creating Jobs “There are probably a few people who get large amounts like 200,000 and half a million. jobs through merits, but the majority they Then another officer came and passed behind get through godfathers. I know someone us scanning the amounts and selecting those who was in my class, he got an F in college who had the largest amounts and asking but because he knew someone somewhere them to move to another location. We did he secured a job in a parastatal, and he is not know what he was doing so the rest of us being paid well.” (employed man, peri-urban were left kneeling there. After a while another Mombasa) officer came and told us that we had failed because our parent’s letters were not heavy. I Bribery and corruption are other major obstacles went home so disappointed and so depressed young Kenyans face in securing jobs. Respondents I could not eat for nearly a whole week, I just indicated that demands for bribes to get jobs were locked myself in the house. This I think is the common, and the more competitive the vacancy, worst problem we have, corruption of the the greater the amount of bribe demanded. Many highest order.” (unemployed man in rural respondents said they had been disappointed and Nakuru) disillusioned by the corruption they had witnessed. Focus group respondents also identified tribalism “I went somewhere in town and I wanted to as a major barrier for youth in accessing jobs. get a supermarket job as a cashier. When Tribalism was widely mentioned by respondents I met the employer, he told me point blank from diverse tribes and regions of the country. They that the salary for the position was 30,000 felt that individuals older than 40 were more likely shilling, but for me to get the job, I had to first to prefer members of their own tribe than were give him 10,000. I did not have even 1000—I younger Kenyans. Many said that recruiters prefer had borrowed money for fare. So I requested people from their own tribes and said that at some him to allow me in, then I would give him the point they had been denied a job due to tribalism. 10,000 [with first salary], but he refused.” (unemployed man in rural Nakuru) “If you go to some companies you will find that they only employ people of the same “I have this strong desire to join the armed tribe because the CEO comes from that tribe, forces from the time I was a child ... so I have there was one time my brother was trying to tried twice once in Kisumu and another time connect me with his friend who worked in in Kisii. The last one I went everybody was one of the prominent tea estates in Kericho, asked to write on their feet barua ya mzazi and he asked my brother to take me there [the content of the parents offer]. … I passed but unfortunately the recruitment officer in all the tests, running, height, physical was not there that day so he asked us to fitness. Then on the last stage we were told go and spend the night at his place. Then that those who had a letter [code word for my brother heard his wife arguing with him bribe] from the parents to move aside and I and telling him that the recruiting officer went, and I could see many people wondering did not want people from our tribe [Kikuyu] and shocked that there was a letter that was and that he was too daring to bring us into required and they had not been told. So I went her house. My brothers know the Kalenjin to the last stage and we were asked to write language so he told me we needed to leave the parents’ letter on our feet. If you have very early the following morning because we 100,000 that is what you write. Then we were were in danger.” (unemployed man in urban asked to kneel down (to expose the written Nakuru) amount on foot) and I could see people had 34 December 2012 | Edition No. 7 Special Focus: Creating Jobs “There is some work just next to my place “Those who hawk food at the construction for excavating fish ponds. When they started sites must sleep with the construction we went there, but we were told there was supervisor to be allowed to access the no work. But since the Manger is a Digo he construction site. Then after that he will get has gone to his home area and collected another woman, sleeps with her then he his Digo friends and relatives—they are the will find an excuse to throw you out. He will ones working there.” (unemployed female in start complaining that the food is little or it urban Nairobi) is not good just so that he can get another woman to sleep with. It is really difficult for “In that hotel I was working in, the majority women.” (unemployed woman, peri-urban of workers are Kambas, in all departments: Mombasa) security, house keeping and the bosses are Kambas, so its difficult to get a job if you are The focus group study paints a broad picture of from another tribe. I was just working there hardship and inequality of opportunity for young because it was training, so they were not Kenyans entering the job market. For those with paying me. When I asked for employment the least power in Kenyan society, the possibility after my training they declined.” (unemployed of obtaining a wage job—or even just the access female in peri-urban Mombasa) to markets for a self-employed job—can seem so daunting or hopeless. Desirable jobs are already Sexual harassment is also another major barrier scarce and to have them rationed by connections, to job market access. Both men and women bribery, and tribal affiliation exacerbates the reported experiencing sexual harassment in job anguish young people face in seeking employment. recruitment, but it was more commonly reported Pervasive discrimination stacks the deck against by women. A number of women said they had the poor and women, threatening to exacerbate given up on looking for a job because of repeated experiences with sexual harassment. inequalities over time. “I also have a friend whom we were school These stories of severe challenges faced by young with, she has been looking for work for 6 people invite the question of what public policy years, yet she is educated, she has a degree can do to reduce such hardship. The importance of and other post graduate qualifications but connections to obtaining a job is nearly universal, every office she goes they want to get down but Kenya can aspire to fight tribalism, bribery, and with her before she gets a job. She is pretty sexual harassment. One part of the possible policy and has a good body structure. She tells response is to assert as matters of principle that me these stories crying and when she gets society opposes such practices and prohibit such a job the boss start tuning her, she has a behavior through legislation. Kenya has in fact major problem.” (employed woman, urban already adopted this approach, through the new Mombasa) Constitution, which asserts broad principles of equal opportunity regardless of tribe and gender, “Some people tend to think that men are the and bribery is already illegal for recruitment for only people who harass ladies, but men are public positions. Given how embedded these also being harassed by the women. Like me, practices are in Kenyan society, implementing these the business I do, there was a woman who provisions and enforcing them will require strong had made me go to her office 20 times in one leadership and a longterm effort. The Bill of Rights month. Just sweet talking me. That is when I (Chapter 4) includes the following provisions under came to learn that she had a hidden agenda.” “Rights and Fundamental Freedoms” (Part 2): (self-employed man, urban Nairobi) December 2012 | Edition No. 7 35 Special Focus: Creating Jobs (3) Women and men have the right to equal (also measured by the Afrobarometer survey) treatment, including the right to equal are largely unchanged over time, there is some opportunities in political, economic, cultural indication that citizen outrage over the bribery and social spheres. culture has increased, as evidenced by initiatives (4) The State shall not discriminate directly or such as the I Paid a Bribe Kenya website, through indirectly against any person on any ground, which Kenyans can anonymously report demands including race, sex, pregnancy, marital status, for bribes. health status, ethnic or social origin, colour, age, disability, religion, conscience, belief, Abuses by job recruiters are likely to continue to culture, dress, language or birth. be acute as long as good jobs remain intensely (5) A person shall not discriminate directly or scarce. Many respondents in the focus group indirectly against another person on any of the study aspired to modern sector wage jobs. Others, grounds specified or contemplated in clause (4). recognizing the unlikelihood of getting such jobs, saw self-employment as the best option. As While tribalism, corruption, and sexual noted in the first section of this report, the ranks harassment will persist for some time and may employed in modern sector wage jobs grow by never be entirely eliminated, there are some just 50,000 a year, while the number of people of positive signs that things are starting to change. working age expands by roughly 800,000 a year. Successive rounds of the Afrobarometer survey Until the Kenyan economy can create jobs at a (2005, 2008, and 2011) show that Kenyans over much more rapid pace—employment will continue time have become more likely to identify as Kenyan to be rationed in large part through exploitative and less likely to identify principally as members of practices. The next section of this report examines their tribe. Although rates of payment of bribes how Kenya can achieve its job creation potential. 36 December 2012 | Edition No. 7 Special Focus: Creating Jobs 5. How can Kenya spur job creation? T he key question going forward is how will Kenya spur job creation in a manner that supports and sustains its longterm structural Three broad sectors will account for the bulk of high productivity jobs: modern agriculture, skilled services such as information and communications transformation process? Kenyans will continue technology (ICT), and manufacturing. Kenya has to shift out of family farming. The first challenge had notable success in recent years in expanding is to move them into better jobs, principally high its wage-based agricultural sector—in cut flower productivity wage jobs. Only through generating farming, tea, and coffee—and likewise ICT has more high productivity wage jobs will Kenya been a small but leading area of growth. Both wage achieve substantial growth in incomes and a agriculture and skilled services are likely to continue reduction in poverty over the long term. Without to be success stories for the Kenyan economy. the right policies in place, the economy will create However, what stands out in the trajectory of fewer such jobs, and the bulk of Kenyans will be Kenya’s economy over several decades is its failure stuck in poorly paid self-employment and low- to see a substantial takeoff of manufacturing. end wage jobs. At the same time, it is inevitable Thus, the bulk of the discussion presented here is that non-farm self-employment and wage jobs framed around addressing the barriers to growth associated with the informal sector will continue in manufacturing wage jobs. to be the main livelihood for millions of Kenyans for many years to come. Consequently, a second Kenya’s private sector, particularly in challenge is how to increase incomes for the non- manufacturing, is somewhat paradoxical. Kenyan farm self-employed and informal wage workers businesses are recognized worldwide for their in the medium term. These two challenges are dynamism and innovation, and the private sector addressed here in turn. is highly diverse. At the same time, growth— particularly in the manufacturing sector—has been A job creation strategy also needs to recognize limited. This apparent contradiction suggests that that nearly half of Kenyans work on family farms, the country has a high potential for private sector and although the ranks of family farmers are job growth, if the binding constraints to job growth shrinking in relative terms, they will constitute are loosened. the livelihoods of millions of Kenyans for years to come. Because the issues and policies for family The large bulk of modern wage jobs will be created farming are substantially different than those for in the private sector. Thus a principal question is other forms of employment, a full discussion is why more Kenyans have not found modern wage outside the scope of this study. Box 3.1 briefly jobs in the past and what can be done to ensure considers policies to improve productivity in family that more have such jobs in the future. Within a farming. basic economics framework, the possibilities fall into two categories, corresponding to supply and High productivity wage employment should form demand. a principal pillar of Kenya’s job creation strategy. In countries like Brazil, China, South Korea and • “Supply” in the labor market refers to the Vietnam, the expansion of high productivity wage availability of Kenyans with skills. Is the main employment has helped drive income growth and issue that employers want to hire workers but poverty reduction. Unless high productivity wage cannot find the right numbers with adequate employment expands in Kenya, the scope for skills? More broadly, how are skills related to the poverty reduction is limited. prospects Kenyans have of getting good jobs? December 2012 | Edition No. 7 37 Special Focus: Creating Jobs • “Demand” refers to job creation by Kenyan firms. An important question is to what extent education Is the main issue that Kenyans have skills but that pays off in terms of jobs or earnings. This is often firms are creating few jobs? If so, what is stopping referred to as the “returns to education.” One way firms from creating more jobs? Private sector education can pay off is in opening up greater jobs will expand as the private sector grows. If possibilities of wage employment, and data does the main constraint to creating good jobs is on show that the probability of getting a wage job the demand side, what is holding back growth of increases steadily with education level. More the private sector? than half (52 percent) of those with secondary education or more have wage jobs, compared to The discussion below first considers the role of barely a quarter (27 percent) of those with only skills (supply) and then considers constraints to job some primary education (Figure 5.2). creation on the side of employers (demand). Figure 5.2: More educated Kenyans more likely to have wage jobs 5.1 The supply side: Does the workforce have 100 the skills needed for good jobs? 16 26 O 37 ver the long term, the average level of skills 75 19 52 % of employed 16 in Kenya has increased dramatically. Among those who were in their 30s at the time of Kenya’s 50 64 20 independence, approximately 3/4 had never 57 20 attended school. Now, very few do not attend 25 43 school at all, and in the most recent cohorts, 2/3 29 completed primary school and half of primary 0 school graduates completed secondary school. Never attended Some primary Primary Some Secondary or higher Due to policies in the last ten years that have Highest level of education completed boosted primary school enrollments, both primary Family farming Non-farm self-employed Wage work and secondary completion rates are likely to see Source: World Bank computation based on Kenya census data substantial gains in the next few years. Assuming completion rates continue to rise, Kenya will see Among those with wage jobs, one can analyze the a tripling of its secondary school graduates by returns to education by considering how much 2030. The number in the workforce will rise from 6 wages increase with each year of education. million to 18 million (Figure 5.1). For Kenya, the returns to primary education in Figure 5.1: Kenya’s education dividend the wage market are low. In other words, wages increase only slightly with each year of education 30 (Figure 5.3). Wages increase more rapidly for each 25 year of secondary school and most steeply for post- secondary education. This means that the payoff People (millions) 20 in the wage market from more education is very 15 substantial at high levels, but not at the low end.11 10 5 The low wage returns to primary education suggest that the quality of education is limited. 0 One way to understand the quality of primary 1970 1980 1990 2000 2010 2020 2030 2040 2050 education is through the tests in basic literacy and Year numeracy administered by the Uwezo organization No Education Primary Secondary Ter tiary to a random sample of schools across Kenya, Source: World Bank computation based on University of Vienna analysis 11 This same general pattern has been found in earlier work in Kenya based on other data. It is important to note the returns analysis here only concerns wage jobs, and it is possible that primary and secondary education pays off in terms of higher productivity in family farming or non-farm self-employment, as well as improving other outcomes like child survival. 38 December 2012 | Edition No. 7 Special Focus: Creating Jobs Figure 5.3: The returns to education are high for Uganda, and Tanzania on an annual basis. The 2011 post-secondary education but low for primary education Uwezo results show that although Kenya students 640 score above those of Ugandans and Tanzanians, 320 substantial numbers of pupils from the lower Wages per hour (KSH) [log scale] 160 socioeconomic strata perform poorly. Overall 1/3 80 of Standard 3 students cannot pass a Standard 2 40 level test. Pass rates are far lower for the poor. Less than half (49 percent) of students from extremely 20 poor households age 10-16 can pass literacy 10 and numeracy tests for their grade level (Figure 5 5.4). These results indicate a severe inequality Primary education Secondary Post-secondary 2.5 of opportunity between children by household 0 2 4 6 8 10 12 14 16 18 20 wealth. Educational attainment (years) Source: World Bank computation based on Kenya Integrated household Budget Survey data Box 5.1: Reinvigorating family farming The fact that nearly half of working Kenyans are on family farms argues strongly for a renewed effort to improve the productivity of smallholder agriculture. This report focuses on wage and non-farm work, which are the growing categories of employment in Kenya. Although family farming is in decline as a share of employment in Kenya, it remains the main livelihood for 46 percent of working Kenyans. Over the long term, Kenyans will continue to move out of family farming, and agriculture will become concentrated in larger farms. Following the pattern of other countries, by employing more capital and taking advantages of economies of scale, Kenyan agriculture will be able to produce more with fewer people. In the medium term, however, smallholder agriculture will continue to be the main livelihood for millions of Kenyans. The broad formula for making small farms more productive is well known. It includes improving the institutions relevant to smallholder agriculture as well as targeted public investment. Improvements in property rights would help productivity. Likewise, reform of the relevant marketing boards could improve incentives for producers. Important public investments include those in rural roads to connect farmers to markets, as well as irrigation and agricultural extension services. On the institutional side, in many rural areas land rights remain tenuous due to decades-long disputes over land ownership. Over the long term, land reform, which resolves these disputes and clarifies ownership, will help raise productivity by creating incentives for investment in family farms and facilitating the function of land markets. The new Kenyan Constitution calls for new land tenure reforms. Important investments that will increase output on family farms include developing rural roads and irrigation systems as well as improving farming techniques through agricultural extension. Of particular importance is public investment in rural roads. Transportation costs remain high in Kenya, restricting the ability of smallholders to access wider markets. Underinvestment in public goods relevant to agriculture characterizes Kenya’s historical experience, as groups in power have directed investments to their friends and family. This was true particularly the 1980s and 1990s, when the government neglected infrastructure, and investments favored those linked to the political elite. The last decade has seen a resurgence of public investment, particularly in rural roads. To a large extent, Kenya has spent the last several years playing catch-up after the neglect over the previous two decades. Continued investments along the same lines are likely to yield payoffs in improved farm incomes. Evidence suggests that rural farm productivity is already showing the benefits of policy changes over the last decade. Panel data from the Tegemeo rural household survey shows that the maize productivity of smallholder farms has increased, which appears to be a consequence of partial liberalization of maize and fertilizer marketing as well as public investments relevant to agriculture. Source: World Bank December 2012 | Edition No. 7 39 Special Focus: Creating Jobs Figure 5.4: Poor students are much less likely to pass basic through the formal education system. Skills literacy and numeracy exams and vocational training and apprenticeships all require a certain education foundation that only the education system can provide. Literacy and Extreme Poor 49 numeracy programs, equivalency degrees, and accelerated learning programs can also teach basic skills to youth who did not acquired them by the Poor 63 time they left school. (Further discussion of training programs can be found in the section on non-farm self-employment later in this report). Non−poor 78 Although improving skills is important for job 0 25 50 75 100 creation in the long run, in surveys of firms, few % Pupils Passing identify skills as their binding constraint to growth. Source: World Bank computation based on Uwezo testing data In the World Bank’s most recent (2007) Enterprise Survey, lack of a skilled workforce did not rank This brief analysis of education paints a mixed among the top constraints cited by firm owners picture. On the one hand, Kenyans who graduate and managers. The total number of modern wage from elite secondary schools, and especially those jobs is growing by just 50,000 per year, and these who complete post-secondary education (just over slots are easily filled by the significant number of 1 percent of Kenyans), have strong job prospects in highly educated Kenyans who graduate each year. both the public and private sectors. The high wages Given this slow rate of job growth, the low level of that graduates with post-secondary education school attainment and quality for the larger mass can command indicate that the highly skilled are of Kenyans is not currently a substantial constraint. scarce relative to demand. At the same time, Nonetheless, if the other key constraints are even after the large expansion of education, 1̷3 of lessened, and job creation is energized, it is likely Kenyan children still fail to finish primary school. that skills will become a more binding limitation on The low returns to primary education as reflected job growth. in the poor performance on basic skills test results suggests that the education system is failing to 5.2 The demand side: Constraints to job creation prepare millions of less advantaged Kenyan youth by employers for good jobs. Kenya can build on its impressive gains in educational attainment over the last several T he main constraint to creating good jobs in Kenya today is on the demand side. Firms are not hiring more workers into modern wage decades to make education work for all Kenyans, jobs because their businesses are not growing not just those at the high end. The most important sufficiently. Thus the question of how to spur objectives to ensure that young Kenyans have creation of good wage jobs can be answered by the skills for good jobs are: (i) achieving universal determining how to boost private sector business primary completion; (ii) increasing completion growth. In other words, the way to create more rates for secondary school; and (iii) increasing the jobs is to make it possible for Kenyan companies to quality and relevance of education at all levels. prosper and grow. Other measures may offer a second chance for The obstacles to job creation can be assessed using those who dropout of school early and are out surveys of Kenyan companies. In these surveys, of work. Such approaches can include allowing firm managers and owners were asked what they for primary/secondary equivalency certificates saw as the principal obstacles to growth. Recent 40 December 2012 | Edition No. 7 Special Focus: Creating Jobs firm surveys in Kenya include the World Bank’s and over the past three decades, Kenya has had Enterprise Survey in 2007 and a similar survey its lowest growth periods―on average about one by the McKinsey Global Institute in 2011. These percentage point below the long term average―in surveys have a weakness, which is that they can or just following an election year. The single most only survey existing firms. As a result, they reflect important step Kenya can take to spur job creation obstacles faced by firms that are able to operate is to achieve a peaceful political transition in 2013. within the constraints of the Kenyan economy. They do not reflect concerns of firms that have Weaknesses in transport and electricity are a gone out of business or those that never entered second severe constraint to firms, and thus job Kenya because of the current set of obstacles. growth. Supply chain problems due to transport Nonetheless, they do provide a rough guide to problems often result in firms holding large barriers to job creation faced by the existing private inventories. Manufacturing enterprises in Kenya sector. hold on average 47 days worth of inventory of the most important inputs they need for their Firm surveys in Kenya point to 3 main barriers production. This is substantially higher than China, to job creation: (i) potential political and India, Tanzania, and Uganda. Transport costs, macroeconomic instability; (ii) weaknesses in measured as the cost of inland transportation of transportation and electricity; and (iii) corruption. a 40-foot container, also remain very high in Kenya More than half of manufacturing firms report relative to most comparator countries (Figure 5.6). each of these factors to be major or very severe High transport costs are driven by several factors, constraints. Tackling these barriers could form the including poor infrastructure, the cartel structure core of a job creation strategy for the country. A of the trucking industry, long waits at weighbridges fourth element of a job creation strategy—which and the port of Mombasa, and demands for bribe derives not from the firm surveys, but from the payments.12 broad experience of successful economies around the world—is the importance of making cities work Despite improvements in power generation in for everyone, as they will be the centers of wage the last decade, inadequate electricity is another job creation. substantial barrier for job creation. Close to 80 percent of firms in Kenya experience losses Political and macroeconomic instability present a resulting from power interruptions. On average, substantial barrier to job growth in the short term. losses from power disruption average 7 percent of The Enterprise Survey was conducted in 2007, sales. By comparison, only 40 percent of Chinese before the last elections and the ensuing post- firms report losses from power outages, and election violence. Political and macroeconomic fewer than 13 percent of firms in South Africa. instability do not rank in that survey as major Due to power shortages, two out of three firms concerns. However, in a more recent survey in Kenya own or share a generator, and use it for conducted of employers in Kenya in 2011 by the 16 percent of their electricity needs. Owning a McKinsey Global Institute, these risks emerged generator is costly, requiring both expensive fuel as pre-eminent concerns, with 74 percent citing purchases and substantial capital investments, macroeconomic conditions and instability among which average 3-5 percent of the total value of the top three obstacles to growth. Likewise, 44 machinery and equipment. Additionally, obtaining percent mentioned political instability. As the first a power connection is still difficult in Kenya, and half of this KEU notes, Kenya faces elevated risks consequently, the country ranks 162 out of 185 in as it heads toward the March 2013 elections and the ease of Getting Electricity in the World Bank’s the political transition thereafter. In the past, 2012 Doing Business rankings. Kenya’s growth has suffered during election years, 12 See Box 6.4 of the June 2012 Kenya Economic Update for a discussion of these issues. December 2012 | Edition No. 7 41 Special Focus: Creating Jobs Figure 5.6: Weak transport and electricity are principal constraints to job creation Cost of Inland Transportation of a 40-foot Container Percentage of Firms that Experience Sales Losses from Electrical Outages India 600 India 66 China 470 China 42 South Africa 500 South Africa 12 Kenya 1,400 Kenya 78 0 500 1,000 1,500 2,000 0 25 50 75 100 US Dollars ($) % Firms Source: World Bank computation based on Investment Climate Assessment Notes: Transportation costs average export and import costs Figure 5.7: Kenya’s firms are much more likely A third drag on job creation comes from kickbacks to face demands for bribes on government contracts and pervasive demands for bribe payments. In the Enterprise Surveys, 79 Kenya stands out for its high level of business- Expected to give gifts to public 34 related corruption. Overall, 71 percent of firms officials 'to get things done' say they need to give gifts to obtain government 26 contracts, and the average amount paid is 12 71 percent of the value of the contract. Likewise, 79 Expected to give gifts to secure 35 percent say they have to give gifts to public officials government contracts to “get things done.” On both counts, corruption 24 rates are much higher in Kenya than in the world 0 25 50 75 100 and Sub-Saharan Africa as a whole. Firms report % of firms that on average 4 percent of the value of their sales Kenya Sub−Saharan Africa World is directed towards bribe payments. Source: World Bank computation based on Enterprise Survey data Corruption smothers job creation in multiple ways. government contracts are approximately 36 billion First, it attracts qualified Kenyans into rent-seeking Kenyan shillings, and other bribe payments paid by activities rather than job-creating entrepreneurial firms total 69 billion Kenyan shillings. If these funds activity. Second, it discourages firms from growing were used to hire workers at the average formal and expanding their workforces. Third, it directly sector wage, they could be used to create nearly diverts funds that could otherwise be used to 87,000 and 166,000 jobs, respectively. By this hire workers. The effect on growth is likely to be calculation, the total cost of corruption affecting substantial over the long run but it is difficult to businesses amounts to more than 253,000 jobs. quantify. Based on the responses in the Enterprise This is close to the number of urban unemployed Survey, it is possible to roughly estimate the total youth in Kenya (age 15-34). In other words, if funds paid in kickbacks on public procurement firms were able to redirect all the funds they use as well as bribe payments by firms to “get things for bribes to salaries, they could hire almost every done.” By these calculations, total kickbacks paid on young unemployed Kenyan.13 13 This calculation of the “job cost” of corruption is necessarily highly approximate. Each element of the calculation is based on reliable data, but the underlying assumptions are simplified. The 12 percent average payment for government kickbacks in the Enterprise Survey may be more or less than the average paid across all government contracts. Likewise, based on the 4 percent of sales average bribe bill reported in the Enterprise Survey, it is assumed that 4 percent of all household consumption expenditure (with the exception of expenditure on education and agricultural production) ultimately funds bribe payments. Overall, because this calculation does not take into account the broader growth effects of corruption, 253,000 is likely to be a lower bound on the “job cost” of corruption. 42 December 2012 | Edition No. 7 Special Focus: Creating Jobs A fourth issue for job creation is the importance work, non-farm self-employment will continue to of making cities work for everyone. As the grow for decades. analysis earlier in this report shows, the country is undergoing a wave of urbanization, as Kenyans Non-farm self-employment—also referred to move into the towns and cities—particularly as household enterprises—have largely been Nairobi—in search of opportunity. Large towns neglected by both policymakers and researchers. and cities are centers of innovation and engines Household enterprises were largely seen as the of job growth, and they will continue to draw symptom of failed development policy. Only Kenyans looking for better lives. As cities expand, it recently has a new consensus recognized that is important for the government to invest in urban “informal is normal” in Kenya and many other infrastructure, so that they continue to flourish as countries, and that policy should consider how drivers of job creation. to improve the welfare of those in non-farm self- employment. Consequently, although a number of 5.3 Raising productivity of non-farm studies are underway, research thus far provides self-employment few clear guidelines on how to improve the E ven in the best case scenario, as Kenya’s service productivity of such enterprises. Going forward, economy expands, an increasing number of greater use of rigorous impact evaluations are Kenyans will make their living in non-farm self- needed to understand what works for improving employment. This category covers the work known household enterprises productivity. in Kenya as jua kali, as well as what is typically described as informal work. This group accounts Household enterprises face three main barriers: for 18 percent of workers nationwide, and this harassment by authorities, access to finance, and type of work will persist as the central livelihood lack of skills. These three areas present the main for many Kenyans for some time. With a growing opportunities for increasing the productivity of labor force, even if Kenya tackles the obstacles non-farm self-employment. discussed above and succeeds in expanding wage Table 5.1: The “Job cost” of bribes in Kenya Source of funds Total Value Corruption costs Market value of Opportunity cost of (KSH 2011) corruption corruption in yearly (KSH 2011) jobs Public Procurement 298,587,883,000 12% 35,830,546,000 87,000 Private Sales 1,714,879,791,000 4% 68,595,192,000 166,000 Total 2,013,467,674,000 104,425,738,000 253,000 Source: World Bank computation Notes: 1) Public procurement figures are from Public Procurement Oversight Authority: Total value of public procurement in Central government estimated as 10% of GDP, taken from: http://www.ppoa.go.ke/downloads/Procurement%20Journal/issue_no._5.pdf 2) Household final consumption expenditure (representing 80% of GDP) is used to estimate private sales. This excludes the share of household consumption in agriculture and education. 3) Estimates of the financial burden of corruption on firms in Kenya were taken from the Kenya Investment Climate Assessment. This report found that Kenyan firms pay 12 percent of the value of a public contract as informal payments. In addition, the report found that the costs of informal payments to officials to deal with rules and regulations cost 4 percent of annual sales. 4) The opportunity cost calculations are based on dividing the total “market value of corruption” in each category by average modern sector wage earnings. Average modern sector wage earnings are KSH 413,010 per year (for both private and public sector), according to the the 2012 Economic Survey (KNBS). December 2012 | Edition No. 7 43 Special Focus: Creating Jobs Abuse and harassment by the police of household used the accounts, saved more, and increased their enterprises is extraordinarily common. This is productive investment and private expenditures. In particularly the case for traders, who make up a contrast, no effect was found for male bicycle-taxi large portion of the non-farm self-employed. One drivers offered the same accounts. This finding also study of women street vendors in Nairobi found suggests that saving and investment constraints that “Harassment is the main mode of interaction may be binding for self-employed women (but not between street vendors and authorities” (Muiruri men), since women may have greater problems 2010). The study found that demands for bribes by saving on their own, due to pressures to share their police—amounting to 3-8 percent of income—as savings with others. well as sexual abuse are common. Summarizing the difficulties of the street vendors, the study The ability of public policy to address financing found the following: constraints for household enterprises may be limited, but innovative private sector solutions “The most significant challenges on the street were the different types of harassment have emerged. Grant programs are likely to be especially from the city authorities over difficult to scale up, and micro-finance programs licensing, taxation, site of operation, present substantial administrative challenges. At sanitation and working conditions. Various the same time, the private sector in Kenya has begun forms of harassment were reported including, to provide solutions that ease finance constraints beating, confiscation of goods, corruption, for micro-enterprises. Most importantly, the rise evictions, fines, arrests and imprisonment.” of Kenya’s home-grown mobile money system has been a very positive development, as it has Similar findings emerge from studies of household provided entrepreneurs with a mechanism for enterprises in other contexts. In particular, the safe storage and transfer of funds. (This space for informal traders is often neglected in phenomenon was discussed in the December 2010 urban planning. The combination of a lack of Kenya Economic Update). Additionally, private fixed space and legal marginalization leave many sector innovations such as small scale lending from household enterprises vulnerable to exploitation Equity Bank have helped increase access to finance. by authorities. Both developments are likely to have boosted the productivity of household enterprises. A second challenge faced by household enterprises is access to financing. Those working A third challenge for household enterprises is lack in non-farm self-employment typically cite lack of skills. Formal schooling typically provides limited of access to capital as a major constraint. A few studies have shown that providing cash grants can education that is directly applicable to household increase entry into self-employment, but evidence enterprises. A number of different approaches is more limited on the effects of: (i) cash grants have been attempted to improve skills for the self- on increasing household enterprise productivity; employed. Broadly, these have included training in and (ii) the effects of micro-credit on either entry business skills, training in technical skills through into self-employment or household enterprise apprenticeships or vocational training, and training productivity. in behavioral skills. In broad summary, rigorous evaluations are scarce (particularly in Africa), and One recent rigorous study in Kenya offers some when rigorously evaluated, programs in all three positive evidence on providing access to savings categories typically are found to have limited for women in non-farm self-employment (Dupas effects. Although apprenticeship and vocational and Robinson 2009). In the study in a rural area training programs are widespread, the evidence of western Kenya, women market vendors offered is particularly weak on their effectiveness. The access to savings accounts in substantial numbers most consistent positive effects have come from 44 December 2012 | Edition No. 7 Special Focus: Creating Jobs programs that train the self-employed in business World Development Report. As Kenyans move off skills like bookkeeping and market research. family farms and to the cities in search of good jobs, Serious evaluations of such programs typically do their future will be determined by whether the find effects on business practices, but this does not country succeeds in generating good jobs. The WDR always translate into higher earnings, even with framework shows how the benefits of “good jobs” intensive training. go beyond the individual worker and extend to the society as a whole. In terms of living standards, jobs A promising training approach in Kenya, the which increase the incomes of women can have Technical and Vocational Vouchers Program benefits for children’s health and education. For (TVVP), is currently being examined with a productivity, jobs in cities that catalyze knowledge rigorous impact evaluation. The program provides spillovers can raise productivity across firms. For social cohesion, jobs which provide an alternative beneficiaries with vouchers to purchase the to idleness and violence among youth can have training they want either from government/public payoffs for society. All of these dynamics reinforce or private sector operators. Initial analysis has the importance of Kenya achieving job growth. found that giving young Kenyan adults vouchers does boost enrollment in training programs. The The analysis in this report highlights five elements study has also found that recipients offered a to a job creation strategy to boost wage job choice between government and private training creation. These five components are as follows: (rather than being restricted to government training) are more likely to enroll and less likely to (i) maintain political and macroeconomic drop out. Future analysis will examine the effects stability of the program on earnings and other outcomes. (ii) reduce the costs and improve reliability of transport and electricity As a whole, the existing body of knowledge on non- (iii) eliminate job-smothering corruption farm self-employment points to two conclusions. (iv) invest in cities so that they continue to flourish as centers of innovation and job First, microfinance programs and training creation approaches like TVVP are very worth pursuing (v) upgrade skills and make schools work for all through rigorously evaluated pilot programs but Kenyans are largely unproven as vehicles to improve the productivity of household enterprises—particularly Although this report emphasizes the central role of given the administrative challenge of scaling up modern wage jobs, it also emphasize the need to such programs. Second, the single most important promote the welfare of the growing ranks of the action that governments can take to improve the non-farm self-employed. welfare of the self-employed is to accept them as part of the legitimate economy and recognize Currently comprising nearly 1 in 5 workers, the that “informal is normal.” This meansencouraging ranks of this sector are likely to grow as the shift urban authorities to provide space to household out of family farming continues. Authorities enterprises to operate and protecting such can directly support this sector principally by enterprises from pervasive harassment. recognizing them as part of the legitimate economy and providing such enterprises space to operate. 5.4 Creating good jobs: The way forward T his special focus began by highlighting that the nature of work is changing in Kenya, and jobs are important for living standards, productivity, A job creation strategy oriented towards modern wage jobs will also boost the welfare of the self- employed and those working in the informal and social cohesion, in the framework of the 2013 wage sector. This is for two reasons. First, many of December 2012 | Edition No. 7 45 Special Focus: Creating Jobs the issues addressed by the 5-point strategy above generation and the electricity network. The need directly affect those outside the modern wage to focus on school quality is the consequence of sector. In particular, as the focus group interviews the largely successful efforts in the last decade presented in this study illustrate, the culture of to expand school access. Though corruption has corruption harms job seekers at all levels. Likewise proved harder to root out and remains a key upgrading skills across the economy will benefit challenge. all young Kenyans. Second, growth of modern wage jobs will generate demand for the goods and Kenya has the potential to take advantage of its services provided by those in the self-employed demographic opportunity and provide good wage and informal wage sectors. jobs for the coming bulge in Kenyans of working age. The country lies at a crossroads. Given the Figure 5.8: With accelerated wage job growth, most Kenyans could be in wage work by 2030 shrinking numbers of young people working on 80 family farms and the inevitable pull of urban life, it is very likely that fewer and fewer Kenyans will Share of employed in wage jobs (%) 75 70 make their living on family farms. The country’s 65 success in addressing impediments to job creation 60 will determine whether new entrants to the labor 55 force end up mostly in non-farm self-employment 50 or in better paying wage jobs. Two scenarios for 45 Kenya’s future in 2030 are presented in Figure 3.20. 40 In one, wage job creation stagnates at its current 35 rates, and non-farm self-employment absorbs most 2010 2020 2030 Year 2040 2050 of the demographic bulge. (These calculations are Historic yearly growth in wage jobs (3.1%) Accelerated yearly growth in wage jobs (4%) for wage employment as a whole, not just modern Source: World Bank computation based on Kenya census data wage employment.) Under this scenario, less than 40 percent of Kenyans will have wage jobs in 2030. To a substantial extent, the country is already In the alternative scenario, wage employment pursuing elements of the strategy laid out here. creation accelerates, and by 2030, a majority of The importance of achieving a peaceful political both men and women will hold wage jobs. The transition in 2013 is widely recognized. During the country will need to overcome key barriers for job last few years, the country has made important creation to achieve this second scenario. investments in the road network as well as power 46 December 2012 | Edition No. 7 REFERENCES ▪ Afrobarometer. (2012). Kenya Round 5 Results. Retrieved from http://www.afrobarometer.org/results/results-by-country-a-m/kenya ▪ Briceño-Garmendia, C.M. and Shkaratan, M. (2010). Africa Infrastructure Country Diagnostic Report. Kenya’s Infrastructure: A Continental Persepctive. IBRD, World Bank. Washington, D.C ▪ Dupas, X. Pascaline Y. and Jonathan, R. (2009). “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.” NBER Working Paper No. 14693. ▪ Iarossi, G. (2009). An assessment of the investment climate in Kenya. Washington, DC. ▪ IMF. (2012). Regional economic Outlook. Sab-Saharan Africa: Maintaining Growth in an uncertain World. Washington, D.C. ▪ Kenya National Bureau of Statistics. (2012). Economic Survey 2012. Nairobi, Kenya. ▪ KNBS. (2012). Leading Economic Indicators. Various Issues. Accessed on http://www.knbs.or.ke ▪ KNBS. (2012). Statistical Release. Gross Domestic Product. Various Issues. Accessed on http://www.knbs.or.ke ▪ KNBS. (Various years). Economic Survey. Various Issues ▪ Krueger, A. (2011). “Comments on “New Structural Economics” by Justin Yifu Lin.” World Bank Research Observer 26: 222-226. ▪ Lee, J., G.M. Milesi-Ferretti, J. Ostry, A. Prati, and L.A. Ricci. ( 2008). Exchange Rate Assessments: CGER Methodologies. IMF Occasional Paper No. 261. (Washington, DC: International Monetary Fund). ▪ Lin, J. Y. (2011). “New Structural Economics: A Framework for Rethinking Development”. World Bank Research Observer 26: 193-221. ▪ McKinsey Global Institute. (2012). Africa at work : Job creation and inclusive growth. ▪ Ministry of Finance. (2012). Quarterly Economic and Budgetary Review. Various Issues. Accessed on http://www.treasury.go.ke ▪ Modigliani, F. (1966). The life-cycle hypothesis of saving, the demand for wealth and the supply of capital. Social Research. Vol. 33, pp. 160-217. ▪ Muiruri, P. (2010). “Women Street Vendors in Nairobi, Kenya: A Situational and Policy Analysis within a Human Rights Framework”. ▪ Republic of Kenya. Office of the Controller of Budget. (2012). Budget Implementation Review Report. Fourth Quarter 2011/2012. ▪ Republic of Kenya. The National Treasury. (Ministry of Finance). (2012). Quarterly Economic and Budgetary Review. Various Issues. Accessed on http://www.treasury.go.ke ▪ United Nations. (2012). “World Population Prospects: 2010 Revision”. Retrieved from http://esa.un.org/unpd/wpp/index.htm ▪ Uwezo. (2012). Are our children learning? Literacy and numeracy across East Africa. Annual Learning Assessment Nairobi, Kenya. ▪ World Bank. (2012). “World Development Report 2013: Jobs”. Washington, DC. doi:10.1596/978-0-8213-9575-2. December 2012 | Edition No. 7 47 ANNEXES Annexes Annex 1: Macroeconomic environment 2008 2009 2010 2011 2012 GDP Growth Rates (%)* 1.5 2.7 5.8 4.4 3.4 Agriculture -4.3 -2.5 6.3 1.6 2.0 Industry 4.7 2.8 5.4 2.8 4.3 Services 2.5 5.1 5.6 5.1 4.1 Fiscal Framework (% of GDP) Total Revenue 21.8 21.9 23.8 23.8 24.7 Total Expenditure 27.2 27.9 29.7 29.2 30.7 Grants -0.1 -0.1 -0.1 0.0 0.0 Budget Deficit (incl grants) -4.3 -5.2 -5.1 -4.3 -4.5 Total Debt 45.6 47.5 49.9 48.5 47.2 External Account (% of GDP)** Exports (fob) 18.7 14.4 16.5 17.1 14.3 Imports (cif) 42.5 32.8 39.1 43.5 38.2 Balance of Trade -15.7 -12.4 -14.7 -18.9 -16.4 Current Account Balance -7.3 -5.3 -7.9 -9.8 -10.3 Financial and Capital Account 5.6 7.8 8.4 9.7 13.3 Overall Balance -1.7 2.5 0.5 -0.1 3.0 Inflation (average)*** 16.2 10.5 4.1 14.0 12.3 Exchange Rate (KES /$)*** 69.2 77.4 79.2 88.8 85.0 Source: World Bank computation based on KNBS and CBK * 2012 Value are for H1. ** 2012 Value are for September. *** 2012 Value are for October Annex 2: GDP growth rates 2008-2012 Kenya, SSA and EAC 2008 2009 2010 2011 2012* 2008-2012 Kenya 1.5 2.7 5.8 4.4 4.3 5.0 SSA (excluding South Africa) 6.2 4.0 6.4 6.5 6.1 5.8 Uganda 7.7 7.0 6.1 5.1 4.2 6.0 Tanzania 7.4 6.0 7.0 6.4 6.5 6.7 Rwanda 11.2 4.1 7.2 8.6 7.7 7.8 Source: World Bank computation based on IMF data * Projection 50 December 2012 | Edition No. 7 Annexes Annex 3: Kenya annual GDP Years GDP, current GDP, constant GDP/capita, GDP Growth prices prices current prices KES billions KES billions U.S. dollars Percent change 2000 968 965 399 0.6 2001 1026 1011 413 4.7 2002 1039 1014 408 0.3 2003 1142 1042 456 2.8 2004 1274 1090 478 4.6 2005 1416 1156 547 6.0 2006 1623 1229 637 6.3 2007 1834 1315 749 7.0 2008 2108 1335 813 1.5 2009 2367 1371 793 2.7 2010 2550 1450 810 5.8 2011 3025 1514 833 4.4 Source: World Bank computation based on IMF data Annex 4: Broad sectors half year growth rates (%) Years Quarters Agriculture Industry Services GDP 2006 1 2.5 4.7 8.0 6.1 2 6.1 5.3 5.1 6.5 2007 1 5.5 6.6 7.4 7.7 2 -0.1 7.6 8.8 6.4 2008 1 -2.7 4.6 2.5 1.6 2 -5.6 4.8 2.5 1.4 2009 1 -2.7 4.6 7.3 4.2 2 -2.3 1.1 3.0 1.4 2010 1 4.6 4.7 4.3 4.8 2 7.8 6.0 6.8 6.6 2011 1 2.1 3.6 5.2 4.3 2 1.1 2.0 5.1 4.4 2012 1 2.0 4.3 4.1 3.4 Source: World Bank computation based on KNBS data Agriculture = Agriculture and forestry + Fishing Industry = Mining and quarrying + Manufacturing + Electricity ans water + Construction Servics = Wholesale and retail trade + Hotels and restaurants + Transport and communication + Financial intermediation + Real estate, renting and business services + Public administration + Education + Other services + FISIM December 2012 | Edition No. 7 51 52 Annex 5: Quarterly growth rates (%) Agriculture Industry Services GDP Years Quarters Q/Q-1 Q/Q-4 (Q:Q-3) / Q/Q-1 Q/Q-4 (Q:Q-3)/ Q/Q-1 Q/Q-4 (Q:Q-3)/ Q/Q-1 Q/Q-4 (Q:Q-3)/ (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) 2007 1 -15.5 8.7 6.5 -2.2 3.8 4.6 3.5 5.6 5.9 -2.8 7.1 6.6 December 2012 | Edition No. 7 2 -9.6 2.0 5.8 5.7 9.3 5.9 2.8 9.3 6.3 0.1 8.3 7.1 3 24.8 -0.1 4.0 3.2 8.9 6.9 4.7 8.5 6.6 9.1 6.3 6.6 4 4.7 -0.2 2.3 -0.5 6.2 7.1 -2.0 9.1 8.1 0.1 6.4 7.0 2008 1 -19.7 -5.2 -0.9 -5.3 2.8 6.8 -3.1 2.2 7.2 -7.6 1.1 5.5 2 -4.6 0.1 -1.3 9.2 6.2 6.0 3.4 2.8 5.6 1.2 2.2 4.0 3 18.1 -5.2 -2.7 3.4 6.4 5.4 5.8 3.8 4.4 9.5 2.6 3.1 4 4.0 -5.9 -4.3 -3.5 3.2 4.7 -4.6 1.1 2.5 -2.1 0.3 1.5 2009 1 -16.0 -1.5 -3.4 -1.4 7.5 5.8 5.9 10.6 4.5 -2.0 6.4 2.8 2 -6.9 -3.9 -4.3 3.6 1.9 4.7 -2.6 4.1 4.9 -2.9 2.1 2.8 3 18.9 -3.3 -3.8 0.2 -1.3 2.7 8.1 6.4 5.5 9.3 1.9 2.6 4 6.2 -1.3 -2.5 1.4 3.7 2.8 -10.7 -0.5 5.1 -3.1 0.8 2.7 2010 1 -9.9 5.9 -0.7 -0.8 4.4 2.1 11.3 4.6 3.7 1.9 4.8 2.4 2 -9.2 3.3 0.8 4.2 5.0 2.9 -3.1 4.1 3.7 -2.9 4.8 3.1 3 25.0 8.6 4.0 2.2 7.2 5.1 8.6 4.6 3.2 10.5 6.0 4.1 4 4.5 6.9 6.3 -0.9 4.8 5.4 -6.7 9.3 5.6 -1.8 7.3 5.8 2011 1 -15.6 0.2 4.9 -0.7 4.9 5.5 7.9 6.0 5.9 -0.2 5.1 5.8 2 -5.5 4.2 5.1 1.7 2.4 4.8 -4.6 4.3 6.0 -4.4 3.5 5.5 3 20.3 0.3 2.9 0.6 0.8 3.2 9.5 5.1 6.1 11.0 4.0 5.0 4 6.2 1.9 1.6 1.5 3.3 2.8 -6.7 5.1 5.1 -1.0 4.8 4.4 2012 1 -15.3 2.3 2.1 0.7 4.7 2.8 7.1 4.3 4.7 -1.5 3.4 4.0 2 -6.0 1.7 1.5 1.0 3.9 3.2 -4.9 4.0 4.6 -4.5 3.3 3.9 Source: World Bank computation based on KNBS data Annexes Annexes Annex 6: Inflation Year Month Overall inflation Food Inflation Energy Inflation Core Inflation 2011 January 5.4 8.6 5.7 1.4 February 6.5 9.8 7.8 1.8 March 9.2 15.1 9.6 2.5 April 12.1 19.1 12.7 3.6 May 13.0 20.1 14.4 4.0 June 14.5 22.5 15.5 4.8 July 15.5 24.0 16.2 5.6 August 16.7 23.9 16.8 8.5 September 17.3 24.4 17.6 9.1 October 18.9 26.2 19.2 10.4 November 19.7 26.2 20.6 11.8 December 18.9 25.0 19.7 11.6 2012 January 18.3 24.6 17.3 12.1 February 16.7 22.1 14.8 12.1 March 15.6 20.3 13.0 12.0 April 13.1 16.2 11.1 11.0 May 12.2 14.6 10.0 11.3 June 10.1 10.5 9.0 10.7 July 7.7 6.6 7.4 9.7 August 6.1 3.6 6.7 9.0 September 5.3 2.9 6.0 8.3 October 4.1 1.4 5.0 7.0 Source: World Bank computation based on KNBS data December 2012 | Edition No. 7 53 Annexes Annex 7: Tea production and exports Production Price Exports Exports value Year Month MT KES/Kg MT KES million 2010 January 37,713 227 37,495 8,559 February 34,834 240 37,751 8,995 March 39,175 231 34,692 8,454 April 35,857 217 27,945 6,629 May 35,618 199 35,423 7,962 June 29,815 192 40,653 8,118 July 24,401 191 40,687 8,120 August 23,177 224 31,413 6,588 September 28,883 226 28,692 6,406 October 34,140 223 24,737 5,674 November 37,063 224 35,137 8,091 December 38,330 237 35,410 8,022 2011 January 35,999 256 31,110 7,871 February 26,711 251 28,814 7,223 March 22,459 243 35,852 8,890 April 31,482 241 32,084 7,900 May 32,856 245 31,898 7,825 June 28,955 264 34,957 7,825 July 26,343 283 33,629 8,907 August 24,471 294 32,693 9,266 September 30,493 292 26,430 9,333 October 39,926 291 29,422 7,686 November 36,825 269 33,353 8,855 December 41,393 251 35,187 9,334 2012 January 36,205 250 35,382 9,145 February 18,412 245 37,656 9,123 March 17,859 251 31,280 9,415 April 18,118 256 26,816 7,804 May 37,383 264 25,060 6,445 June 30,197 279 29,148 7,770 July 24,306 288 28,054 7,813 August 31,920 288 -- -- Source: KNBS 54 December 2012 | Edition No. 7 Annexes Annex 8: Coffee production and exports Production Price Exports Exports value Year Month MT KES /Kg MT KES million 2010 January 4,473 360 2,235 672 February 5,243 418 3,592 1,172 March 5,930 374 4,408 1,660 April 3,221 284 4,206 1,548 May 2,496 239 3,860 1,583 June 1,699 233 4,523 1,632 July 0 0 4,872 458 August 5,140 544 2,795 1,038 September 2,570 404 3,988 1,804 October 2,634 370 2,971 1,202 November 4,065 473 3,252 1,241 December 1,467 538 2,432 867 2011 January 3,774 682 3,067 1,282 February 3,851 640 3,261 1,671 March 3,639 587 4,204 2,155 April 2,298 474 4,254 2,294 May 0 0 3,878 1,963 June 1,136 596 2,677 1,322 July 3,305 592 2,857 1,749 August 4,558 582 3,096 1,955 September 2,904 593 3,317 2,161 October 1,388 543 3,298 2,134 November 1,331 541 1,990 1,173 December 1,800 603 1,672 940 2012 January 4,770 544 3,094 1,454 February 6,505 369 3,668 1,937 March 3,317 389 5,069 2,550 April 4,801 342 4,625 2,369 May 5,472 303 4,924 2,275 June 3,884 258 4,887 2,098 July 3,086 298 5,727 2,397 August 3,948 277 -- -- September 4,474 265 -- -- Source: KNBS December 2012 | Edition No. 7 55 Annexes Annex 9: Horticulture exports Exports Exports value Year Month MT KES million 2010 January 11,714 3,436 February 10,286 2,919 March 14,461 4,535 April 12,197 2,791 May 13,394 3,192 June 12,386 2,886 July 11,818 2,791 August 12,251 4,372 September 13,265 3,191 October 15,290 3,956 November 15,850 4,279 December 4,219 1,824 2011 January 16,231 7,470 February 17,531 7,368 March 21,287 7,548 April 23,448 7,159 May 21,839 8,315 June 17,730 6,836 July 15,420 5,531 August 16,128 6,582 September 15,658 6,745 October 17,553 9,508 November 17,277 6,647 December 16,145 8,915 2012 January 16,191 9,029 February 17,196 7,014 March 20,856 7,070 April 18,713 6,676 May 18,267 6,312 June 16,454 6,544 July 18,384 8,086 August 17,175 6,110 September 17,998 7,881 Source: KNBS 56 December 2012 | Edition No. 7 Annexes Annex 10: Local electricity generation by source (million KWh) Year Month Hydro Geo-thermal Thermal Total 2010 January 173 111 166 451 February 146 97 169 412 March 183 116 173 472 April 237 111 159 507 May 294 133 123 550 June 305 132 113 551 July 325 122 124 572 August 318 126 125 569 September 314 125 132 571 October 296 124 165 585 November 297 120 164 580 December 307 125 155 587 2011 January 296 119 188 603 February 246 105 200 551 March 259 126 225 610 April 237 120 224 582 May 264 124 222 610 June 268 118 200 586 July 263 122 226 611 August 254 125 234 614 September 249 121 224 595 October 253 122 225 601 November 263 115 208 587 December 331 125 156 613 2012 January 330 129 169 627 February 332 125 159 616 March 293 134 194 620 April 273 124 175 572 May 323 132 159 615 June 342 129 147 618 July 358 119 168 646 August 348 122 176 645 September 358 119 168 646 Source: KNBS December 2012 | Edition No. 7 57 Annexes Annex 11: Soft drinks, sugar, galvanised sheets and cement production Galvanised Cement Soft drinks Sugar Year Month sheets “000” litres MT MT MT 2010 January 29,405 48,100 14,254 290,805 February 31,178 42,982 13,700 266,889 March 33,984 45,388 20,095 300,610 April 29,352 43,801 18,929 284,987 May 29,445 34,465 18,842 294,158 June 29,588 37,828 16,006 312,176 July 29,332 33,495 16,790 334,444 August 28,525 41,911 16,457 323,478 September 29,593 45,595 16,299 319,464 October 30,435 43,669 18,488 351,963 November 29,333 50,822 16,219 323,447 December 31,163 55,414 15,331 307,385 2011 January 34,446 55,974 22,094 332,632 February 32,457 52,069 22,386 302,747 March 36,156 53,842 22,928 323,358 April 31,162 52,061 20,957 330,535 May 26,622 49,130 24,744 343,746 June 28,910 38,818 24,677 332,994 July 28,478 25,884 24,906 360,923 August 28,580 26,060 24,659 348,639 September 29,674 22,815 17,988 352,099 October 28,540 28,990 16,619 320,962 November 27,366 32,689 22,104 294,007 December 38,962 36,729 24,033 326,361 2012 January 34,317 53,852 24,605 318,615 February 32,009 49,480 23,599 345,153 March 37,363 52,342 21,446 370,062 April 29,331 44,914 19,794 339,456 May 24,359 40,503 22,092 344,080 June 27,391 45,111 23,141 357,721 July 22,073 41,607 23,482 354,453 August 23,045 -- 23,777 360,389 Source: KNBS 58 December 2012 | Edition No. 7 Annexes Annex 12: Tourism arrivals Year Month JKIA MIA Total 2009 January 54,167 24,315 78,482 February 54,503 24,542 79,045 March 52,320 18,866 71,186 April 52,458 7,026 59,484 May 50,941 4,181 55,122 June 61,946 7,113 69,059 July 83,972 13,689 97,661 August 82,658 17,656 100,314 September 63,288 12,734 76,022 October 67,951 13,229 81,180 November 65,030 19,027 84,057 December 74,682 24,579 99,261 2010 January 63,734 29,580 93,314 February 66,562 25,392 91,954 March 63,975 22,673 86,648 April 55,739 8,016 63,755 May 61,175 6,642 67,817 June 71,077 8,395 79,472 July 97,920 18,839 116,759 August 77,471 23,993 101,464 September 78,300 17,281 95,581 October 80,165 18,769 98,934 November 66,900 23,772 90,672 December 79,568 29,346 108,914 2011 January 79,142 35,770 114,912 February 69,221 31,211 100,432 March 71,734 26,027 97,761 April 66,276 10,181 76,457 May 74,148 5,167 79,315 June 72,944 6,676 79,620 July 131,519 12,037 143,556 August 113,438 23,402 136,840 September 85,397 17,317 102,714 October 88,918 18,741 107,659 November 89,394 19,641 109,035 December 94,355 21,624 115,979 December 2012 | Edition No. 7 59 Annexes Annex 12: Tourism arrivals (continued) Year Month JKIA MIA Total 2012 January 83,450 28,134 111,584 February 80,405 24,636 105,041 March 75,668 19,965 95,633 April 72,023 7,531 79,554 May 71,287 4,830 76,117 June 90,972 5,934 96,906 July 108,136 12,671 120,807 August 108,869 17,771 126,640 Source: KNBS 60 December 2012 | Edition No. 7 Annexes Annex 13: Exchange rate Year Month USD UK POUND EURO 2010 January 75.8 122.5 108.3 February 76.7 120.1 105.1 March 76.9 115.8 104.5 April 77.3 118.5 103.7 May 78.5 115.2 98.8 June 81.0 119.6 99.0 July 81.4 124.3 103.9 August 80.4 125.9 103.8 September 80.9 125.9 105.6 October 80.7 128.0 112.2 November 80.5 128.5 110.1 December 80.6 125.7 106.5 2011 January 81.0 127.7 108.2 February 81.5 131.5 111.3 March 84.2 136.1 117.9 April 83.9 137.1 121.1 May 85.4 139.5 122.4 June 89.0 144.4 128.1 July 89.9 145.0 128.5 August 92.8 151.9 133.0 September 96.4 152.1 132.7 October 101.3 159.4 138.7 November 93.7 148.2 127.1 December 86.7 135.1 114.1 2012 January 86.3 133.9 111.4 February 83.2 131.4 110.1 March 82.9 131.2 109.6 April 83.2 133.2 109.6 May 84.4 134.3 108.0 June 84.8 132.0 106.5 July 84.1 131.3 103.6 August 84.1 132.1 104.2 September 84.5 136.1 108.7 October 85.0 136.6 110.2 Source: World Bank computation based on CBK data December 2012 | Edition No. 7 61 Annexes Annex 14: Interest rate Overall Average Interest weighted Year Month Interbank 91-Tbill CBR deposit Savings rate lending rate % spread rate 2010 January 3.7 6.6 - 5.0 1.8 15.0 10.0 February 2.4 6.2 - 4.9 1.8 15.0 10.1 March 2.2 6.0 7.0 4.7 1.8 15.0 10.2 April 2.5 5.2 7.0 4.5 1.8 14.6 10.1 May 2.2 4.2 6.8 4.6 1.8 14.4 9.8 June 1.2 3.0 6.8 4.5 1.7 14.4 9.9 July 1.4 1.6 6.8 3.8 1.6 14.3 10.4 August 1.7 1.8 6.8 3.7 1.5 14.2 10.4 September 1.2 2.0 6.0 3.5 1.5 14.0 10.4 October 1.0 2.1 6.0 3.6 1.5 13.9 10.3 November 1.0 2.2 6.0 3.5 1.4 13.9 10.4 December 1.2 2.3 6.0 3.6 1.5 13.9 10.3 2011 January 1.0 2.0 6.0 3.4 1.3 14.0 10.6 February 1.0 3.0 6.0 3.4 1.4 13.9 10.5 March 1.0 3.0 6.0 3.5 1.4 13.9 10.4 April 4.0 3.0 6.0 3.5 1.4 13.9 10.5 May 6.0 5.0 6.0 3.6 1.4 13.9 10.3 June 6.0 9.0 6.0 3.7 1.4 13.9 10.2 July 9.0 9.0 6.0 3.9 1.4 14.1 10.3 August 14.0 9.0 6.0 4.1 1.4 14.3 10.3 September 7.0 12.0 7.0 4.2 1.3 14.8 10.6 October 15.0 15.0 7.0 4.8 1.3 15.2 10.4 November 29.0 16.0 11.0 5.7 1.4 18.5 12.7 December 22.0 18.0 17.0 7.0 1.6 20.0 13.1 2012 January 19.0 21.0 18.0 7.7 1.6 19.5 11.9 February 18.0 20.0 18.0 8.0 1.7 20.3 12.3 March 24.0 18.0 18.0 8.0 1.7 20.3 12.3 April 16.0 16.0 18.0 9.0 1.6 20.2 11.2 May 17.0 11.0 18.0 8.4 1.6 20.1 11.7 June 17.0 10.0 18.0 7.9 1.5 20.3 12.4 July 14.0 12.0 17.0 8.3 1.7 20.2 11.9 August 9.0 11.0 17.0 7.9 1.6 20.1 12.3 September -- -- 13.0 -- -- -- -- Source: CBK * World Bank computations 62 December 2012 | Edition No. 7 Annex 15: Credit to private sector Annexes Other activities Year Total private Real estate Business services Agriculture Trade insurance Private Consumer Month sector KES Manufacturing construction communication Transport and Finance and quarrying durables million Building and Mining and households 2010 January 15.7 17.8 -6.3 25.3 -12.3 12.7 55.8 37.3 121.6 21.4 42.5 -8.8 16.6 February 14.3 10.9 6.1 28.9 -2.5 10.3 60.9 38.3 7.3 24.9 46.6 -8.8 -7.8 March 15.0 10.7 3.5 26.2 -1.9 17.3 64.8 38.0 6.1 34.5 41.7 0.3 -19.7 April 16.0 11.6 3.4 35.1 -3.1 20.4 73.8 44.6 1.1 29.0 36.8 -2.8 -16.3 May 17.0 18.6 7.8 36.8 -12.4 22.2 37.5 75.2 -22.9 34.0 25.2 -7.7 -7.5 June 17.2 23.6 14.5 31.0 -22.3 21.7 19.2 88.6 -23.5 40.0 17.8 -4.1 -16.7 July 19.4 16.8 15.9 33.7 -7.8 9.3 7.9 88.8 -12.7 44.4 14.1 2.8 -7.7 August 19.8 19.0 14.4 35.6 -21.1 2.9 12.2 101.8 -11.8 41.8 16.0 9.8 -11.7 September 22.4 9.8 24.4 29.0 -16.3 2.1 14.8 100.4 193.9 14.0 16.9 17.7 16.6 October 22.2 12.7 31.4 29.4 -26.2 1.8 -42.8 90.6 206.0 14.1 31.6 30.5 13.8 November 23.3 9.9 30.5 25.5 -27.2 1.1 2.1 90.2 102.3 14.1 8.9 39.6 11.3 December 21.3 11.9 27.7 13.7 -28.7 -5.9 -4.2 87.1 78.0 36.4 12.5 41.6 4.1 2011 January 21.6 20.8 30.3 33.5 -1.9 -5.5 -8.2 96.2 -12.0 17.0 15.2 34.4 -7.1 February 24.4 17.4 27.4 29.5 -2.2 2.3 -19.1 93.6 23.2 21.6 17.8 18.1 18.8 March 26.1 20.8 26.6 28.8 1.1 -3.0 -22.9 95.1 59.5 20.5 16.9 25.3 35.8 April 27.7 24.0 26.6 22.1 3.9 2.8 -14.0 96.6 53.7 23.5 50.2 21.0 22.7 May 28.6 21.4 28.4 29.0 15.1 3.8 -6.5 63.0 45.9 22.0 27.2 13.8 49.2 June 31.8 27.7 30.6 30.6 27.1 13.6 2.4 44.5 56.0 29.3 30.1 13.6 59.8 July 33.3 35.8 28.5 39.5 38.7 26.1 26.9 47.2 40.0 27.4 33.5 9.0 41.2 August 33.9 33.1 29.0 37.5 36.5 29.2 25.8 42.4 45.2 33.8 37.5 4.5 43.9 September 37.2 38.0 38.6 40.1 55.6 28.5 23.8 37.7 46.6 40.0 38.6 4.4 50.1 October 36.1 28.8 39.6 37.8 53.4 32.6 24.5 35.7 45.6 39.9 35.8 3.4 48.8 December 31.1 27.6 30.3 24.3 55.7 45.3 31.2 39.0 73.3 32.5 26.7 -5.8 47.4 December 2012 | Edition No. 7 63 64 Annex 15: Credit to private sector (continued) December 2012 | Edition No. 7 Total private Other activities Year Real estate Trade Private Agriculture Business services Month sector KES Manufacturing construction communication insurance Consumer quarrying durables million Transport and Finance and Mining and households Building and 2012 January 28.6 24.7 24.8 27.4 54.2 40.9 14.1 38.3 93.7 24.4 21.3 -15.4 53.7 February 26.6 21.1 22.2 26.3 65.2 31.1 22.9 39.4 28.3 17.4 19.2 -0.5 40.2 March 25.2 16.6 30.5 24.0 54.4 36.3 28.4 36.7 18.0 17.4 19.9 -5.0 23.7 April 24.2 14.5 29.7 27.4 59.4 25.0 19.3 29.0 37.9 15.7 -7.4 -5.7 47.6 May 23.1 14.3 26.9 25.4 51.8 28.7 17.9 29.7 10.0 13.0 16.3 0.0 25.0 June 17.6 10.1 23.4 21.4 49.9 10.3 10.0 27.8 1.8 7.0 14.7 -5.1 16.2 July 15.3 3.6 19.0 10.5 36.7 -2.9 10.7 26.4 3.3 7.7 13.7 -1.3 27.0 August 13.3 3.9 14.8 7.8 35.2 -2.7 16.2 26.2 -10.4 8.1 12.5 0.5 21.7 September 9.0 0.7 7.3 3.2 27.8 -4.3 20.3 24.8 -13.7 6.0 8.0 0.9 8.8 Source: CBK Annexes Annexes Annex 16: Money aggregate Broad Foreign Broad Money Money money currency money ( M1 ) ( M0 ) Year Month (with FCDs deposits supply of residents) (FCDs) ( M2 ) M3 2010 January 19.2 14.2 20.1 16.2 4.9 February 20.5 10.9 22.1 20.3 6.7 March 22.3 18.6 22.9 13.9 9.6 April 20.9 14.0 22.1 24.5 14.3 May 24.9 20.6 25.6 25.0 13.5 June 26.2 19.6 27.3 27.7 16.0 July 24.6 16.6 26.0 22.2 16.7 August 23.7 14.4 25.3 18.7 16.6 September 26.0 20.1 27.0 23.9 19.5 October 24.7 25.0 24.6 23.7 18.8 November 23.1 19.1 23.8 27.6 20.3 December 21.6 16.8 22.4 30.5 21.8 2011 January 20.4 14.1 21.5 24.3 18.0 February 20.5 20.7 20.5 28.0 17.5 March 19.6 20.7 19.4 29.7 18.5 April 18.9 23.3 18.2 24.3 19.0 May 16.5 16.1 16.6 23.3 17.3 June 15.2 19.2 14.5 21.2 17.4 July 16.4 27.0 14.7 19.6 19.2 August 18.1 35.4 15.2 20.4 19.7 September 19.3 52.1 14.3 16.9 18.2 October 20.7 63.6 14.0 19.6 16.2 November 18.3 47.4 13.8 12.4 16.3 December 19.1 50.9 14.1 7.9 11.4 2012 January 17.1 59.7 10.6 5.3 13.0 February 15.2 40.5 11.2 5.7 12.5 March 14.5 34.0 11.5 1.4 13.1 April 15.1 27.7 13.0 6.1 8.1 May 15.6 34.9 12.5 1.7 10.6 June 15.5 29.8 13.1 0.6 6.9 July 14.2 15.8 13.9 2.3 3.6 Source: CBK December 2012 | Edition No. 7 65 Annexes Annex 17: Mobile payments Number of Number of Number of Value of Year Month agents customers transactions transactions (millions) (millions) (Billions) 2009 January 7,512 5.8 11.1 28.7 February 13,358 6.3 13.6 33.8 March 14,790 6.5 13.8 34.0 April 16,029 6.8 15.0 36.8 May 16,641 7.2 16.0 38.2 June 18,504 7.4 16.9 40.3 July 18,780 7.7 17.0 40.7 August 19,803 8.0 18.4 45.4 September 20,631 8.4 19.9 48.6 October 22,476 8.6 20.0 47.5 November 23,012 8.9 21.7 52.3 December 24,850 9.5 20.1 48.5 2010 January 25,394 9.7 20.8 49.9 February 27,622 10.0 24.1 56.1 March 29,570 10.2 22.7 51.8 April 31,036 10.5 24.7 58.1 May 31,902 10.9 25.0 58.1 June 32,974 13.5 26.9 61.8 July 33,864 14.6 26.8 61.5 August 35,373 15.2 29.4 68.5 September 37,009 15.7 31.3 71.8 October 38,201 16.1 30.0 70.3 November 39,449 16.4 29.1 75.9 December 33,968 16.7 28.2 75.4 2011 January 34,572 16.9 28.5 76.3 February 36,198 17.5 32.7 89.0 March 37,309 17.8 32.4 86.1 April 38,485 17.9 35.3 94.4 May 42,840 18.1 35.8 92.6 June 43,577 18.3 38.0 99.7 July 44,762 18.6 39.3 107.4 August 46,234 18.9 39.2 108.6 September 47,874 19.2 40.6 109.1 October 49,091 19.5 41.2 112.3 November 50,471 19.2 41.7 118.1 December 52,315 18.8 40.2 114.1 67 December 2012 | Edition No. 7 Annexes Annex 17: Mobile payments (continued) Number of Number of Number of Value of Year Month agents customers transactions transactions (millions) (millions) (billions) 2012 January 53,685 18.8 41.8 116.7 February 55,726 19.2 45.8 126.1 March 56,717 19.5 44.4 117.4 April 59,057 19.7 48.0 128.4 May 61,313 19.8 47.9 124.0 June 63,165 19.6 49.4 129.3 July 64,439 19.4 49.7 131.4 August 67,301 19.7 48.9 130.7 Source: CBK December 2012 | Edition No. 7 68 Annexes Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) Year Month 2009 January 3,198.9 8,001 February 2,474.8 7,063 March 2,805.0 7,609 April 2,800.1 8,168 May 2,852.6 8,500 June 3,294.6 8,447 July 3,273.1 9,172 August 3,102.7 9,496 September 3,005.4 9,712 October 3,066.0 9,713 November 3,189.6 10,345 December 3,247.4 10,428 2010 January 3,565.3 10,067 February 3,629.4 10,325 March 4,072.9 10,857 April 4,233.2 11,009 May 4,241.8 10,137 June 4,339.3 9,774 July 4,438.6 10,466 August 4,454.6 10,015 September 4,629.8 10,788 October 4,659.6 11,119 November 4,395.2 11,006 December 4,432.5 11,578 2011 January 4,464.9 11,892 February 4,240.2 12,226 March 3,887.1 12,320 April 4,029.2 12,811 May 4,078.1 12,570 June 3,968.1 12,414 July 3,738.5 12,143 September 3,284.1 10,913 October 3,507.3 11,955 November 3,155.5 12,046 December 3,205.0 12,218 69 December 2012 | Edition No. 7 Annexes Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) (continued) Year Month 2012 January 3,224.9 12,633 February 3,303.8 12,952 March 3,366.9 13,212 April 3,546.7 13,214 May 3,650.9 12,393 June 3,703.9 12,880 July 3,832.4 13,009 August 3,865.8 13,091 September 3,972.0 -- October 4,143.0 -- Source: World Bank computation based on NSE and NYSE data Annex 19: Foreign investors participation (in/out flows) - KES millions Foreign Foreign sales Equity % overall net purchases (FS) market % of FP TO foreign Year Month % of FS to ET (FP) turnover (ET) ET participation to ET 2011 January 4948 2961 9462 52.3 31.3 0.4 February 2408 1786 6216 38.7 28.7 0.3 March 3226 1674 7984 40.4 21.0 0.3 April 3160 6184 7883 40.1 78.4 0.6 May 2909 6243 8406 34.6 74.3 0.5 June 3527 5124 7047 50.0 72.7 0.6 July 4487 3314 7132 62.9 46.5 0.5 August 3410 2789 6109 55.8 45.7 0.5 September 2646 2111 5453 48.5 38.7 0.4 October 3242 2523 4466 72.6 56.5 0.6 November 2820 2789 3928 71.8 71.0 0.7 December 2709 1774 3973 68.2 44.7 0.6 2012 January 1118 1930 3544 31.5 54.5 0.4 February 1999 1204 3493 57.2 34.5 0.5 March 3860 1209 6386 60.4 18.9 0.4 April 4912 3141 7640 64.3 41.1 0.5 May 5141 4042 8815 58.3 45.9 0.5 June 3880 2241 6214 62.4 36.1 0.5 July 3134 2306 6038 51.9 38.2 0.5 August 3327 2279 5681 58.6 40.1 0.5 Source: AAK December 2012 | Edition No. 7 70 Annexes Annex 20: Nominal and real exchange rate NEER REER Year Month 2003=100 2003=100 2009 January 107 72 February 107 71 March 107 71 April 107 71 May 107 71 June 108 72 July 107 71 August 107 71 September 107 71 October 107 71 November 107 71 December 107 70 2010 January 107 71 February 107 71 March 107 71 April 107 71 May 107 71 June 110 73 July 112 74 August 111 74 September 112 74 October 114 76 November 113 75 December 113 74 2011 January 114 74 February 115 73 March 119 76 April 120 74 May 122 75 June 127 77 July 128 77 August 133 79 September 135 80 October 141 82 November 130 75 71 December 2012 | Edition No. 7 Annexes Annex 20: Nominal and real exchange rate (continued) NEER REER Year Month 2003=100 2003=100 2012 December 119 68 January 119 67 February 116 66 March 115 65 April 115 65 May 115 65 June 115 65 July 114 65 September -- -- October -- -- Source: CBK Annex 21: ICT penetration 2007 2008 2009 2010 2011 2012* Population 21,027,161 21,548,388 22,100,911 22,653,434 23,990,000 24,617,051 >15yrs Mobile 9,304,818 16,200,000 19,400,000 22,000,000 25,270,000 29,703,439 subscriptions Mobile money 169,114 3,038,523 7,153,028 9,643,408 17,300,000 19,505,702 customers Internet users 2,770,296 2,900,205 3,648,406 8,700,000 12,538,030 14,032,366 Source: CCK and World Bank *FY 2011/2012 Annex 22: Budget implemenation Total Expenditure in KES million Revised Gross Actual Deviation Absorption % Estimates Expenditure 2011/2012 Agriculture and Rural Development 43694.7 29512.6 14,182.1 67.5 Trade Tourism and Industry 13128.6 11717.2 1,411.4 89.2 Physical Infrastructure 215091.2 103918.1 111,173.1 48.3 Environment Water and Irrigation 52809.2 30692.4 22,116.8 58.1 Human Resource Development 232500.8 203854.2 28,646.6 87.7 Research Innovation and Technology 63196.1 37282.6 25,913.5 59.0 Governance, Justice, Law and Order 117825.8 98986.9 18,838.9 84.0 Public Administration 102625.2 74234.8 28,390.4 72.3 Special Programs 41571.9 27472.9 14,099.0 66.1 National Security 78560 78695 -135.0 100.2 Total 961003.5 696366.7 264,636.8 72.5 Source: World Bank computation based on office of the Budget Controller. Budget Implementation Review report. 4th Q 2011/2012 December 2012 | Edition No. 7 72 73 Annex 23: Fiscal position Actual % of GDP 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Revenue and grants 22.7 21.8 22.5 23.3 22.6 25.1 24.6 23.1 Total Revenue 21.6 20.5 21.6 22.0 21.8 23.9 24.0 22.6 Tax Revenue 19.8 18.7 19.7 20.2 20.4 21.9 21.9 20.9 December 2012 | Edition No. 7 Income Tax 7.0 7.2 7.2 8.0 8.2 8.8 9.3 9.5 VAT 5.7 5.0 5.6 5.7 5.7 6.0 6.2 5.6 Import Duty 1.8 1.4 1.6 1.7 1.6 1.7 1.7 1.6 Excise Duty 3.3 3.3 3.3 3.2 3.1 3.0 2.9 2.4 Other Revenues 2.1 1.8 2.0 1.7 1.7 2.4 1.9 1.9 Appropriation-in-aid 1.8 1.8 1.9 1.8 1.4 1.9 2.1 1.7 Grants 1.1 1.3 0.9 1.3 0.8 1.3 0.7 0.5 Expenditure & Net Lending 22.6 25.2 24.3 27.3 26.6 29.5 29.1 28.7 Recurrent 19.0 20.2 17.8 20.6 19.5 20.8 21.3 19.6 Wages and Salaries 7.9 7.4 7.4 7.4 6.6 7.0 7.1 6.8 Interest Payments 2.3 2.7 2.5 2.4 2.3 2.6 2.7 2.8 Development and Net lending 3.4 4.5 4.7 6.7 7.2 8.7 7.9 9.1 Deficit (commitment Basis) Excluding grants -1.0 -4.7 -2.7 -5.2 -4.8 -5.7 -5.2 -6.0 Including grants 0.1 -3.4 -1.8 -3.9 -4.0 -4.4 -4.5 -5.6 Financing -0.5 2.4 2.1 -0.4 5.2 7.1 4.3 5.2 Foreign -0.1 0.1 -0.1 0.3 1.8 0.9 1.0 3.0 Domestic Borrowing -0.5 2.3 2.2 -0.7 3.4 6.2 3.2 2.2 Public Debt to GDP (Net) - 42.6 39.5 42.2 44.9 48.3 44.6 External Debt 23.3 22.6 24.2 23.2 25.9 23.4 Domestic Debt 23.5 21.9 23.3 26.9 27.4 26.0 Source: World Bank computation based on Ministry of Finance. Quarterly Economic and Budgetary Review,August 2012 Annexes Annex 24: 12-months cumulative balance of payments (US$ millions) Annexes 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 1. CURRENT ACCOUNT -492 -595 -293 145 -133 -253 -511 -1034 -1973 -1671 -2512 -3330 -4290 Balance of Trade -1279 -1273 -828 -636 -1007 -1397 -2226 -2996 -4260 -3892 -4642 -6440 -6831 2. MERCHANDISE ACCOUNT -1558 -1614 -1195 -1364 -1906 -2488 -3817 -4936 -6444 -5768 -7169 -9007 -9996 2.1 Exports (fob) 1782 1891 2162 2426 2726 3462 3516 4132 5048 4528 5225 5807 5971 Coffee 154 94 84 81 89 128 138 166 155 201 209 222 269 Tea 463 435 437 435 456 561 656 693 924 892 1159 1153 1156 Horticulture 209 241 258 351 416 433 509 607 763 692 725 678 672 Manufactured Goods 162 175 194 218 292 350 422 513 625 526 608 729 712 Other 793 947 1190 1342 1473 1990 1792 2153 2580 2216 2525 3026 3161 2.2 Imports (cif) 3339 3504 3357 3790 4632 5950 7333 9069 11492 10296 12395 14814 15966 Oil 850 721 607 879 1119 1341 1745 1919 3051 2192 2673 4081 4056 Chemicals 431 479 508 591 746 833 1004 1156 1446 1324 1603 1947 2057 Manufactured Goods 361 437 421 497 687 779 1065 1435 1589 1411 1774 2250 2296 Machinery & Transport Equipment 944 1162 1060 969 1119 1783 2252 2800 3063 3065 3808 3686 4392 Other 753 705 760 854 961 1214 1267 1759 2343 2304 2537 2848 3166 3. SERVICES 1065 1019 902 1509 1773 2234 3306 3902 4470 4097 4657 5676 5706 3.1 Non-factor services 279 341 367 728 898 1091 1591 1940 2184 1876 2527 2566 3164 3.2 Income account -133 -123 -143 -88 -127 -109 -70 -143 -45 -38 -158 7 -118 3.3 Current Transfers account 920 801 678 869 1001 1253 1785 2106 2331 2259 2288 3103 2659 of which remittances 382 408 574 611 609 642 891 1123 4. CAPITAL & FINANCIAL ACCOUNT 710 967 351 219 250 560 1186 1888 1505 2451 2675 3288 5534 4.1 Capital Account 63 69 81 163 145 188 211 267 294 290 154 235 216 4.2 Financial Account 647 898 270 56 105 372 975 1621 1210 2161 2522 3053 5318 4.2.1.1 Official, medium- & long-term -170 -284 -44 -229 -195 -216 -202 -16 106 466 308 340 1221 4.2.1.2 Private, medium- & long-term 96 307 257 84 -20 458 38 592 72 44 176 35 -68 4.2.1.2.3 Direct Investment (FDI) 143 -18 -42 55 -7 -55 -11 438 153 127 106 107 96 4.2.1.3 Commercial Banks (net) -221 95 -172 104 -122 -202 -156 -5 15 494 61 -213 164 December 2012 | Edition No. 7 74 75 December 2012 | Edition No. 7 Annex 24: 12-months cumulative balance of payments (US$ millions)(continued) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 4.2.2 Short Term and Net Errors & 942 780 229 97 442 332 1296 1050 1017 1158 1977 2891 4001 Omissions (NEO) Short Term (incl. portfolio flows) 379 396 348 423 443 568 714 1032 995 577 1130 1678 2235 Net Errors and Omissions (NEO) 562 384 -119 -326 -1 -236 582 18 22 581 847 1213 1766 5. OVERALL BALANCE 217 372 59 365 117 306 675 854 -469 781 163 -43 1244 Memo: Gross Reserves 1398 1459 1614 1887 2078 2534 3331 4557 4641 5064 5123 6045 7214 Official 897 1064 1067 1480 1519 1799 2415 3355 2875 3847 4002 4248 5476 Commercial Banks 501 395 547 408 560 735 916 1202 1765 1217 1121 1797 1738 Imports cover (calender year) 2.7 3.0 3.2 4.2 3.4 3.2 3.55 4.00 2.75 4.08 3.55 3.12 3.8 Import cover (36 months imports) 3.3 4.4 4.1 3.98 3.89 4.84 3.36 4.08 3.85 3.71 4.3 GDP market price (KES m) 967838 1020022 1035374 1131783 1274328 1415724 1622434 1833511 2107589 2366984 2549825 3024782 3548526 GDP market price (US$ m) 12293 12963 13018 14888 15688 19397 23302 28964 27053 31359 31665 34059 41747 Source: CBK Annexes Annexes Annex 25: Growth outlook 2008 2009 2010 2011* 2012** 2013*** 2014*** BASELINE GDP 1.5 2.6 5.8 4.4 4.3 5.0 5.1 Private Consumption -1.3 5 7.2 2.8 4.2 5.4 6.5 Government Consumption 2.5 3.8 9.2 10.6 8.0 4.6 3.7 Gross Fixed Investment 8.8 5.5 5 16.1 4.6 6.3 4.6 Exports, GNFS 7.5 -7 6.1 8.9 3.1 5.9 6.5 Imports, GNFS 6.6 -0.2 3 8.6 3.3 5.8 6.3 Output Gap (% of GDP) -- -- -- -- -0.6 -0.4 0.1 HIGH CASE SCENARIO GDP 1.5 2.6 5.8 4.4 4.3 5.6 5.8 Private Consumption -1.3 5 7.2 2.8 4.2 6.0 6.5 Government Consumption 2.5 3.8 9.2 10.6 4.7 4.6 3.7 Gross Fixed Investment 8.8 5.5 5 16.1 5.6 6.3 6.5 Exports, GNFS 7.5 -7 6.1 8.9 3.1 7.2 7.5 Imports, GNFS 6.6 -0.2 3 8.6 3.3 5.9 6.5 Output gap -- -- -- -- -0.8 0.0 1.2 LOW CASE SCENARIO GDP 1.5 2.6 5.8 4.4 4.3 4.1 3.7 Private Consumption -1.3 5 7.2 2.8 4.2 4.4 5.0 Government Consumption 2.5 3.8 9.2 10.6 4.7 4.6 3.7 Gross Fixed Investment 8.8 5.5 5 16.1 5.6 6.3 4.6 Exports, GNFS 7.5 -7 6.1 8.9 3.1 4.6 4.6 Imports, GNFS 6.6 -0.2 3 8.6 3.3 5.0 5.9 Output Gap -- -- -- -- -0.8 -1.4 -2.2 Souce: World Bank computation * Preliminary ** Estimates ***Forecasts December 2012 | Edition No. 7 76 Annexes Annex 26: Defining and measuring employment from census data The analysis presented in this report uses data from the 1989, 1999 and 2009 Kenya Population and Housing Censuses. The census data was used to generate labor market indicators derived from standard definitions: labor force participation (the economically active population), employment status (the proportion of people with jobs) and the type of employment (wage, non-farm self-employed, and family farming). A flow chart showing the relationship of these categories is given in Figure A1. To identify employment categories and generate standard labor market indicators from the census data, responses from the following census question were used: What was -NAME- mainly doing during the last 7 days preceding the census night? Annex 27: Response categories to primary activity question in census data 1989 2008 1999 ▪ Work for pay or profit ▪ Work for pay ▪ Work for pay ▪ Family agriculture ▪ Family business ▪ Family business ▪ On leave, sick ▪ Family agriculture ▪ Family agriculture ▪ Seeking work ▪ On leave, sick ▪ On leave, sick ▪ No work available ▪ Seeking work ▪ Intern/Apprentice ▪ Full time student ▪ No work available ▪ Volunteer ▪ Homemaker ▪ Full time student ▪ Seeking work ▪ Incapacitated ▪ Homemaker ▪ No work available ▪ Retired ▪ Incapacitated ▪ Full time student ▪ Other ▪ Retired ▪ Homemaker ▪ Other ▪ Incapacitated ▪ Retired ▪ Other Source: World Bank computation based on Kenya census data The table displays the response categories for this question in each of the three censuses. The response categories are generally consistent but become more detailed over time. In the 1989 census, only two employment categories are available: family agriculture and work for pay or profit. Thus it was not possible to distinguish between wage work and non-farm self-employment in 1989. In 1999, non-farm family holding was added as an employment category, and in 2009, several new categories were introduced, including intern, apprentice, and volunteer. Figure A2 explains in more detail the criteria used by enumerators to label individuals in categories corresponding to the employed: family farming, non-farm self-employment, and wage work. 77 December 2012 | Edition No. 7 Annexes Annex 28: Standard definitions of the working age population, labor force, the employed and unemployed Working-age population (15 -64) In Labor Force: Not in Labor Force Worked for pay, No work available, Worked on family Retired, Homemaker, holding, on leave or sick, Full time student, seeking work incapacitated, other Employed Unemployed without work but actively seeking work Wage work Self-employment At work for wage or On leave or sick salary in cash or in (has formal job Family Farming Non-farm kind attachment) Source: World Bank computation Annex 29: Defining family farming, non-farm self-employment and wage work from Census data Employment category Self-employed on Self-employed in Wage work family farm family enterprise [family farming] [non-farm self-employment] Own-Family Own- Family Business Worked for Pay Agriculture Holding 2009 census responses to Self-employed individuals Self-employed individuals Individuals who in the “What was -NAME- mainly working on a family working on their own seven days preceding the doing during last 7 days agricultural holding where business or individuals census worked most of the preceeding the census a holding is a unit of land, who work on their own time for wages, salaries, night?” used to categorized farm or shamba which is family business for family commissions, tips, contracts, employment. owned or leased by the gain. This includes ”Jua- and paid in kind (especially family and is used for Kali” artisans, mechanics, in the rural areas where purposes of cultivation traders in farm produce, people who have rendered or rearing livestock. All and family workers not services may be paid using members of a household on wage employment. food or clothing). who work on the holding without pay or profit are Includes individuals who included. reported they were on leave for sickness or other reasons who have a formal attachment to a job. Includes members of households who are paid for their work in a household enterprise or on a family farm. Source: World Bank computation based on 2009 Kenya Population and Housing Census, Enumerators Instructors Manual December 2012 | Edition No. 7 78 79 Annex 30 Age pyramids showing activity, urban and rural in 2009 Rural Urban December 2012 | Edition No. 7 90+ Females Males Females Males 90+ 85−89 85−89 80−84 80−84 75−79 75−79 70−74 70−74 65−69 65−69 60−64 60−64 55−59 55−59 50−54 50−54 45−49 45−49 Age group Age group 40−44 40−44 35−39 35−39 30−34 30−34 25−29 25−29 20−24 20−24 15−19 15−19 10−14 10−14 5−9 5−9 2500 1750 1000 500 0 500 1000 1750 2500 2500 1750 1000 500 0 500 1000 1750 2500 People (thousands) People (thousands) Family farming Non-farm self-employed Wage work Inactive Students Homemakers Source: World Bank computation based on Kenya census data Annexes Annexes Annex 31: Unemployment and other measures of joblessness By the standard definition, a person is unemployed if he or she is of working age (15-64) and not working but actively seeking work. The unemployment rate is the number of persons who are unemployed divided by the labor force. The labor force is made up of those age 15-64 who are working plus those who are not working and seeking work. An alternative measure of joblessness used in this report is the inactivity rate. Inactive individuals are people between the ages of 15 and 64 who are neither working nor studying. Homemakers are considered to be working for purposes of this calculation. The inactive include those who are seeking work, those who say no work is available, the incapacitated, and the retired. Definitions of the unemployment and inactivity rate are presented in Figure A4. Annex 32: Measures of joblessness (1) Unemployment rate = Number of persons seeking work Number of persons seeking work + Number of persons working (2) Inactivity rate = Number of workers + Number of students + Number of homemakers 1- Number of persons in population Source: World Bank computation based on Kenya census data Annex 33: All Kenya - Unemployment and inactivity rates overall, by age, sex and urban/rural setting, 2009 All Kenya Unemployed Inactive Age Group Percent N Percent N 15-19 5.4 83,965 8.0 334,468 20-24 8.1 209,867 11.9 449,485 25-29 5.2 135,730 9.2 295,319 30-34 3.4 72,950 7.2 181,883 35-39 2.5 44,158 6.2 124,344 40-44 2.0 25,305 6.1 89,204 45-49 1.7 18,743 5.7 72,264 50-54 1.4 11,256 7.3 69,977 55-59 1.2 7,256 9.3 66,130 60-64 1.1 5,045 12.1 71,790 Overall 4.1 614,274 8.5 1,754,866 Source: World Bank computation based on Kenya census data. December 2012 | Edition No. 7 80 Annexes Annex 34: Males and females - Unemployment and inactivity rates overall, by age, sex and urban/rural setting, 2009 Males Females Unemployed Inactive Unemployed Inactive Age Group Percent N Percent N Percent N Percent N 15-19 5.5 44,048 8.4 178,010 5.3 39,917 7.6 156,443 20-24 8.9 113,410 13.3 230,834 7.3 96,456 10.8 218,642 25-29 5.7 77,422 10.3 155,231 4.6 58,308 8.3 140,078 30-34 3.9 45,334 8.2 102,518 2.8 27,616 6.2 79,350 35-39 3.0 28,481 7.0 70,550 2.0 15,677 5.3 53,784 40-44 2.5 17,426 7.1 52,512 1.3 7,879 5.0 36,682 45-49 2.2 13,235 6.6 41,812 1.1 5,507 4.8 30,444 50-54 1.9 8,170 8.3 39,296 0.8 3,085 6.3 30,676 55-59 1.6 4,924 10.6 37,877 0.9 2,332 7.9 28,247 60-64 1.4 3,477 13.3 39,316 0.7 1,568 10.8 32,470 Overall 4.6 355,928 9.4 947,957 3.6 258,346 7.6 806,817 Source: World Bank computation based on Kenya census data Annex 35: Urban and Rural - Unemployment and inactivity rates overall, by age, sex and urban/rural setting, 2009 Urban Rural Unemployed Inactive Unemployed Inactive Age Group Percent N Percent N Percent N Percent N 15-19 13.4 48,992 10.7 128,355 3.0 34,973 6.9 206,084 20-24 13.2 133,329 15.6 236,885 4.8 76,538 9.5 212,482 25-29 7.5 85,814 11.0 154,851 3.4 49,917 7.8 140,392 30-34 4.9 43,495 8.3 84,832 2.3 29,455 6.5 97,017 35-39 3.8 25,245 7.1 53,928 1.8 18,913 5.7 70,397 40-44 3.1 13,838 6.8 34,778 1.4 11,467 5.7 54,418 45-49 2.8 9,959 6.8 27,794 1.2 8,783 5.2 44,463 50-54 2.3 5,346 9.3 25,731 1.0 5,909 6.5 44,241 55-59 2.4 3,447 13.7 24,564 0.9 3,809 7.8 41,561 60-64 2.3 2,241 19.0 25,731 0.8 2,804 10.0 46,055 Overall 7.0 371,706 10.7 797,451 2.5 242,568 7.2 957,110 Source: World Bank computation based on Kenya census data 81 December 2012 | Edition No. 7 Annexes Annex 36: Urban males and rural males - Unemployment and inactivity rates overall, by age, sex and urban/rural setting, 2009 Urban Males Rural Males Unemployed Inactive Unemployed Inactive Age Group Percent N Percent N Percent N Percent N 15-19 14.2 23,647 10.8 61,131 3.2 20,401 7.5 116,875 20-24 13.2 66,559 16.3 110,955 6.1 46,851 11.3 119,845 25-29 7.1 44,992 10.8 74,480 4.4 32,430 9.8 80,729 30-34 4.8 25,164 8.3 45,559 3.1 20,170 8.1 56,947 35-39 3.8 15,175 7.1 29,363 2.5 13,306 7.0 41,180 40-44 3.4 9,105 7.0 19,938 2.0 8,321 7.2 32,571 45-49 3.2 6,944 7.0 15,884 1.7 6,291 6.4 25,926 50-54 2.6 3,698 9.3 14,174 1.5 4,472 7.8 25,121 55-59 2.7 2,261 14.5 14,224 1.2 2,663 9.2 23,651 60-64 2.6 1,487 19.7 14,204 1.0 1,990 11.2 25,111 Overall 6.7 199,033 10.7 399,910 3.2 156,895 8.6 547,956 Source: World Bank computation based on Kenya census data Annex 37: Urban females and rural females - Unemployment and inactivity rates overall, by age, sex and urban/rural setting, 2009 Urban Females Rural Females Unemployed Inactive Unemployed Inactive Age Group Percent N Percent N Percent N Percent N 15-19 12.8 25,345 10.6 67,226 2.6 14,572 6.3 89,188 20-24 13.2 66,770 15.0 125,936 3.6 29,687 7.8 92,616 25-29 8.1 40,822 11.2 80,374 2.3 17,486 6.1 59,647 30-34 5.1 18,331 8.2 39,271 1.5 9,286 5.0 40,057 35-39 3.7 10,070 7.1 24,563 1.1 5,608 4.4 29,209 40-44 2.6 4,733 6.5 14,839 0.8 3,146 4.3 21,838 45-49 2.1 3,015 6.5 11,909 0.7 2,492 4.1 18,531 50-54 1.8 1,648 9.3 11,557 0.5 1,437 5.3 19,116 55-59 2.1 1,186 12.7 10,339 0.5 1,146 6.5 17,906 60-64 1.9 754 18.1 11,527 0.5 814 8.9 20,941 Overall 7.3 172,673 10.7 397,540 1.8 85,673 6.0 409,050 Source: World Bank computation based on Kenya census data December 2012 | Edition No. 7 82 Kenya at work Energizing the economy and creating jobs Kenya is entering a decisive year in its history. So far in 2012, Kenya has successfully navigated an economic storm. In 2013, Kenya's main risk is the potential for political and social instability during the March national elections. These elections will also mark the transition to a new decentralized political system. This momentous political transition is happening at a time of major social and economic transformation marked by a workforce that is growing rapidly, is more educated and is increasingly settling in cities with the expectation of finding good jobs. While Kenya’s economy has stabilized in 2012, it has not yet created the number and quality of jobs it needs to become one of Africa’s vibrant emerging economies. This report which focuses on Kenya at work has three main messages. First, while the economy is stabilizing, Kenya is heading into an election year, and that may impact growth. Historically, Kenya’s economy has slowed during election periods, but Kenya could grow at 5 percent in 2013, provided that the next election and the subsequent transfer of power to a new administration are both achieved peacefully. Second, Kenya will need to continue expanding its exports and diversifying its markets so as to reduce the impact of the recession in the Euro zone, which is one of Kenya’s major trading partners and a key source for its tourism industry. Furthermore, export growth is crucial if Kenya is to begin reversing its significant current account deficit, which could undermine its long-term stability and growth prospects. Third, Kenya needs to create more jobs to cater for the large number of people entering the work force. Kenya is on the verge of a significant demographic opportunity, as the working-age population is increasing faster than the number of dependents, both young and old. But this opportunity will yield a growth dividend only if Kenya is able to create jobs for the youth who are entering the workforce. Join the conversation! WHAT IS THE BIGGEST BARRIER TO GOOD JOBS IN KENYA? Text message your answers to: +254 700 186 473 Tweet your answers using the following hashtag in your response: #kenyakazini Produced by Poverty Reduction and Economic Management Unit Africa Region. Photo credits: Cover 1st image: Charles Kamau/2nd image: Nation Media Group/3rd image, Page 1 and 23: Boni Mwangi. Design by Robert Waiharo.