April 2018 | Edition No. 17 Private Sector Poverty Big 4 Policies Poverty GDP Private Sector GDP Policies Interest Rate Cap Growth Big4 Interest Rate Cap Policies Growth GDP Big4 Fiscal Conslidation Policies Interest Rate Cap GDP Fiscal Conslidation Poverty Big4 Poverty Interest Rate Cap Policy Options to Advance the Big 4 Unleashing Kenya’s Private Sector to Drive Inclusive Growth and Accelerate Poverty Reduction Policy Options to Advance the Big 4 Unleashing Kenya’s Private Sector to Drive Inclusive Growth and Accelerate Poverty Reduction © 2018. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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TABLE OF CONTENTS ABBREVIATIONS................................................................................................................................................................................................................................................................ i FOREWORD.......................................................................................................................................................................................................................................................................... ii ACKNOWLEDGEMENTS.............................................................................................................................................................................................................................................. iii EXECUTIVE SUMMARY................................................................................................................................................................................................................................................. v PART 1: THE STATE OF KENYA’S ECONOMY 1. Recent Economic Developments ................................................................................................................................................................................... 2 1.1 A broad-based global economic recovery is underway........................................................................................................................................................ 2 1.2 Following multiple headwinds that dampened output in 2017, an incipient recovery of the Kenyan economy has started ... 3 1.3 Government spending has been a key driver of growth in recent years, however the contribution from the private sector has waned .......................................................................................................................................................................................................................................................... 5 1.4 After years of an expansionary stance, fiscal consolidation is underway.................................................................................................................... 6 1.5 Inflation has eased off since H2 2017, while credit conditions remain tight ........................................................................................................... 10 1.6 Rising oil prices and underperformance of exports are contributing to the widening of current account deficit ......................... 12 2. Outlook ................................................................................................................................................................................................................................... 13 2.1 Growth is projected to recover over the medium term......................................................................................................................................................... 13 2.2 Recovery in private demand is expected to drive the rebound in growth, even as the stimulus from fiscal policy wanes ...... 13 3. Risks remain tilted to the downside ............................................................................................................................................................................. 14 3.2 Domestic risks................................................................................................................................................................................................................................................... 14 3.3 External risks ..................................................................................................................................................................................................................................................... 15 PART 2: SPECIAL FOCUS I 4. Assessing Poverty Reduction in Kenya Against International Benchmark..................................................................................................... 18 4.1 Introduction....................................................................................................................................................................................................................................................... 18 4.2 Poverty Trends.................................................................................................................................................................................................................................................. 19 4.3 Poverty in International Comparison................................................................................................................................................................................................. 22 4.4 Non-Monetary Poverty................................................................................................................................................................................................................................ 23 4.5 Conclusion.......................................................................................................................................................................................................................................................... 27 PART 3: SPECIAL FOCUS II 5. Policy Options to Advance The Big 4............................................................................................................................................................................ 32 5.1 The Big 4 – an ambitious development agenda ....................................................................................................................................................................... 32 5.2 Policies to create an enabling macroeconomic environment to support the Big 4............................................................................................ 32 5.3 Structural Policies in support of the Big 4....................................................................................................................................................................................... 34 REFERENCES ........................................................................................................................................................................................................................................................................ 43 STATISTICAL TABLES ..................................................................................................................................................................................................................................................................... 45 LIST OF FIGURES Figure 1: Global growth pick-up is broad-based ......................................................................................................................................................................................... 2 Figure 2: Growth in the EAC countries decelerated in 2017, but is still above the SSA average .................................................................................. 2 Figure 3: Multiple headwinds dampened economic performance in 2017............................................................................................................................... 3 Figure 4: Resilience in the service sector mitigated weakness elsewhere in the economy ............................................................................................ 3 Figure 5: Drought conditions saw output in the agriculture sector decline, but a recovery is currently underway......................................... 3 Figure 6: Economic headwinds in 2017 adversely impacted manufacturing activity, but a modest recovery is underway ��������������������� 4 Figure 7: After a weak performance in2017, there has been a pick-up in some manufacturing sub-sectors .................................................... 4 Figure 8: Business sentiment has sharply rebounded since the conclusion of the 2017 elections ................................................................. 4 Figure 9: Though resilient, the contribution of service sub-sectors to GDP was heterogeneous .................................................................... 5 Figure 10: Public sector spending has been an important driver of growth in recent years .................................................................................. 5 Figure 11: Private investment contribution to GDP growth has declined........................................................................................................................... 6 Figure 12: Government borrowing has kept yields of government securities elevated ........................................................................................... 6 Figure 13: Growth has been propped up in recent years by a decline in the drag from net exports................................................................ 6 Figure 14: Government spending has been elevated in recent years.................................................................................................................................... 7 Figure 15: Expansionary fiscal policy contributed to elevated fiscal deficit levels.......................................................................................................... 7 Figure 16: Fiscal consolidation has begun and is expected to continue into the medium term......................................................................... 8 Figure 17: Revenue growth has moderated........................................................................................................................................................................................... 8 Figure 18: The overall increase in debt stock arises from both external and domestic sources ........................................................................... 9 Figure 19: The primary fiscal deficit remains the key driver to rising debt stock ........................................................................................................... 9 Figure 20: Inflation remains well within the target range.............................................................................................................................................................. 10 Figure 21: Food and energy prices continue to be the main driver of headline inflation in Kenya..................................................................... 10 Figure 22: Inflation decelerated sharply in most EAC economies because improved weather conditions and subdued demand pressures........................................................................................................................................................................................................................... 10 Figure 23: There has been a modest appreciation in the nominal exchange rate in 2018 ...................................................................................... 10 Figure 24: Weakness in private sector credit growth continued unabated in 2017...................................................................................................... 11 Figure 25: The CBR has remained unchanged since September 2016 while interbank rates have been volatile ..................................... 11 Figure 26: Rise in non-performing loans contributed to tighter lending conditions in 2017................................................................................. 11 Figure 27: Deteriorating balance of trade led to widening current account deficit .................................................................................................... 11 Figure 28: Capital inflows have helped to finance the current account deficit and accumulate reserves .................................................... 12 Figure 29: Foreign portfolio flows have favored government bonds over equity in recent months................................................................. 12 Figure 30: Domestic demand will continue to be the main driver of medium term growth................................................................................. 14 Figure 31: Poverty at the US$ 1.25, 1.90, and 3.20............................................................................................................................................................................... 19 Figure 32: Cumulative consumption distribution with shock..................................................................................................................................................... 19 Figure 33: GDP sectoral simulation of poverty trajectory at international poverty lines, 2005 to 2015 ........................................................... 20 Figure 34: Overall GDP growth simulation of poverty trajectory at international poverty lines, 2005 to 2015 .......................................... 20 Figure 35: Real sector growth, 2007 to 2015 ......................................................................................................................................................................................... 21 Figure 36: Share of households by sector of household head occupation, 2005 vs. 2015 ...................................................................................... 21 Figure 37: Consistent sectoral elasticities for poverty pass-through....................................................................................................................................... 22 Figure 38: Combination of growth and redistribution needed to eradicate poverty in 2030 ............................................................................... 22 Figure 39: International comparison of poverty................................................................................................................................................................................... 22 Figure 40: Poverty headcount against GDP per capita.................................................................................................................................................................... 23 Figure 41: Poverty rate against depth at international poverty line........................................................................................................................................ 23 Figure 42: Poverty headcount at IPL and LMIC, international comparison......................................................................................................................... 23 Figure 43: Poverty gap at IPL and LMIC, international comparison......................................................................................................................................... 23 Figure 44: International comparison of elasticity of poverty reduction ............................................................................................................................... 24 Figure 45: Elasticity of poverty reduction against GDP per capita ........................................................................................................................................... 24 Figure 46: Deprivation in access to services, 2015.............................................................................................................................................................................. 24 Figure 47: Poverty headcount against HDI.............................................................................................................................................................................................. 24 Figure 48: Poverty headcount against access to improved water............................................................................................................................................ 25 Figure 49: Poverty headcount against access to improved sanitation.................................................................................................................................. 25 Figure 50: Poverty headcount against literacy rates.......................................................................................................................................................................... 25 Figure 51: Poverty headcount against adult educational attainment, primary .............................................................................................................. 26 Figure 52: Poverty headcount against adult educational attainment, secondary.......................................................................................................... 26 Figure 53: Poverty headcount against net primary school enrollment ................................................................................................................................ 26 Figure 54: Poverty headcount against net secondary school enrollment .......................................................................................................................... 26 Figure 55: Poverty headcount against child stunting ......................................................................................................................................................................... 27 Figure 56: Poverty headcount against under five mortality........................................................................................................................................................... 27 Figure 57: Country Distribution in Space of Competitiveness, Capabilities, and Connectedness, Circa 2012-14......................................... 40 Figure 58: Most problematic factors for doing business in Kenya .............................................................................................................................................. 40 LIST OF TABLES Table 1: Medium term growth outlook (annual percent change unless indicated otherwise) ......................................................................... 13 Table 2: Key monetary poverty Indicators ........................................................................................................................................................................................... 19 Table 3: Sectoral decomposition of changes in poverty ............................................................................................................................................................ 21 Table 4: Options for Universal Health Coverage................................................................................................................................................................................ 39 LIST OF BOXES Box B.1: The International Poverty lines ................................................................................................................................................................................................. 18 Box B.2: Ethiopia Box- Case Study ............................................................................................................................................................................................................. 36 ABBREVIATIONS AGOA African Growth and Opportunity Act MTP II Medium Term Plan II AIDS Acquired Immune Deficiency Syndrome m-o-m Month-on-month AU African Union NEER Nominal Effective Exchange Rate AGRA Alliance for a Green Revolution in Africa NPL Non-Performing Loans COMESA Common Market for Eastern and Southern Africa NSE Nairobi Security Exchange CBK Central Bank of Kenya NHIF National Health Insurance Fund CBR Central Bank Rate NT National Treasury CBN Cost-of-Basic Needs PFM Public Finance Management CPI Consumer Price Index P/E Price Earning ratio EAC East African Community PPP Purchasing power parity EPA Economic Partnership Agreement PMI Purchasing Managers’ Index EU European Union PPP Public Private Partnership EM Emerging Markets Q1, Q2, Q3, Q4 Quarter One, Two, Three, Four EGS Early Generation Seed q-o-q Quarter on quarter EMDE Emerging Markets and Developing Economies R&D Research and Development FY Fiscal Year RWA Rwanda GHA Ghana REER Real Effective Exchange Rate GDP Gross Domestic Product SA South Asia GNI Gross National Income SGR Standard Gauge Railway GoK Government of Kenya SME Small and Medium Enterprises HDI Human Development Index SSA Sub-Saharan Africa H1, H2 First, Second Half SPS Sanitary and Phyto Sanitary ICT Information Communication Technology TZA Tanzania IPL International Poverty Line T-Bill Treasury Bill IFMIS Integrated Financial Management Information System USA United States of America KEN Kenya UGA Uganda KPGA Kenya Poverty and Gender Assessment UNDP United Nations Development Program KEU Kenya Economic Update VAT Value Added Tax KIHBS Kenya Integrated Household Budget Survey WBG World Bank Group KNBS Kenya National Bureau of Statistics y-o-y Year on year LMIC Lower Middle Income Countries YTD Year to date MFMod Macroeconomic and Fiscal Model i April 2018 | Edition No. 17 FOREWORD The 2010 Constitution of Kenya introduced a devolved system of government aimed at better service delivery. With that foundation laid and 5 years of implementation experience, the Government of Kenya has announced an ambitious development agenda for the next 5 years anchored on “the Big 4”: deliver affordable housing, roll-out universal health coverage, increase the share of manufacturing in the economy and improve food security. At this critical juncture in Kenya’s development journey, it is my pleasure to present the 17th Edition of the Kenya Economic Update. The report has three key messages. First, after multiple headwinds dampened growth in 2017, the incipient rebound in economic activity in Kenya is gaining momentum. Supported by improved rains, the dissipation of political uncertainty which held back investment, and the ongoing broad-based recovery in the global economy, GDP growth is expected to recover to 5.5 percent in 2018 and steadily rise to 6.1 percent by 2020. Nonetheless, downside risk to this outlook stem from fiscal slippages that could endanger macroeconomic stability, a continuation of subdued credit growth to the private sector (especially for households and small enterprises), and negative spillovers from the global economy due to tighter financial market conditions and escalation of tensions in global trade. Second, though ambitious, the Big 4 can be achieved. However, significant policy reforms will be needed. This report proposes macroeconomic and sectoral policy options that could help advance delivery on the Big 4 over the medium- term. Underpinning the proposed policy options is the recognition that success will require support from both the public and especially the private sector. Hence the need to provide appropriate incentive structures, through policy reforms, to allow resources to flow to the Big 4 areas. Third, policies to achieve the Big 4 could help foster inclusive growth and accelerate the pace of poverty reduction. In the special focus section of the report, macroeconomic drivers of poverty reduction in Kenya are analyzed, including an assessment of current levels against international benchmarks. The rate of poverty reduction in Kenya outpaces many in the region, but is less responsive to growth and remains higher compared to other lower-middle income countries. Growth in the agriculture sector accounted for the largest share of poverty reduction, but also revealed progress is vulnerable to climatic shocks. The World Bank remains committed to working with key Kenyan stakeholders to identify policy and structural issues that will enhance inclusive growth, keep Kenya on the path to upper middle-income status, and attain its Big 4 policy objectives. The Kenya Economic Update offers a forum for such policy discussions. We hope that you will join us in debating topical policy issues that can contribute to fostering growth and shared prosperity and poverty reduction in Kenya. Diarietou Gaye Country Director for Kenya World Bank April 2018 | Edition No. 17 ii ACKNOWLEDGEMENTS T his seventeenth edition of the Kenya Economic Update was prepared by a team led by Allen Dennis and Christine Awiti. Part One – The State of Kenya’s Economy was written by Christine Awiti, Allen Dennis, Celina Mutie, Sarah Sanya, Angélique Umutesi, and Peter Chacha Wankuru. Part Two – Assessing Poverty Reduction In Kenya Against International Benchmark was written by Utz Pape under guidance of Johan Mistiaen, with contributions from Marina Tolchinsky. Part Three – Policies to advance the Big 4 was written by Allen Dennis, with contributions from Ladisy Chengula (Agriculture), Mehnaz Safavian (Housing), and Gandham N.V. Ramana (Health). The team would like to thank Anne Khatimba for providing logistical support, Keziah Muthembwa and Vera Rosauer for managing communication and dissemination, and Robert Waiharo for design and layout of the report. The report benefitted from excellent comments from Tom Bundervoet, Jan Mikkelson, Rose Mungai, Rose Ngugi, and Ekaterine T. Vashakmadze. The team also received overall guidance from Abebe Adugna (Practice Manager, Macroeconomic Trade and Investment), Johan Mistiaen (Program Leader for Kenya, Rwanda, Uganda, and Eritrea), and Diarietou Gaye (Country Director for Kenya, Rwanda, Uganda, and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of this report. The preliminary findings in this report were shared with the National Treasury and Ministry of Planning, and the Central Bank of Kenya. Furthermore, in preparation for this report, the team solicited views from a broad range of private sector participants. iii April 2018 | Edition No. 17 EXECUTIVE SUMMARY 1. After multiple headwinds dampened growth in 5. Support from the public and more importantly the 2017, a nascent rebound in economic activity in Kenya private sector will be required to achieve the Big 4. In is gaining momentum. Economic growth decelerated this regard, policy reforms can play an important catalytic to a 5-year low of an estimated 4.8 percent in 2017. Poor role in incentivizing private sector resources to advance rains, slowdown in credit growth to the private sector the Big 4. and election-induced uncertainty weighed down on economic activity in 2017. Reflecting the easing of some 6. A stable macroeconomic environment will of these headwinds, as well as a broad-based recovery in be foundational to advancing the Big 4. Without the global economy, the green shoots of a rebound in macroeconomic stability the ability of government to economic activity is underway. allocate resources or for the private sector to contribute to the Big 4 will be seriously constrained. Hence, public 2. Growth is projected to recover over the medium sector resources devoted to the Big 4 will need to term. GDP growth is projected to recover to 5.5 percent be contained within a fiscally sustainable resource in 2018, and steadily rise to 6.1 percent by 2020. On the envelope, consistent with the projected pathway of fiscal upside, agricultural output is expected to rebound (thanks consolidation. Specific measures to create fiscal room to better rains). The dissipation of political uncertainty to support the Big 4 could include: enhancing domestic and the recovery in the global economy is supporting revenue mobilization through the rationalization of tax a rebound in business sentiment. This should support a exemptions; slowing the pace of expansion of recurrent broad-based recovery in private investment. However, spending and improving the efficiency of spending. partially mitigating the lift from the upside drivers are the Further, the potency of monetary policy will need to be rise in oil prices; down-sizing of the fiscal stimulus from restored to help re-ignite private sector lending. While earlier years; and the still weak credit growth to the private prudent macroeconomic policies are necessary to lay sector. Regarding the latter, the baseline however assumes down an appropriate foundation, critical sectoral policy that the ongoing discourse to remove the interest rate reforms will be required to advance the Big 4. cap, in its current form, will be successful in 2018, thereby supporting a robust recovery in private sector credit 7. Boosting agricultural productivity and food growth in 2019 and beyond. security will require re-allocating more resources to agriculture and improving the efficiency of current 3. Notwithstanding the projected rebound in spending in the sector. Specifically, more resources could economic activity risks are tilted to the downside. be re-allocated to support high-return public goods such On the domestic front, fiscal slippages leading to as extension services and irrigation to small hold farmers. macroeconomic instability; the persistence of the interest Further, reforms to improve the efficiency of spending rate cap law into the medium term; and the potential for (e.g. through better targeting of fertilizer subsidies; and re- another drought could dampen growth prospects. On the allocating from producer subsidies to high-yielding public external front, the main risks are a spike in oil prices and goods) would be beneficial. Other reforms that could be the potential for negative spill overs from global markets considered include passing the warehouse receipt bill (trade and finance). to enhance access to finance; and reforming the seed market to allow for high-yielding seeds to be more readily 4. The Government of Kenya has outlined four big available to smaller farmers; and climate proofing the priority areas for the next five years. These are agricultural agriculture sector. and food security, affordable housing, increased share of manufacturing, and universal health coverage. The 8. Kenya is in a strong position to make rapid attainment of these goals should help advance the Vision progress to expand health coverage given the high 2030 agenda – helping Kenya to move forward towards a level of political commitment and strong institutional middle-income economy with a high standard of living. foundations. Attaining universal health coverage will April 2018 | Edition No. 17 iv Executive Summary however require some level of government subsidies. 11. In the special focus section of the report on Creating the fiscal space to be able to support increased poverty, macroeconomic drivers of poverty reduction in health coverage will require the re-doubling of efforts Kenya are analyzed, including an assessment of current to rebuild fiscal buffers (as previously discussed) so as to levels against international benchmarks. After a gap of create the fiscal room to address this priority. Further, it ten years, in March 2018 the Kenya National Bureau of will be critical that the expansion of health insurance is Statistics (KNBS) released the most recent official poverty accompanied by continued and intensified efforts to statistics based on national poverty lines. This Economic strengthen NHIF systems and capacity, especially in the Update reports poverty as the proportion of Kenyans areas of costing benefit packages and provider payment living below the international poverty line at US$ 1.90 mechanisms, and to address outstanding issues regarding PPP 2011, to allow cross-country comparisons. Poverty the flow of funds to counties and public facilities. dropped from 43.6 percent in 2005/6 to 35.6 percent in 2015/16, with poverty reduction driven by increased 9. Policy options to advance manufacturing in Kenya consumption for the poorest of the poor especially in the need could focus on the 3Cs — competitiveness, agricultural sector. capabilities and connectedness. The development of industrial enclaves with reliable infrastructure and 12. Poverty incidence in Kenya is below the average in procedures can help address some of the structural sub-Saharan Africa and a decade of strong economic bottlenecks that affect manufacturing competitiveness growth has fueled a relatively fast pace of poverty and help attract foreign direct investment. Firm-level reduction. But considering Kenya’s lower middle-income capabilities can be enhanced by improving management class status, current poverty incidence is relatively high and organizational practices that support the adoption compared to its middle-income peers. Moreover, in Kenya of new technologies and international certification of poverty is less responsive to growth compared to other quality standards. Worker capabilities can be enhanced by countries where equivalent growth rates result in higher prioritizing literacy, numeracy and ICT skills and partnering levels of poverty reduction. Growth in the agriculture sector with the private sector to enhance school curricula. On the accounted for the largest share of poverty reduction, but external front, measures to strengthen regional integration also revealed progress is vulnerability to climatic shocks. and seizing opportunities under various preferential trade agreements can boost manufactured exports. 13. To eradicate poverty by 2030, Kenya would need a combination of higher growth, more inclusive growth, 10. Policy options to increase the provision of affordable and growth that is increasingly driven by the private housing could be advanced by addressing both supply sector and translates into more rapid poverty reduction. and demand side bottlenecks. On the supply side, Using the KIHBS 2015/16 survey, the forthcoming Kenya specific measures could include: implementation of the Poverty and Gender Assessment (KPGA) will provide a supporting regulations to the Lands Act to increase the more detailed analysis of the drivers of poverty reduction efficiency of the land registration and unlock the ability in Kenya through both a sectoral and spatial lens. The of developers to build affordable houses; implement a KPGA will also zoom into the gender aspects of poverty, lands record storage system and regulations for electronic contrast poverty profiles in urban and rural areas, and conveyance; amending the sectional properties Act to examine poverty through education, health and social allow titles for multi-story units. Measures to boost the protection lenses. The objective of the KPGA is to foster an demand for affordable housing could include: lowering of evidence-based debate about policy options to accelerate yields on government securities to incentivize longer term poverty reduction in Kenya. lending (e.g. mortgages); standardization of mortgage contracts; and reviewing stamp duties for first time buyers. v April 2018 | Edition No. 17 Executive Summary Photo: © Sarah Farhat /World Bank RECENT ECONOMIC TRENDS AND OUTLOOK Multiple headwinds dampened economic Resilience in the service sector mitigated weakness performance in 2017 elsewhere in the economy 10 8 8.4 8 6 6.1 3.9 Year-on - year (%) GDP growth (% y-o-y) 5.9 3.0 3.5 6 5.7 5.8 2.9 5.4 4.8 4 3.1 3.7 4.6 4 2 1.4 1.4 1.2 1.1 2 0.8 1.4 1.2 1.3 1.2 0.8 0 0.7 0.2 0 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017e Agriculture Industry Services GDP growth Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Note: “e” denotes an is an estimate The service sector has remained resilient, albeit Recovery in the manufacturing sector has with differences across sub-sectors picked up pace in 2018 5 60 4 PMI Index (3 month moving average) 55 Year-on- year (%) 3 50 2 45 1 0 40 2012 2013 2014 2015 2016 2017 Accomodation and restaurant Transport Services Information and communication Financial & Insurance 35 Real estate Other services Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank Public sector investment has been the Private investment contribution to key driver of growth GDP growth has declined 8 2 4 -year moving average (%) 6 4 - year moving average (%) 4 1 2 0 0 2012 2013 2014 2015 2016 2017e 2012 2013 2014 2015 2016 2017e -2 Government Consumption Government Investment GDP -1 Private Consumption Private Gross Fixed Investment Government Investment Private Gross Fixed Investment Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank vii April 2018 | Edition No. 17 RECENT ECONOMIC TRENDS AND OUTLOOK Inflation remains well within Energy and food prices continue to be the main driver the target range of headline inflation in Kenya 14 120 12 100 10 80 Upper bound Percent 8 Percent 60 6 40 4 Lower bound 2 20 0 0 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Feb -16 May-16 Aug-16 Nov-16 Feb -17 May-17 Aug-17 Nov-17 Feb -18 Overall in ation Upper bound Lower bound Core in ation Food In ation Energy In ation Core In ation Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank The increase in imports led to widening Expansionary fiscal policy contributed to current account deficit elevated fiscal deficit levels 15 2013/14 2014/15 2015/16 2016/17 2017/18* 0 10 Percent of GDP 5 -2 0 -5.2 -6.5 -5 -6.7 Percent of GDP -8.8 -10.4 -4 -10 -9.2 -8.3 -15 -6 -20 -6.1 -25 -7.4 -7.2 2011 2012 2013 2014 2015 2016 2017-Nov -8 -8.1 Services Balance of trade Income Net Errors and Omissions -8.9 Current Account -10 Source: Central Bank of Kenya Source: The National Treasury Notes: * indicates preliminary results Fiscal consolidation has begun and is expected to Domestic demand will continue to be the main driver continue into the medium term of medium term growth 2017/18* 2018/19f 2019/20f 2020/21f 2021/22f 8 0 6.1 5.8 5.9 6 5.5 -2 Percent of GDP 4.8 GDP growth (%) 3.0 3.4 4 -4 4.3 2 -6 6.0 7.2 0 -8 2016 2017e 2018f 2019f 2020f Source: The National Treasury Source: World Bank Notes: * indicates preliminary results, “f” denotes forecast Notes: “e” denotes an estimate, “f” denotes forecast. April 2018 | Edition No. 17 viii Part 1: The State of Kenya’s Economy Photo: © Kenya Ports Authority The State of Kenya’s Economy 1. Recent Economic Developments 1.1 A broad-based global economic recovery is inflation declines, robust public investment growth in underway some economies, and improved rainfall that will see the 1.1.1. For the first time since the global financial rainfed agriculture sector flourish in addition to improved crisis, a broad-based pick-up in the global economy electricity supply. is underway. Global GDP growth is estimated to have reached 3.0 percent in 2017, up from 2.4 percent in 2016. 1.1.2. Real GDP growth in the East African Community The recovery is broad based, coming from a synchronous (EAC) region decelerated, albeit still stronger than the recovery in both high income and emerging market SSA average. In 2017, the EAC economies endured the economies. Notwithstanding downside risks, the recovery adverse effects of drought and lower credit to private in the global economy is being supported by still benign sector to grow at an average of 5.3 percent (Figure 2). financing conditions, generally accommodative monetary Kenya lagged her regional peers by 0.5 percentage points policy stance, a rebound in trade and investments, to grow at 4.8 percent on account of poor rains, slow improved confidence with the global manufacturing growth in credit to private sector and a prolonged election Purchasing Managers’ Index reaching a 7-year high in Q1 cycle. Tanzania, Rwanda and Uganda are estimated to 2018 and an upturn in commodity prices on the back of have grown by 6.4 percent, 6.1 percent and 4.0 percent positive momentum in global trade (Figure 1). respectively in 2017. In Tanzania and Uganda growth was driven by a bumper harvest in the latter half of the year 1.1.2. Supported by the uptick in commodity prices, following favorable weather conditions while in Rwanda, a modest recovery is also underway in sub-Saharan improved weather and a rebound in exports explained Africa (SSA). At (2.4) percent in 2017, growth in the region accelerated growth from 6.0 percent recorded in 2016. rebounded from a 22-year low of 1.3 percent in 2016 In the wider EAC regions, Ethiopia maintained a strong (Figure 1). While growth in non-resource rich countries growth at (10.3) percent in 2017 mainly driven by the remained stable on account of infrastructure investments, public sector’s investment in infrastructure. growth in resource rich economies such as Angola and Nigeria, was lifted by the beginning of a steady recovery 1.1.4. Economic activity in Kenya moderated in 2017 in oil, metal and mineral prices. In Nigeria, a recovery in on account of multiple headwinds, but a nascent the oil sector was a key factor for the positive growth, as recovery is underway. Economic growth decelerated reduced attacks on oil pipeline paved way for increased to a 5-year low of an estimated 4.8 percent in 2017 from production. Growth in the region is projected to accelerate 5.8 percent in 2016 (Figure 3). Poor rains, slowdown in to (3.2) percent in 2018 supported by strengthening credit growth to the private sector and election-induced commodity prices, the expected increase in demand as uncertainty weighed down on economic activity in Figure 2: Growth in the EAC countries decelerated in 2017, but Figure 1: Global growth pick-up is broad-based is still above the SSA average. 6 10 8 4.3 4 GDP growth (%) 6.4 GDP growth (%) 6 6.1 3.0 4.8 2.4 4 4.0 2 2 0 0 2013 2014 2015 2016 2017e 2012 2013 2014 2015 2016 2017e World EMDE SSA Uganda Tanzania Kenya Rwanda Source: World Bank Source: World Bank (MFmod) Notes: “e” denotes an estimate Notes: “e” denotes an estimate 2 April 2018 | Edition No. 17 The State of Kenya’s Economy 2017. However, tail winds from the rebound in tourism, agricultural sector to GDP growth in 2017 dropped from strong public investment, and resilient remittance inflows a historical average of about 1.2 percentage points to just partially mitigated some of the headwinds the economy 0.2 percentage points for the first three quarters of 2017 faced in 2017. Reflecting the easing of some of the (Figure 4). Growth in the sector declined to 0.8 percent transient headwinds including from improved rains and (first three quarters) from 5.0 percent for the same period easing of political tensions following the conclusion of in 2016. This was the lowest agricultural sector growth the Presidential elections, a nascent rebound in economic since 2009, an indication of the severity of the drought. activity is beginning to take root in 2018. The weakness in the sector’s performance reflected in the contraction in output of key agricultural exports such as Figure 3: Multiple headwinds dampened economic performance in 2017 tea and coffee, and staple food such as maize, kale, and 10 potatoes. However, better rains in the second half of 8.4 2017 improved the sector’s fortunes, with solid recoveries 8 recorded in Q4 2017 for tea, cane, and coffee output 6.1 (Figure 5). GDP growth (% y-o-y) 5.9 5.7 5.8 6 5.4 4.8 4.6 1.2.2. Economic headwinds in 2017 adversely 4 impacted manufacturing activity, however, with their easing, the green shoots of a modest recovery are 2 underway, albeit uneven. The industrial sector which 0 accounts for some 19 percent of GDP, contributed only 2010 2011 2012 2013 2014 2015 2016 2017e 0.8 percentage points to GDP growth in 2017 compared Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an estimate to a historical average of 1.2 percentage points on account of the headwinds faced by the economy. Growth in the manufacturing sector, an important pillar in the government’s 1.2 Following multiple headwinds that job creation agenda, but whose performance in recent dampened output in 2017, an incipient recovery of the Kenyan economy has years has been lack-lustre, decelerated to 2.4 percent in started 2017 from 3.8 percent in 2016 (Figure 6). Activity in the sub 1.2.1. Drought conditions dampened agriculture sector was impacted by a prolonged electioneering period output in 2017, however with improved rains in Q42017, which dampened business sentiment and trade with the sector is recovering. With only 2.0 percent of Kenya’s neighboring countries; poor agricultural harvests which cultivable land under irrigation, agricultural output is weakened agribusiness activity; and challenges in credit highly rain dependent. Reflecting poor weather conditions access which limited working capital and the ability of in the first half of the year, the contribution of the firms to expand. The weak performance was broad-based Figure 4: Resilience in the service sector mitigated weakness Figure 5: Drought conditions saw output in the agriculture elsewhere in the economy sector decline, but a recovery is currently underway 8 80 60 6 40 3.9 Year-to-date growth (%) Year-on - year (%) 3.0 3.5 2.9 20 4 3.1 3.7 0 Oct-15 Jan -16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 2 1.4 1.4 -20 1.2 1.1 0.8 -40 1.4 1.2 1.3 1.2 0.8 0 0.7 0.2 2012 2013 2014 2015 2016 2017 -60 Agriculture Industry Services GDP growth Cane Tea Co ee Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank April 2018 | Edition No. 17 3 The State of Kenya’s Economy Figure 6: Economic headwinds in 2017 adversely impacted to the higher execution of government development manufacturing activity, but a modest recovery is underway spending in 2017 (see section 1.3). In contrast to the 2 robust performance in the construction sector, growth in electricity generation decelerated to 5.4 percent in 2017 from 7.9 percent in 2016. This was mainly on account of the lower generation of electricity from hydropower sources, Year -on-year (%) 1 given poor rains. With fiscal consolidation commencing in 2018 the construction sector is likely to moderate (unless private investment picks up strongly); however, electricity generation is picking up with improved rains. 0 2012 2013 2014 2015 2016 2017 Manufacturing Construction Mining & Quarrying 1.2.4. The service sector has remained resilient, albeit Electricity Industry with differences across sub-sectors. The services sector, Source: Kenya National Bureau of Statistics and World Bank which accounts for 58.5 percent of GDP was the main engine of economic growth in 2017 — single handedly as contractions were recorded in sugar, beverages, cement accounting for some 80 percent of the 4.8 percent growth and galvanized sheet. However, reflecting an uneven (Figure 9). However, the robust performance in the sector recovery, as some headwinds started to ease in Q4 2017, was uneven. Reflecting the ongoing rebound in tourism, there has been a pick-up in some sectors (e.g. cement, sugar the accommodation and transport sectors recorded robust and sheet metal), while output remained in contractionary growth. Solid growth was also recorded in the ICT sub territory for others (e.g. soft drinks) (Figure 7). Nonetheless, sector (thanks to the exponential growth in mobile money a healthy rebound in the Purchasing Managers Index for Q1 2018 suggests that the incipient recovery that began in and data services) and the real Estate sub sector (spurred Q4 2017, is continuing into 2018 (Figure 8). by the dynamism in commercial real estate market and steady growth in residential real estate market). Reflecting 1.2.3. Performance in other industrial sub sectors the dynamism in the real estate sector, the largest mall in was mixed in 2017. While the manufacturing sector is East and Central Africa was completed and works on the the largest industrial sub-sector (50 percent), construction tallest building in Africa began in 2017 — all of which and electricity generation are also significant, accounting are situated in and around Nairobi, the Nation’s capital. for some 25 percent and 13 percent of industrial activity However, reflecting ongoing challenges in the banking respectively. Despite weakness elsewhere in the economy, sector, including from the interest rate caps, growth in growth in the construction sector was at a robust 6.9 financial services, which has historically been one of the percent (albeit lower than the 8.4 percent registered in key drivers of GDP growth, decelerated to 4.0 percent — its 2016). Given weakness in private investment, much of the lowest in over five years. robust growth in the construction sector can be attributed Figure 7: After a weak performance in2017, there has been a Figure 8: Business sentiment has sharply rebounded since the pick-up in some manufacturing sub-sectors conclusion of the 2017 elections 160 60 PMI Index (3 month moving average) 120 55 80 50 3 m-o-m growth (%) 40 45 0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 40 - 40 - 80 35 Cement Soft drinks Galvanized sheet Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank 4 April 2018 | Edition No. 17 The State of Kenya’s Economy Figure 9: Though resilient, the contribution of service sub- Figure 10: Public sector spending has been an important driver sectors to GDP was heterogeneous of growth in recent years 5 8 4 -year moving average (%) 4 6 Year-on- year (%) 3 4 2 2 1 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017e -2 Accomodation and restaurant Transport Services Information and communication Financial & Insurance Government Consumption Government Investment GDP Real estate Other services Private Consumption Private Gross Fixed Investment Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an estimate 1.3 Government spending has been a key the contribution from the private investment has been driver of growth in recent years, however negative in recent years, declining from 1.3 percentage the contribution from the private sector points of GDP in the four years leading to 2013 to negative has waned 0.7 percentage points in the four years leading to 2017 1.3.1. The public sector has been a key driver of growth (Figure 11) a-swing of 2 percentage points of GDP. In other in recent years. Over the past four years the public sector’s words, had the private sector sustained its contribution contribution to GDP growth has more than doubled (from to GDP growth throughout the 2013-2017 period, GDP 1.1 to 2.5 percentage points of GDP). This has been spurred growth would have been much higher. Based on sectoral on by an expansionary fiscal stance with both increases growth performance (assuming growth in labor supply and in government consumption and public investment technology constant), the sectors that have contributed (Figure 10). In the four years to 2017, the contribution of to the weakness in private sector growth are agriculture, government consumption to GDP growth increased by manufacturing, and trading activities whereas, private some 0.4 percentage points (0.8 to 1.2 percentage points investment is likely to have been expanding more rapidly of GDP). This reflects, inter alia, increased spending to in the real estate and transportation sectors. support the roll out of devolution, new institutions under the new Constitution, response to wage agitations, rising 1.3.3. Why has private investment lagged behind? The debt service and pension liabilities. However, the increase reasons for this are multiple. First, to the extent that the in the contribution to GDP from public investment has rapid expansion in government spending (thereby leading been even higher than that of government consumption to increased domestic financing requirement) in recent — i.e. from a mere 0.3 percentage points of GDP in the years has kept yields on benchmark government securities four years leading to 2013 to 1.3 percentage points. This elevated (Figure 12), this has contributed to a sustained reflects increases in development spending. Hence, the direct contribution (not taking into account fiscal crowding out of the private sector weakening private multipliers) from total public spending to GDP growth was investment. Second, this state of affairs has only been some 1.4 percentage points. The strong role of the public made worse by the interest rate cap law since 2016, which sector in driving growth continued in 2017 with high has incentivized the banks to re-allocate their portfolios level of capital expenditures on infrastructure projects. in favor of the public sector. Thirdly, for 2017, headwinds Further, spending on transient items such as the general from the heightened political tensions also led to a wait- elections and food subsidies have contributed to higher and-see attitude which held back private investment. In government consumption. 2018, the dissipation of political uncertainty should pave the way for higher private investment. Nonetheless until 1.3.2. Worryingly, the contribution to growth from the relatively elevated yields on benchmark government private investment has been decelerating in recent years. securities decline significantly, the anticipated recovery in Unlike the solid contribution to growth from public sector, private investment is likely to be benign. April 2018 | Edition No. 17 5 The State of Kenya’s Economy Figure 11: Private investment contribution to GDP growth has Figure 12: Government borrowing has kept yields of declined government securities elevated 2 24 20 4 - year moving average (%) 16 1 Percent 12 8 0 2012 2013 2014 2015 2016 2017e 4 0 Aug-13 Feb -14 Aug-14 Feb -15 Aug-15 Feb -16 Aug-16 Feb -17 Aug-17 Feb -18 -1 Government Investment Private Gross Fixed Investment 91 days T- bill 182 days T- bill 364 days T- bill Source: Kenya National Bureau of Statistics and World Bank Source: Central Bank of Kenya Notes: “e” denotes an estimate 1.3.4. The contribution from private consumption to Figure 13: Growth has been propped up in recent years by a decline in the drag from net exports GDP growth has also been subdued. Private consumption 2 remains the largest demand component of GDP, accounting 4- year moving average (%) for some 75 percent of GDP. Like private investment, the contribution to GDP growth from private consumption has 0 declined: from about 5 percentage points of GDP in the 2010 2011 2012 2013 2014 2015 2016 2017e four years leading to 2013 to 3.6 percent in the four years leading to 2017 (Figure 10). Private consumption likely worsened in 2017 as food prices escalated in the first half 2 of 2017 due to poor weather conditions that adversely affected agriculture output, and led to severe famine in the arid parts of the country. However, government subsidies 4 Imports Exports Net exports on staple food and relief efforts, together with robust Source: Kenya National Bureau of Statistics and World Bank remittance inflows helped mitigate the dampening effect Notes: “e” denotes an estimate on consumption from the higher prices. With the decline in food prices since Q4 2017, thanks to easing of the 1.4 After years of an expansionary stance, fiscal drought conditions, and the effects of earlier government consolidation is underway subsidies, consumption should be on the rise. 1.4.1. The expansionary fiscal stance in recent years contributed to elevated fiscal deficit levels. Kenya’s 1.3.5. Growth has been propped up in recent years expansionary fiscal policy began in FY 2013/14 (Figure 14), by a decline in the drag from net exports. As is the case driven by the implementation of the 2010 Constitution with most non-resource rich economies, the contribution (roll out of devolution and establishment of independent of net exports to GDP growth is often negative. In the offices); execution of mega infrastructural projects; four years leading to 2017, the drag from net exports was high wage bill and increasing interest payments; and only negative 0.1 percentage points of GDP in Kenya, transitional factors in FY 2016/17 (elections and drought compared to negative 0.9 percentage points of GDP in mitigation expenditures). As a result, total expenditure 2013 — thereby implying that the impact of changes to steadily increased from 23.7 percent of GDP in FY 2011/12 net exports over the past four years has been positive for to 27.6 percent of GDP in FY 2016/17. Notwithstanding GDP growth (Figure 13). A decomposition of the sources robust GDP growth, tax revenues did not keep pace with of this change suggests that this was overwhelmingly government spending, thereby contributing to a widening due to lower drag from the imports deduction from GDP deficit. Consequently, the fiscal deficit doubled from growth (which is consistent with weaker private demand) 4.5 percent of GDP in 2011/12 to 8.9 percent of GDP in rather than an increase in the positive contribution to GDP 2016/17 and the stock of public debt rose as a share of growth from exports. GDP by 15.2 percentage points over that period. 6 April 2018 | Edition No. 17 The State of Kenya’s Economy 1.4.2. Starting 2017/18, fiscal consolidation 2017/18, development spending experienced a slowdown has commenced. Recognizing the importance of (decelerated by 36.7 percent equivalent to a decline of 0.97 macroeconomic stability to sustain and accelerate percentage points of GDP). Kenya’s robust growth, fiscal consolidation began in 2017/18 (Figure 15) and is projected to continue over the 1.4.4. On the contrary, the contribution from recurrent medium term. In H1 2017/18, the fiscal outturn shows expenditure to the ongoing fiscal consolidation a lower fiscal deficit of 2.4 percent of GDP versus a half in 2017/18 remains minimal. Reflecting the more year target of 2.6 percent of GDP. While the government challenging task of rationalizing recurrent spending, the remains on track for its half-fiscal year target it is however contribution of recurrent expenditure to the ongoing important to recognize that with the prolongation of the fiscal consolidation process in FY 2017/18 is much elections into the Q4 2017, this might have hampered the lower (targeted at 0.1 percentage points) than that of execution of projects in the first half of the FY2017/18, development expenditure (1.2 percentage points). The thereby limiting spending. Hence a pick-up in spending net decline in recurrent spending is projected to come is to be expected in the second half of FY 2017/18. Given from a reduction in domestic interest payments (by 0.4 the underperformance of revenue compared to the percentage points of GDP), while other recurrent spending target, thus far in this fiscal year, it will be important for items (wages, foreign interest payments, operations and fiscal discipline to be maintained in order to achieve the 7.2 maintenance) are expected to rise (by 0.3 percentage percent of GDP target for FY17/18. points). So far in H1 2017/18, recurrent expenditure increased by 20.4 percent. Challenges in reining in 1.4.3. The biggest driver of fiscal consolidation is recurrent spending reflect government’s expenditures the slowdown in the pace of development spending. on the election rerun of October 2017, drought related Increased development expenditure in recent years food subsidies, foreign interest payments, and meeting driven by infrastructural projects has been an important demands of public sector wage agitations. The need to rein driver of Kenya’s growth (averaging 1 percentage points in recurrent expenditures has become more pertinent given of GDP in the last five years) and is expected to enhance the increasing share of recurrent expenditure in revenues the competitiveness of the economy. Nonetheless, much — both at national and county level. At national level, as a of the burden of fiscal consolidation is being shouldered share of ordinary revenue, recurrent expenditure increased by development spending. Ongoing fiscal consolidation from 86.2 percent in H1 2016/17 to 98.5 percent in H1 in FY 2017/18 targets a decline of total expenditure 2017/18. Similarly, at county level, recurrent expenditure by 1.4 percentage points as a share of GDP, of which accounted for a larger share total county revenue (61.9 1.2 percentage points (86 percent) is coming from percent), mainly driven by personnel emoluments (50.1 development expenditure. Based on fiscal outturn in H1 percent of total county revenue in Q1 2017/18). Figure 14: Government spending has been elevated in recent Figure 15: Expansionary fiscal policy contributed to elevated years fiscal deficit levels 30 2013/14 2014/15 2015/16 2016/17 2017/18* 0 25 3.9 3.7 3.5 3.9 3.8 3.0 3.5 3.5 20 2.7 3.2 -2 Percent of GDP 5.1 4.6 4.4 4.6 5.5 15 Percent of GDP -4 6.7 7.5 8.1 10 7.5 6.6 -6 5 8.8 -6.1 6.3 7.2 8.4 7.0 0 -7.4 -7.2 2013/14 2014/15 2015/16 2016/17 2017/18* -8 -8.1 Development and Net Lending Other recurrent County allocation -8.9 Wages and salaries Interest payments -10 Source: The National Treasury Source: The National Treasury Notes: * indicates preliminary results Notes: * indicates preliminary results April 2018 | Edition No. 17 7 The State of Kenya’s Economy 1.4.5. While a slowdown in the pace of development percent of total county revenue in Q1 2017/18). After one- spending is in order, a growth friendly fiscal off expenditures, associated with the 2017 general elections consolidation should combine efforts to raise tax and drought mitigation, a lower baseline in recurrent revenue with the reining in of recurrent spending. At expenditure could obtain if the Government focuses on the heart of most fiscal consolidation packages is the lowering of transfers to state owned enterprises, cleaning need to increase tax revenues and to rein in expenditures, the payroll of ghost and redundant workers, reducing the both development and recurrent expenditures.1 However, level of wage adjustments and frugality in operations and from a growth perspective, the latter should take a management expenses. greater weight. Further, to counteract the drag from fiscal consolidation, policy measures could be put in place to 1.4.7. Recurrent spending also needs to be contained stimulate the private sector’s contribution. For instance, at the County level. While the provisions under the while the state slows down on development spending PFM Act (2012) regulation 26(1) that caps the percent of a regulatory environment and incentive structure could national government revenue to be used in compensation be instituted to achieve flagship infrastructure projects of employees at 35 percent has been adhered to (31.71 through public private partnership initiatives. Thereby percent in 2014/15; 31.01 percent in 2015/16; and 28.48 providing an avenue where the State does not have to percent in 2016/17); a similar cap at the county government act through public bodies but through private entities to level could help contain county-level recurrent spending. advance spending on infrastructure such as roads, which Section 107(2c) of the PFM Act 2012 requires that the are financed through tolls and vignettes. This is, in fact, county government expenditure on wages and benefits to consistent with the completion of some mega projects its public officers not to exceed a percentage of the county (Energy - Olkaria) and the country’s reorientation towards government’s total revenue as prescribed by the County public private partnerships (e.g. dualling of Mombasa- Executive member of Finance in regulations approved Nairobi is being carried through a PPP). by the County Assembly. This flexibility on caps setting at the county government level could have led to the 50.1 1.4.6. A more ambitious cut in the recurrent spending percent of total county revenue in Q1 2017/18 being spent is needed to rein in the fiscal deficit. This is critical given on personnel emoluments at the county governments. the increasing share of recurrent expenditure in revenues Policy could help tighten this fiscal rule in line with the 35 — both at national and county level. At national level, as a percent required for the national government’s expenses share of ordinary revenue, recurrent expenditure increased on personnel emoluments. from 86.2 percent in H1 2016/17 to 98.5 percent in H1 2017/18. Similarly, at county level, recurrent expenditure 1.4.8. Domestic revenue mobilization has accounted for a larger share total county revenue (61.9 underperformed in recent years. As a share of GDP, percent), mainly driven by personnel emoluments (50.1 revenue collections have consistently decreased in the Figure 16: Fiscal consolidation has begun and is expected to Figure 17: Revenue growth has moderated continue into the medium term 2017/18* 2018/19f 2019/20f 2020/21f 2021/22f 20 0 1.3 1.3 1.2 1.2 1.2 16 2.0 2.0 2.1 2.2 2.1 1.3 1.3 Percent of GDP -2 1.3 1.2 1.3 Percent of GDP 12 4.6 4.5 4.3 4.4 4.4 3.0 3.4 8 -4 4.3 8.9 8.7 8.4 8.2 8.2 4 -6 6.0 0 2013/14 2014/15 2015/16 2016/17 2017/18* 7.2 -8 Income tax Value Added tax Other revenue Excise duty Import duty (net) Source: The National Treasury Source: The National Treasury Notes: * indicates preliminary results Notes: * indicates preliminary results 1 Nauschnigg (2006), Nauschnigg (2010). 8 April 2018 | Edition No. 17 The State of Kenya’s Economy last three fiscal years, declining from 18.1 percent of GDP debt stood at 27.4 percent of GDP, representing 3.0 and in FY 2013/14 to 17.2 percent of GDP in FY 2016/17 (Figure 0.4 percentage points higher than their level in June 17). However, based on the data for H1 2017/18, revenue 2016 respectively. On the composition of external debt, collections recorded a modest growth of 5.3 percent, short the stock of debt on concessional basis continued to of the target by 0.5 percentage points of GDP. The main decline. The share of multilateral debt to total external drivers of revenue growth remained Kenya’s traditional debt declined by 7.0 percentage points to 38.0 percent sources of tax revenue including income tax, VAT, and in June 2017 compared to the same period in 2016 in import duty. Policy reforms and administrative measures favor of bilateral and commercial banks (which rose by to support domestic revenue mobilization include 2.8 and 4.1 percentage points to 32.7 percent and 28.6 integration of iTax and IFMIS, roll out of integrated custom percent in June 2017 respectively). In February 2018, Kenya management, and expansion of tax base (e.g. informal successfully issued a US$ 2 billion Eurobond (US$ 1billion sector, betting, and pursue non-filers). for 10 years and US$ 1 billion for 30 years at 7.25 and 8.25 percent respectively). While this is expected to lengthen 1.4.9. The primary fiscal deficit has been the main the maturity profile of loans as well as help refinance driver of rising debt stock. Debt to GDP ratio has increased upcoming bullet payments on external debt obligations, from 40.6 percent of GDP in FY11/12 to an estimated 58.1 exchange rate risks and vulnerability to developments in percent of GDP in FY17/18, representing a cumulative international markets have also increased. increase of 17.5 percentage points (Figure 18). The increase was largely driven by the primary fiscal deficit that rose 1.4.11. A growth friendly fiscal consolidation can help steadily from 1.8 percent of GDP in 2011 to an average of stabilize public debt. Given the importance of growth about 4 percent over the 2012-2017 period (Figure 19). in stabilizing debt dynamics, it is important that ongoing The second important contributor to the rise in the debt fiscal consolidation occurs in a growth-friendly manner. to GDP ratio is the increase in interest payments, which In that regard, a path where much of the weight of fiscal has increased from 1.9 percent of GDP to an average of consolidation is falling on development spending, while 2.5 percentage points of GDP over the 2012-2017 period. not addressing the structural factors that keep recurrent On the otherhand the rise in debt to GDP has also been spending high could undermine Kenya’s long-term partially mitigated, first by robust GDP growth (contributing growth potential. Hence efforts to re-calibrate the balance to a decline by some 2.4 percentage points) and secondly between development and recurrent spending should through revaluations (by some 2.3 percentage points). help safeguard robust growth. This will lend support to boosting domestic revenue mobilization, a reduction 1.4.10. The overall increase in debt stock arises from in the primary deficit, and thereby contribute to a more both external and domestic sources. External debt favorable debt trajectory. reached 29.8 percent of GDP in June 2017, while domestic Figure 18: The overall increase in debt stock arises from both Figure 19: The primary fiscal deficit remains the key driver to external and domestic sources rising debt stock 80 12 58.1 8 60 57.5 53.8 48.8 47.8 4.2% Percent of GDP 43.1 4 3.1% 39.7 40.7 40.6 42.1 2.7% 2.2% 2.6% Percent 1.5% 1.4% 40 - 0 1.8% 20 -4 0 -8 2010 2011 2012 2013 2014 2015 2016 2017 2008/09 2011/12 2014/15 2017/18* Primary bal. Seignorage Growth e ect Interest Domestic External Total public debt (Gross) Revaluation Residual Change in debt Source: The National Treasury Source: The National Treasury, Central Bank of Kenya and World Bank Notes: * indicates preliminary results April 2018 | Edition No. 17 9 The State of Kenya’s Economy 1.5 Inflation has eased off since H2 2017, while (Figure 21). However, the stability of the exchange rate credit conditions remain tight (Figure 23) continues to remain a nominal anchor to 1.5.1. Following a spike in inflation in H1 2017, inflationary pressures and expectations. inflation has since decelerated to the lower end of the target band (5±2.5 percent). A sharp increase in food 1.5.2. With the Banking Amendment Act of (2016) still prices pushed headline inflation above the target range in place, monetary policy remains compromised. Given starting in February 2017. However, inflationary pressures that the policy rate is directly linked to the level of interest started to ease as the weather situation improved and the rate cap, there is a perverse incentive structure for using the food subsidies introduced by government to address food policy rate to spur or restrain economic activity. For instance, shortages came into effect. As a result, headline inflation under the new regime, a lowering of the policy rate — an fell to 4.2 percent in March 2018 compared to the high of action often taken by Central Banks globally if they want to 11.7 percent in May 2017. Core inflation, which excludes stimulate economic activity — could lead to the opposite food and energy prices, fell to 3.2 percent in October effect since the lowering of the cap further narrows the 2017—its lowest level since March 2011— but has since spread between yields on risk free government securities recovered to 4.2 percent in February 2018 (Figure 20). The and the maximum allowed lending rates. Since September low level of core inflation is consistent with an economy 2016, the policy rate was kept stable at 10.0 percent (Figure where demand pressures are still benign. With Kenya 25), however, in March 2017, the policy rate was cut by being a net oil importer, the recent rise in international 50bps (now at 9.5 percent) to support economic activity, oil prices is contributing to a pick-up in energy inflation given the weaker growth in 2017. Figure 21: Food and energy prices continue to be the main Figure 20: Inflation remains well within the target range driver of headline inflation in Kenya 14 120 12 100 10 80 Percent 8 Upper bound Percent 60 6 40 4 Lower bound 2 20 0 0 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Feb -16 May-16 Aug-16 Nov-16 Feb -17 May-17 Aug-17 Nov-17 Feb -18 Overall in ation Upper bound Lower bound Core in ation Food In ation Energy In ation Core In ation Sources: Kenya National Bureau of Statistics Sources: Kenya National Bureau of Statistics and World Bank Figure 22: Inflation decelerated sharply in most EAC economies because improved weather conditions and subdued demand Figure 23: There has been a modest appreciation in the nominal pressures exchange rate in 2018 18 140 14 100 10 Jan = 2003 Percent 6 60 2 -2 20 Apr-16 Jul-16 Oct-16 Jan -17 Apr-17 Jul-17 Oct-17 Jan -18 Apr -15 Aug-15 Dec -15 Apr -16 Aug-16 Dec -16 Apr -17 Aug-17 Rwanda Uganda Kenya Tanzania NEER REER Sources: Kenya National Bureau of Statistics, National Institute of Statistics Rwanda, Sources: Central Bank of Kenya Uganda Bureau of Statistics and Tanzania National Bureau of Statistics 10 April 2018 | Edition No. 17 The State of Kenya’s Economy 1.5.3. Weakness in private sector credit growth 1.5.4. The rise in non-performing loans contributed continued unabated in 2017. Private sector credit growth to tighter lending conditions in 2017. Non-performing fell from its peak of about 25 percent in mid-2014 to (2.0) loan ratio (NPLs) increased have increased to 11.4 percent percent in February 2018 (Figure 24). The slowdown in in February 2018, up from 10.6 percent December 2017 credit growth is broad based, with credit contraction in and 7.8 percent in 2016. This rise in NPLs was broad-based key sectors of the economy in 2017 (Agriculture, private across sectors, however, trade, personal & households, households, exports and business services). Whereas large manufacturing and real estate had the highest level of NPLs corporations have adequate liquidity, micro and small (Figure 26). Notwithstanding the deterioration in NPLs, and medium-sized enterprises (SMEs) encounter greater capital ratios (risk weighted) remains broadly unchanged challenges to access financing. Episodic increases in at 18.5 percent in December 2017 compared to December volatility in the inter-bank market also reflect in part the 2016. However, headwinds from the compression in structural liquidity segmentation in the banking system. interest margins, a low growth environment, and economic Since the conclusion of the elections in August 2017, the uncertainty related to the prolonged electioneering period interbank rate has declined by some 190 basis points from affected the profitability of the sector. In December 2017, 8.1 percent to 6.3 percent in February 2018, suggesting return on assets at 2.5 percent, though still sizeable, are at improvement in the liquidity situation among banks the lowest level in a decade. Risks are, however, inherently (Figure 25). However, the decline has not yet translated to high for smaller banks whose business models are now increased lending to the private sector. challenged by interest rate caps. Figure 24: Weakness in private sector credit growth continued Figure 25: The CBR has remained unchanged since September unabated in 2017 2016 while interbank rates have been volatile 20 30 50000 45000 25 40000 15 35000 Year-on-year growth (%) 20 Intebank volume 30000 Percent 10 15 25000 20000 10 15000 5 10000 5 5000 0 0 0 Nov -15 Feb -16 May -16 Aug -16 Nov -16 Feb -17 May -17 Aug -17 Nov -17 Feb -18 2015-01-02 2015-08-10 2016-03-11 2016-10-19 2017-05-30 2018-01-09 Private sector credit CBR Interbank rate Source: Central Bank of Kenya Sources: Central Bank of Kenya Figure 26: Rise in non-performing loans contributed to tighter Figure 27: Deteriorating balance of trade led to widening lending conditions in 2017 current account deficit 100 15 79.1 10 80 Percent of GDP 67.5 5 Ksh. Billions 60 53.8 48.8 40.5 44.3 0 40 31.7 30.0 28.8 -5.2 28.4 -5 -6.7 -6.5 23.4 17.2 -8.8 20 10.1 7.4 4.9 -10.4 8.7 6.1 6.4 3.28.7 1.5 1.6 -10 -9.2 -8.3 0 -15 Trade Personal/Household Manufacturing Real Estate Building & Construction Transport & Communication Agriculture Energy and water Tourism, restaurant & Hotels Financial Services Mining & Quarying -20 -25 2011 2012 2013 2014 2015 2016 2017-Nov Services Balance of trade Income Net Errors and Omissions Jun-17 Sep-17 Current Account Source: Central Bank of Kenya Sources: Central Bank of Kenya April 2018 | Edition No. 17 11 The State of Kenya’s Economy 1.6 Rising oil prices and underperformance of of GDP in 2016 (Figure 28). In terms of the breakdown of exports are contributing to the widening of capital flows, the balance on the financial account has current account deficit been driven almost entirely by the “other investments” 1.6.1. Kenya’s current account deficit widened in category related to foreign borrowing by the government 2017. Following a pickup in international commodity while banks have continued to see a decline in external prices and economic recovery among Kenya’s major financing — a likely compounding factor to the decline in trading partners (e.g. the EU, USA etc.), the value of Kenya’s credit to the private sector. In contrast, net foreign direct agricultural exports improved in 2017. Tea, coffee, and investments inflows have been subdued (Figure 29). At horticulture grew by 11.5 percent, 11.3 percent, and 1.1 about 5.9 months of imports, international reserves provide percent respectively in 2017, compared to 4.2 percent, -1.6 a comfortable buffer against external shocks.2 percent and 5.7 percent respectively in 2016. However, the expansion in agricultural exports was unable to 1.6.3. The stock market recovered in 2017, although mitigate the contraction from manufactured exports. performance has been muted since Q4 2017. After years Indeed, manufactured export volumes and re-exports of a bear market, the Nairobi Stock Exchange recovered from neighboring countries contracted on account of by some 33 percent in 2017. However, performance was disruption to trade logistics arising from the prolonged mixed during the year. Prior to the elections, the NSE Index election cycle. On the imports side, a moderate recovery had risen by some 44 percent reflecting a re-allocation of international oil prices, public infrastructural projects, of portfolios towards equities as the real interest rate and an increase in food imports to supplement for poor on government securities fell whereas price earnings harvests led to a rise in the import bill. Total imports ratio (P/E) ratios on stocks were at attractive valuations. increased by 18.1 percent in 2017 (November), compared However, reflecting the heightened uncertainty following to a contraction of 12.4 percent growth in 2016. The the annulment of the first presidential elections, there was widening of the current account deficit was curbed by a sharp decline in foreign equity outflows from the Nairobi the rebound in tourism receipts and increased diaspora stock exchange in September 2017. Since then, the index remittances. Remittances grew by 12.9 percent in 2017, has remained somewhat muted, stabilizing around the travel receipts increased by 17.1 percent in 2017 compared 3700-3800 range. However, as the stock market stabilized to 8.1 percent in 2016 (Figure 27). in Q4 2017, there was a rotation into government bonds reflecting attractive valuations, and the relative safety of 1.6.2. The financial account balance improved in 2017. bonds amidst a softening of global investor risk appetite With respect to the financing of the current account, the for emerging markets (EM) assets so far in 2018 (Figure 29). financial account balance improved to about 7.5 percent of GDP in November 2017 compared to about 5.9 percent Figure 28: Capital inflows have helped to finance the current Figure 29: Foreign portfolio flows have favored government account deficit and accumulate reserves bonds over equity in recent months 12 100000 5500 5000 8 80000 4500 NSE 20 Share Index Percent of GDP 4 4000 Ksh Million 60000 0 3500 -4 3000 40000 2500 -8 2011 2012 2013 2014 2015 2016 2017-Nov Direct Investment Portfolio Investment 20000 2000 General Government Non nancial corporations and NPISHs May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Other Investments Net Errors and Omissions NSE Index (Jan 1966=100) Foreign ownership of Treasury bonds Source: Central Bank of Kenya Sources: Central Bank of Kenya 2 The Monetary Policy Committee meeting held on 19th March 2018 reported CBK reserves at 5.9 months of import cover (USD 8.8 billion), which includes proceeds from the recently issued Eurobond. 12 April 2018 | Edition No. 17 The State of Kenya’s Economy 2. Outlook 2.1 Growth is projected to recover over the global economy, remittances to the economy is projected medium term to be robust, thereby lending support to household 2.1.1. Notwithstanding fiscal consolidation, economic consumption. Further, given that unsecured lending to activity is poised to rebound over the medium term. households has been one of the hardest hit borrower GDP growth is projected to recover to 5.5 percent in 2018, segments in the aftermath of the interest rate cap regime, and steadily rise to 6.1 percent by 2020 when output gaps the anticipated repeal or significant modification to the cap in the economy would have closed, (Table 1) and (Figure is likely to bolster private consumption as more households 30). On the upside, the rebound in economic activity is gain credit. However, on the downside, with global oil predicated on favorable rains which should be supportive prices expected to continue their steady rebound (about of the ongoing rebound in the agriculture sector, the 10 percent increase in 2018 over 2017 prices) and with the dissipation of political tension and the strengthening of pass-through of these prices dampening household real the global economy. However, partially mitigating the lift incomes, this will serve as a drag on private consumption, from the upside drivers are the rise in oil prices; down-sizing thereby mitigating the lift from some of the upside factors. of the fiscal stimulus from earlier years; and the still weak credit growth to the private sector. Regarding the latter, 2.2.2. With fiscal consolidation underway, the earlier the baseline however assumes that the ongoing discourse stimulus from the fiscal stance is expected to wane to repeal the interest rate cap will be successful in 2018, over the medium term. Government expenditures have thereby supporting a robust recovery in private sector expanded at a compound average growth rate of 12.1 credit growth in 2019 and beyond. percent between FY13/14 and FY16/17, and with that the contribution of government spending (including recurrent 2.2 Recovery in private demand is expected to and development) to GDP growth has averaged about 1.8 drive the rebound in growth, even as the percentage points. In other words, over the past five years stimulus from fiscal policy wanes about a third of growth has come from the public sector. 2.2.1 A modest recovery in private consumption is With fiscal consolidation underway, the pace of expansion expected to occur over the medium term. The baseline of government spending is projected to slow down to 5.8 assumes normal weather conditions. With that, food price percent. On the one hand, this will reduce the stimulus to inflation is expected to remain benign, thereby lending the economy coming from the public sector, nonetheless, support to the recovery in private consumption, unlike in a necessary step to safeguard macroeconomic stability. 2017 when household consumption was hit hard by the On the other hand, to the extent that the slowdown in drought. With the ongoing broad-based recovery in the government spending is likely to translate into lower Table 1: Medium term growth outlook (annual percent change unless indicated otherwise) 2014 2015 2016 2017e 2018 f 2019 f 2020f Real GDP growth 5.4 5.7 5.8 4.8 5.5 5.9 6.1 Private Consumption 4.3 5.1 4.8 4.6 5.2 5.7 5.7 Government Consumption 1.7 13 7 9.9 5.9 4.1 2 Gross Fixed Capital Investment 14.2 6.7 -9.3 1.5 9.2 9.5 12.1 Exports, Goods and Services 5.8 6.2 0.6 2.8 5.8 6.8 7 Imports, Goods and Services 10.4 1.2 -4.7 3.8 7.8 7.4 7.6 Agriculture 4.3 5.5 4 2.3 3.9 4.3 4.6 Industry 6.1 7.3 5.8 2.9 4 4.8 5 Services 6.3 5.9 7.1 6.7 6.8 7 7.1 Inflation (Consumer Price Index) 6.9 6.6 6.3 8 6.8 6.5 6.5 Current Account Balance (% of GDP) -10.4 -6.7 -5.2 -5.5 -6.5 -7.2 -8.4 Fiscal Balance (% of GDP) * -8.1 -7.4 -8.9 -7.2 -6.0 -4.3 -3.4 Sources: World Bank and the National Treasury Notes: “e” denotes an estimate, “f” denotes forecast. *Fiscal Balance is sourced from National Treasury and presented as Fiscal Years April 2018 | Edition No. 17 13 The State of Kenya’s Economy yields on benchmark securities, this should help crowd- not materialize, the expected recovery in private sector in private investment, contributing to the recovery of the activity will be significantly curtailed. economy. Further, the completion of critical infrastructure Figure 30: Domestic demand will continue to be the main driver projects including the first phase of the SGR, and ongoing of medium term growth infrastructure investments (including PPPs) such as the 8 second phase of the Standard Gauge Railway (SGR), electricity generation, Lamu Port, and the upgrade of several 5.8 5.9 6.1 6 5.5 highways are expected to ease supply-side constraints to 4.8 GDP growth (%) growth in the economy. 4 2.2.3. Private investment growth is expected to recover, but could remain sub-par without a supportive 2 policy environment. With the easing of political uncertainties in the aftermath of the Presidential elections, 0 pent-up investment is coming onstream as the wait-and- 2016 2017e 2018f 2019f 2020f see attitude adopted by the private sector in 2017 gives Source: World Bank Notes: “e” denotes an estimate, “f” denotes forecast way to a rebound in business sentiment (as reflected in the recent increase in PMIs). Further, the strengthening of the 2.2.4. The contribution of net exports will be global economy is providing a further fillip to private sector moderate. Historically, the contribution of net exports activity as external demand for Kenyan goods and services to GDP growth has been negative, subtracting about 1.1 (e.g. tourism) is expected to increase. However, the extent percentage points from GDP growth. Lower oil prices in to which the private sector in Kenya will be able to take recent years has however reduced the extent of the drag advantage of improving conditions could be curtailed from net exports. However, since oil prices are expected by the extent to which it is starved of credit. Our baseline to continue their steady ascent in 2018 and beyond, we assumes that with a repeal or significant modification of expect the drag from net export over the forecast horizon the cap in 2018, credit conditions will improve by 2019, to rise. This is expected to be mitigated somewhat by the thereby lending support to a recovery in the private lift from Kenya’s merchandise (horticulture and tea) and sector. Relatedly, this will help bring down yields on services (mainly tourism) exports as the projected broad- government securities, thereby incentivizing banks to based recovery in the global economy takes root. Further, lend to the broader private sector rather than current with fiscal consolidation underway and with it a projected skewed lending to the public sector or blue-chip Kenyan slowdown in development spending, this should moderate companies. However, as noted in the risk section, if the the pace of import expansion and reduce the extent of the favorable policy environment, factored in our baseline does drag from the net exports contribution to growth. 3. Risks remain tilted to the downside 3.1 Introduction rates caps and other measures to boost credit growth to 3.1.1. While our baseline projects a rebound in the private sector will come to fruition. If this does not economic activity, there remain several risks. On balance, occur, it presents a significant downside risk to growth risks are however tilted to the downside. This section prospects since weak credit growth will dampen effective addresses some of the key domestic and external risks demand by households, stunt business expansion plans, Kenya faces. and lower the growth potential of the Kenyan economy over the long-run. For Kenya’s rebound in growth to be 3.2 Domestic risks sustained over the medium term, it must be accompanied 3.2.1. The projected growth in the economy could be by sufficient growth in credit to the private sector and derailed if the ongoing weakness in private sector credit especially to micro, small and medium enterprises that growth is not reversed. Our baseline assumption assumes contribute to growth and job creation. that the ongoing consultation to repeal the law on interest 14 April 2018 | Edition No. 17 The State of Kenya’s Economy 3.2.2. Deviations from projected fiscal consolidation projected growth. Our forecast assumes normal rains for path could jeopardize Kenya’s hard-earned March-May 2018 rain season and over the medium term. macroeconomic stability and raise debt to GDP ratio. However, if normal or near normal rains do not materialize, Fiscal slippages represent a significant risk to maintaining it poses a significant risk to agricultural output, with macroeconomic stability — a key enabler to achievement downside risks to medium term growth. of the big four agenda of the Government and the projected growth. Given past pressures from recurrent 3.3 External risks expenditures, vulnerability to drought effects and a 3.3.1. Spillovers from tighter global financial persistent underperformance of revenues vis-a-vis targets, conditions represent a risk to Kenya’s medium-term fiscal pressures could mount if the planned path for fiscal prospects. In our baseline, we assume a normal adjustment consolidation is not adhered to. This could have adverse of monetary policy in major advanced economies that implications for government borrowing cost, crowding does not result in disruption of global financial markets out of the private sector, exchange rate stability, and high conditions. However, tighter global financial condition interest payments, thereby potentially reversing some could be triggered by an increase in interest rates in major of Kenya’s recent gains (macro-stability, robust growth, advanced economies or developments that prompts poverty reduction) and curtailing growth. global risk aversion (e.g. the recent proposal to slap taxes on steel and aluminum in the US). This could raise 3.2.3. The ongoing recovery in business confidence Kenya’s external financing risks, reduction in capital flows could dissipate if political tensions were to escalate. Our to Kenya, exchange rate depreciation and rising interest baseline assumes a return to political normalcy following a rates payments. However, this risk is assessed low given the prolonged election cycle in 2017. However, in the unlikely recent successful issuance of a US$ 2 billion Eurobond (US$ event of an escalation in political tensions, the ensuing political uncertainty could cripple the recent recovery in 1billion for 10 years and US$ 1 billion for 30 years at 7.25 business confidence and curtail private investment and and 8.25 percent respectively) that was over-subscribed. consumption, thereby leading to a weaker than projected Furthermore, given a comfortable level of official foreign growth performance. reserves estimated at US dollar 8.9 billion (equivalent to 4.5 months of import cover) in December 2017 there is scope 3.2.4. Insufficient rains and potential for drought to absorb exogenous shocks associated with tightening conditions present significant downside risks to the global financial conditions. The projected growth in the economy could be derailed if the ongoing weakness in private sector credit growth is not reversed Photo: © Sarah Farhat/World Bank April 2018 | Edition No. 17 15 The State of Kenya’s Economy 3.3.2. Weaker global growth and the sub-region. pressures on the current account balance and terms of The baseline assumes a further firming up of the global trade. However, a sharper than expected rise in oil prices economic activity and recovery in growth of the sub- could result in deterioration of terms of trade, rising Saharan African (SSA) region. This is expected to support energy prices and inflation that could potentially weaken manufacturing exports (mainly to COMESA) to the sub- the domestic demand and overall growth. This, however, region and auger well for Kenya’s growth prospects. remains a tail risk event given that higher oil prices are Nonetheless, escalating tensions in global trade, adversarial likely to induce a supply response, especially from US geopolitical developments, and an increase in policy shale oil producers. uncertainty among high-income countries could mark down global growth. If this were to occur, support to 3.3.4. Despite the vulnerabilities to growth, there are growth from the global economy through trade, tourism, several positive factors that have not been factored in investment and remittances would be weaker than the baseline forecasts, which could yield better outturns assumed in the baseline, thereby presenting a downside to the growth forecast. These include a better than risk to Kenya’s growth prospects. expected recovery in the global recovery, above average rains leading to bountiful harvests, a swifter than projected 3.3.3. Sharper than expected increase in oil prices could recovery in private sector credit growth following the cap, a present a downside risk to Kenya’s projected growth. The downturn in global oil prices. Were anyone or a combination baseline assumes a moderate increase in global oil prices of these to occur, there could be significant upside risks to that is expected to be accommodated without excessive the baseline projections. 16 April 2018 | Edition No. 17 Part 2: Special Focus I Assessing Poverty Reduction in Kenya Against International Benchmark Photo: © Sarah Farhat/World Bank Special Focus 4. Assessing Poverty Reduction in Kenya Against International Benchmark 4.1 Introduction 4.1.2. While the national poverty lines are critical to 4.1.1. Poverty incidence declined from 46.8 percent analyze poverty dynamics and distribution within the in 2005/06 to 36.1 percent in 2015/16, using Kenya’s country, they are not comparable across countries. Kenya’s official national poverty lines. The Kenya National Bureau national poverty line is derived from the Cost-of-Basic Needs of Statistics (KNBS) released the most recent poverty statistics (CBN) method.4 The CBN method stipulates a consumption in March 2018, based on the second Kenya Integrated bundle deemed to be adequate for ‘basic consumption Household Budget Survey (KIHBS 2015/16). KIHBS 2015/15 needs’, and then estimates what this bundle costs in closes an important data gap, as the previous survey collecting reference prices. As basic consumption needs are usually expenditure data to estimate poverty was implemented different across countries, the poverty rate measured by the 10 years ago in 2005/06. The ‘Basic Report on Well-Being 3 national poverty line is not comparable across countries. in Kenya’ by the Kenya National Bureau of Statistics (2018) Therefore, this Special Section uses the international poverty provides a detailed assessment of poverty at the national line defined at US$ 1.90 PPP 2011 (Box B.1). poverty line and describes progress since 2005/06. Box B.1: The International Poverty lines The international poverty line is defined in absolute terms as a threshold of purchasing a fixed basket of goods that meets basic needs across countries. The concept of an international poverty line was first introduced in the 1990 World Development Report. The objective was to measure poverty in a consistent way across countries, using a poverty line that reflected conditions of poverty in poor countries, while also considering real purchasing power across countries of all incomes. To decide on an international poverty line, the World Bank analyzed data from 33 national poverty lines from both developed and developing countries in the 1970s and 1980s. The threshold of US$ 1 a day was agreed upon and became the first international poverty line. Over the years, the poverty line has periodically been adjusted as new purchasing power parity (PPP) measures became available. The new measures reflected both changes in relative price levels across countries, as well as changes to methodologies. The poverty line increased from US$ 1 a day at 1985 PPPs to US$ 1.08 at 1993 PPPs, then to US$ 1.25 at 2005 PPPs, and finally to its current level of US$ 1.90 at 2011 PPPs. The increase in the international poverty line can be mostly attributed to changes in U.S. dollar purchasing power relative to the purchasing power of the local currencies in the poorest countries. Essentially, the increase in the poverty line says that US$ 1.90 in 2011 real terms would buy about the same basket of goods that US$ 1.25 bought in 2005. The World Bank introduced an additional set of international poverty lines in 2016, taking into account the relationship between national poverty lines and the wealth of the country. These lines are defined as the median national poverty line for each grouping of countries by their GNI per capita, using the World Bank classification of countries as low-income, lower middle-income, upper middle-income and high-income. The World Bank now reports poverty rates for countries using the new lower middle-income and upper middle-income poverty lines. The poverty line for lower middle-income countries is US$ 3.21 per day and for upper middle-income countries, it is US$ 5.48 per day. In addition to these poverty lines, this section also uses a US$ 1.25 2011 PPP poverty line to further distinguish between the poor living below US$ 1.90 and the poorest living below US$ 1.25. To allow for international comparisons, poverty in this chapter is estimated using the current international poverty line and the lower middle-income class poverty line. Since 2014, Kenya has been classified as a lower middle-income country. Its current GNI per capita of US$ US$ 1,380 puts it at the bottom of the lower middle-income class (LMIC) grouping.7 As the poverty lines are defined at US$ 2011 PPPs, this is converted to the local currency used to measure consumption for both survey years 2005 and 2015. First, US$ 2011 are converted into Kenyan Shilling in 2011 using the PPP estimate for Kenya (35.43). Second, the change in purchasing power per Kenyan Shilling is adjusted for by considering inflation or deflation to the survey period as measured by the national Consumer Price Index (CPI). 3 The KIHBS 2015/16 utilized a two-stage stratified cluster sampling method with the objective of providing data for poverty estimates at national and county levels as well as for urban and rural areas. The sample included 24,000 households from 2,400 clusters distributed to urban and rural strata for each of the 47 counties in Kenya based on the 2009 Census. The survey was implemented for a duration of 12 months from September 2015 to August 2016 to take into account seasonal effects. Source: Kenya National Bureau of Statistics (2018): ‘Basic Report on Well-Being in Kenya’. 4 The American Economic Review, Vol. 84, No. 2, Papers and Proceedings of the Hundred and Sixth Annual Meeting of the American Economic Association. (May, 1994), pp. 359-364. 5 Source: World Bank Open Data Catalogue. 18 April 2018 | Edition No. 17 Special Focus 4.1.3. In this special section, the macroeconomic — differences to make relevant distinctions in drawing drivers and the trends of poverty reduction are analyzed, conclusions. The in-depth analysis will provide specific including an assessment of current levels against policy recommendations to accelerate poverty reduction international benchmarks. The relationship between and foster shared prosperity. macro-economic growth and poverty is important to assess the transmission of growth on poverty reduction. 4.2 Poverty Trends It also helps to understand resilience against shocks and 4.2.1. About 1 out of 3 people in Kenya live below the vulnerability of the population to fall into poverty. the international poverty line. The daily consumption International benchmarking puts Kenya’s achievements expenditure for 35.6 percent of the population is below in terms of poverty reduction and well-being into US$ 1.90 in 2011 PPP. For 63.7 percent of the population it perspective, highlighting areas that might require more is below US$ 3.20 in 2011 PPP (Box B.1). The poverty rate policy attention. has moderately reduced over the past decade at both international poverty lines, dropping from 8 percentage 4.1.4. A detailed assessment of poverty in Kenya and points at the US$ 1.90 line and five percentage points at the policy implications will be provided in the forthcoming US$ 3.20 line between 2005 and 2011 (Figure 31). Poverty World Bank Kenya Poverty and Gender Assessment reduction has been steady over the past decade, except (KPGA). Based on the KIHBS 2005/06 and KIHBS 2015/16 for a shock to consumption in the years following the 2008 surveys as well as other relevant data sources like the global economic crisis (Figure 33). Kenya Demographic and Health Survey (2014), the KPGA will describe in detail poverty characteristics and trends in 4.2.2. Increased consumption for the poorest of the Kenya, including sectoral deep dives into health, education poor has driven poverty reduction in the past decade. and social protection. The analysis in the KPGA will be The rate of poverty under the threshold of $1.25 USD a day disaggregated to acknowledge — e.g. spatial and gender in 2011 PPP, has decreased by 7.8 percentage points since Figure 31: Poverty at the US$ 1.25, 1.90, and 3.20 Figure 32: Cumulative consumption distribution with shock 80 100 Poverty headcount (% of population) Percent of Population 80 60 60 40 40 20 20 0 0 0 100 200 300 400 500 2005 2015 Average per capita monthly consumption, US$ 2011 PPP Extreme poverty, under $1.25 USD a day Poverty, under $1.90 USD a day US$ 1.90 Poverty Line Consumption distribution, KIHBS 2015 Poverty, under $3.20 USD a day US$ 3.20 Poverty Line Consumption distribution, 10% shock Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank Table 2: Key monetary poverty Indicators 6 Poverty Headcount (%) Piverty Gap (%) 2005 2015 2005 2015 US$ 1.25 2011 PPP poverty line 7 22.7 14.9 7.3 4.0 US$ 1.90 2011 PPP poverty line 43.6 35.6 16.1 11.3 US$ 3.20 2011 PPP poverty line 68.7 63.7 33.0 27.5 Source: Kenya National Bureau of Statistics KIHBS 2005 & 2015) and World Bank 6 Poverty estimates in this section are preliminary. The official source for World Bank estimated poverty headcounts is PovcalNet. The estimation for poverty was made using a per capita aggregate for consumption. The poverty line was adjusted using the 2011 PPP estimate and inflated or deflated to the survey period. The official CPI used for 2011 was 121.1654. For the KIHBS 2005, the weighted average of the official CPI for the survey period was 73.2557. For the KIHBS 2015 survey period, it was 166.299. 7 The US$ 1.25 2011 PPP poverty line is used to distinguish further between the poorest living below this poverty line and the poor living below US$ 1.90 2011 PPP poverty line. April 2018 | Edition No. 17 19 Special Focus Figure 33: GDP sectoral simulation of poverty trajectory at Figure 34: Overall GDP growth simulation of poverty trajectory international poverty lines, 2005 to 2015 at international poverty lines, 2005 to 2015 80 80 Poverty headcount (% of population) Poverty headcount (% of population) 60 60 40 40 20 20 0 2005 2007 2009 2011 2013 2015 0 2005 2007 2009 2011 2013 2015 Poverty, under $1.25 a day Poverty, under $1.90 a day Poverty, under $3.20 a day Poverty, under $1.25 a day Poverty, under $1.90 a day Poverty, under $3.20 a day Source: Kenya National Bureau of Statistics (KIHBS 2005) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2005) and World Bank 2005 to reach 14.9 percent in 2015 (Figure 31). The reduced pass-through parameter can be defined as the elasticity poverty at the international poverty line reflects these of a sector’s growth to changes in the consumption of improvements. Measured by the poverty gap index, which households employed in that sector.8 In other words, is the average deficit between the total consumption of the the pass-through parameter ensures that sectoral GDP poor and the international poverty line, depth of poverty growth transmitted to household consumption growth is decreased from 16.1 percent of the poverty line in 2005 to consistent with the observed changes in poverty between 11.3 percent in 2015 (Table 2). 2005 and 2015. 4.2.3. Well-being has stagnated for households living 4.2.5. Growth in the agriculture sector accounted between the US$ 1.90 and US$3.20 poverty lines. The for the largest share of poverty reduction. In the years percentage of the population consuming between US$1.90 following the slow-down of growth in 2008, the agriculture and US$3.20 increased by 3 percentage points between sector experienced a strong rebound (Figure 35). From 2011 2005 and 2015 (Figure 34). This is not surprising as increases to 2015, growth averaged 4.1 percent. Comparing poverty in consumption of the very poor have pushed them above rates from KIHBS 2005 and KIHBS 2015 data, households the US$ 1.90 poverty line while in the same period not as benefitted the most from agriculture sector growth many (net) households increased consumption beyond compared to other sectors of the economy. From 2005 to US$ 3.20. Therefore, still many households have a certain 2015, the poverty rate decreased by 2.2 percentage points degree of vulnerability to fall back into poverty measured at for Kenyans living in a household engaged in agriculture the US$ 1.90 level. A 10 percent consumption shock would (Table 3). The share of households engaged in agriculture push a fifth of households currently between US$ 1.90 and slightly dropped from 50.7 percent in 2005 to 47.8 percent US$ 3.20 below the US$ 1.90 a day threshold, raising the in 2015 (Figure 36). The large share of households in poverty headcount by 5.9 percentage points (Figure 32). agriculture, combined with a high pass-through rate in the sector, drives the poverty reduction impact, also because 4.2.4. To estimate the relationship between poverty most poor are in the agricultural sector. reduction and growth at the sector level, the evolution of poverty from 2005 to 2015 is simulated based on sectoral 4.2.6. Shocks in the agriculture sector have a large growth rates, while assuming no redistribution beyond impact on poverty. Households engaged in agriculture that resulting from differences in sectoral growth. benefit from the highest pass-through rate, especially for Consumption expenditure per household from KIHBS 2005 those consuming less than $1.25 a day (Figure 37). For these is augmented based on the growth rate of the household households, real consumption increased by 0.75 percent for head’s sector of economic activity. The poverty rate per each 1 percent growth in the agriculture sector. The flipside sector in KIHBS 2015 provides the anchor to determine of a high pass-through rate is the vulnerability to shocks. the pass-through parameter of that sector. Thus, the For example, the estimated trajectory of poverty reduction 8 Occupations are categorized into three broad categories: 1) agriculture; 2) manufacturing; 3) services. Assumptions about sectoral pass-through parameters for these sector groupings are drawn from the sectoral decomposition of poverty analysis between 2005 and 2015. Parameters are assumed to be constant over years. For households without reported household head occupation, average GDP growth is applied. 20 April 2018 | Edition No. 17 Special Focus slowed following a shock to agriculture growth in 2010 4.2.8. Poverty reduction is relatively strong for (Figure 33 and Figure 35). The poverty headcount decreased households in the services sector. Growth in this sector by less than one percentage point from 2010 to 2011. followed a similar trajectory to that of the agriculture sector, but with more stability and less vulnerability to shocks 4.2.7. The industry sector has a weak relationship (Figure 35). The share of households in this sector remained between growth and poverty reduction. While the constant from 2005 to 2015, at about 40 percent (Figure 36). number of households in the industry sector is low at 9.1 The poverty rate at the US$ 1.90 threshold decreased by 1.5 percent in 2005, it increased to 12.4 percent in 2015. For percentage points for households in this sector between all poverty lines, the poverty rate for households in the 2005 and 2015 (Table 3), indicating the sector has a relatively industry sector decreased by less than one percentage higher pass-through rate compared to the industrial sector. point (Table 3) between 2005 and 2015. This is not surprising as most households in the industrial sector are non-poor, 4.2.9. Kenya is not on track to eradicate poverty by so growth in the sector cannot have a strong impact on 2030. In order to achieve a poverty rate below 3 percent by poverty reduction. However, the shift of households to the 2030, the poverty rate must decrease by 32.6 percentage industry sector strongly contributes to poverty reduction. points. However, Kenya’s annualized poverty reduction For poverty at US$ 1.90, the intra-sectoral effect on poverty rate was 1.8 percent between 2005 and 2015. Assuming reduction is around 5 percentage points (Table 3). Thus, this rate is maintained for the next 15 years, the poverty the changes in sectoral composition — with households rate will remain above 25 percent in 2030. To achieve moving from agriculture and services to industry — had a an annual poverty reduction rate of 6.1 percent (which much stronger impact on poverty reduction than the pass- would be necessary to reach the 3 percent goal) growth through growth effect. needs to be higher, more inclusive, and coupled with redistributive policies. Figure 36: Share of households by sector of household head Figure 35: Real sector growth, 2007 to 2015 occupation, 2005 vs. 2015 14 60 10 Percentage of households 40 6 Percent 2 20 -2 -6 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agriculture Industry Services Agriculture GDP Services Industry 2005 2015 Source: Kenya National Bureau of Statistics Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Table 3: Sectoral decomposition of changes in poverty US$ 1.25 line US$ 1.90 line US$ 3.20 line Sector Absolute Percentage Absolute Percentage Absolute Percentage change change change change change change Agriculture -3.24 41.07 -2.24 27.92 -0.20 4.05 Industry -0.47 6.02 -0.41 5.13 -0.30 6.11 Services -1.10 14.01 -1.45 18.05 -0.44 8.86 Total intra-sectoral effect -6.13 77.79 -5.16 64.43 -1.86 37.66 Population shift effect -2.09 26.57 -2.93 36.63 -3.18 64.48 Interaction effect 0.34 -4.37 0.09 -1.06 0.11 -2.14 Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank April 2018 | Edition No. 17 21 Special Focus Figure 37: Consistent sectoral elasticities for poverty pass- 4.3 Poverty in International Comparison through 0.8 4.3.1. Poverty in Kenya is below the average in sub- Saharan Africa and is amongst the lowest in the East 0.6 African Community.9 The poverty rate at the US$ 1.90 a Pass-through rate day line in Kenya is nearly half the poverty rate of Rwanda 0.4 in 2013 (60.4 percent). However, it is higher than poverty in Uganda (34.6 percent) and Ghana (13.6 percent), both 0.2 measured in 2012 (Figure 39). When considering GDP per capita in constant PPP terms, poverty in Kenya is in line with 0 expectations given the trend of poverty to GDP per capita Agriculture Industry Services Sectoral elasticity, 1.25 projection Sectoral elasticity, 1.90 projection in sub-Saharan Africa (Figure 40). Kenya’s ratio of poverty Sectoral elasticity, 3.20 projection GDP elasticity, 1.90 projection GDP elasticity, 1.25 projection GDP elasticity, 3.20 projection to GDP per capita is close to that of the sub-Saharan Africa Source: World Bank aggregate. Ghana and Uganda both have lower ratios of poverty to GDP per capita. However, it is important to note 4.2.10. To eradicate poverty by 2030, a strong that Kenya has the most recent estimate for poverty (2015), combination of both inclusive growth and which may bias its performance in comparison to countries redistribution will be needed. Growth increases with older poverty estimates such as Ghana and Uganda household consumption, while redistribution is a transfer (both 2012). of income / consumption between households affecting inequality. To achieve a poverty rate of 3 percent in 2030 4.3.2. The depth of poverty at the international without any redistribution, real household consumption poverty line is in line with expectations. The relationship would need to increase on average by 11.4 percent per between the poverty headcount and the poverty gap year from 2015 to 2030. Without any growth in household in Kenya conforms to the trend for sub-Saharan African consumption, inequality would need to be reduced countries (Figure 41). Kenya’s poverty gap is close to that of by 2.9 percent per year. In a more realistic scenario, an Uganda (10.3 percent), but is notably higher than in Ghana average annual growth rate of 5.5 percent coupled with (4.0 percent). The improvement in the poverty gap since an annual reduction in inequality by 1.5 percent could 2005 suggests that many of the poor are close to reaching eradicate poverty in 2030 (Figure 38). This is a much higher the US$ 1.90 a day consumption threshold. This reflects level of growth and inequality reduction than Kenya has Kenya’s notable reduction in poverty below the US$ 1.25 a demonstrated the past decade. day line since 2005. Figure 38: Combination of growth and redistribution needed to Figure 39: International comparison of poverty eradicate poverty in 2030 3 80 Annual Pace in Inequality Reduction (Percent) Poverty headcount (% of population) 2.5 60 2 1.5 40 1 20 0.5 0 0 2 4 6 8 10 12 0 Annual Growth in Household Consumption (Percent) RWA 2013 TZA 2011 SSF 2013 KEN 2015 UGA 2012 GHA 2012 Source: World Bank Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank 9 Four countries were selected for the international comparison due to geographic proximity, comparable population size and/or level of wealth: Ghana (GHA), Rwanda (RWA), Tanzania (TZA), and Uganda (UGA). The aggregate for sub-Saharan Africa (SSA) is also included as a regional benchmark. Tanzania has a GDP PPP per capita ($2,583) comparable to that of Kenya ($2,926), while Ghana ($3,980) is relatively wealthier. Rwanda ($1,774) and Uganda ($1,687) are both relatively poorer than Kenya. In terms of population, Tanzania (55.6 million) and Uganda (41.5 million) are similar in size to Kenya (48.5 million), whereas Ghana (28.2 million) and Rwanda (11.9 million) are notably smaller. 22 April 2018 | Edition No. 17 Special Focus Figure 41: Poverty rate against depth at international Figure 40: Poverty headcount against GDP per capita poverty line 100 50 Poverty headcount (% of population) 80 40 poverty gap (% of poverty line) RWA 2013 60 30 TZA 2011 RWA 2013 KEN 2005 40 SSF 2013 20 SSF 2013 KEN 2005 UGA 2012 KEN 2015 TZA 2011 20 GHA 2012 10 UGA 2012 KEN 2015 GHA 2012 0 0 6.0 7.0 8.0 9.0 10.0 11.0 0 20 40 60 80 100 Log GDP per capita, constant PPP Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2005 &2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank 4.3.3. When considering Kenya’s lower middle-income Kenya is irrigated compared to 6 percent in sub-Saharan class status, poverty is relatively high. Poverty in Kenya is Africa (SSA) and 37 percent in Asia. Recent studies show higher than the aggregate for LMIC countries, both at the that for SSA economies returns to irrigation range from US$ 1.90 and US$ 3.20 lines (Figure 42). Ghana provides an 17 percent for large scale farmers to 43 percent for small appropriate benchmark as it has a similar GNI per capita scale farmers, and can triple per capita farm incomes, to Kenya (US$ 1,380). The poverty headcount in Ghana at with significant impacts on poverty reduction. Further, the LMIC line (34.9 percent) is 28.8 percentage points less aggregate returns to research spending is 93 percent than that in Kenya. Poverty in Kenya is also much deeper and ranges between 8-49 percent for extension services. at the lower middle-income class line than it is at the Given the low level of resources devoted to such high international poverty line. The poverty gap at the LMIC line return activities in the agricultural sector, there remains is 27.5 percent (Figure 43), compared to 11.3 percent at the significant scope for Kenya to re-allocate resources to international poverty line. Kenya’s depth of poverty at the these areas to boost productivity in the sector. LMIC line is substantially higher than Ghana and the LMIC aggregate (Figure 43). 4.4 Non-Monetary Poverty 4.4.1. Poor households are often deprived in multiple 4.3.4. Returns to public spending could be significant. dimensions. The most common type of deprivation For instance, only 2 percent of the total arable land in is access to improved sanitation10, which affects 40.7 Figure 42: Poverty headcount at IPL and LMIC, international Figure 43: Poverty gap at IPL and LMIC, international comparison comparison 80 30 poverty headcount (% of population) Poverty gap (% of poverty line) 60 20 40 10 20 0 0 KEN 2015 GHA 2012 LMIC 2013 KEN 2015 GHA 2012 LMIC 2013 Poverty rate at $1.90 USD PPP per day line Poverty gap at $1.90 USD PPP per day line Poverty rate at $3.20 USD PPP per day line (LMIC) Poverty gap at $3.20 USD PPP per day line (LMIC) Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank 10 Improved sanitation is defined as a toilet with a flush, a ventilated improved pit latrine or a latrine with a slab. 11 Improved drinking water sources are defined as a piped water system, public tap, borehole, protected dug well, bottled water or water from rainwater collection vendors. April 2018 | Edition No. 17 23 Special Focus Figure 44: International comparison of elasticity of poverty Figure 45: Elasticity of poverty reduction against GDP per capita reduction Sub-Saharan Log GDP per capita, constant PPP Rwanda Kenya Africa Tanzania Ghana Uganda 7.0 7.4 7.8 8.2 8.6 0.0 0.0 % change in poverty per 1% change in GDP % change in poverty per 1% change in Rwanda -0.2 GDP per capita PPP -0.4 -0.4 -0.6 Kenya Sub-Saharan -0.8 -0.8 Tanzania Africa -1.0 Uganda Ghana - 1.2 -1.2 Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank percent of Kenyan households. The second most common 4.4.3. Kenya has a relatively high level of access deprivation is monetary, defined as a daily consumption to improved sanitation, but lags behind in access to expenditure below US$ 1.90 in 2011 PPP. Monetary improved water. Though progress has been made in deprivation affects 35.6 percent of households. Lastly, 28.2 improving access to improved water since 2005, Kenya percent of households lack access to improved drinking still lags behind other countries in the international water sources11 (Figure 46). comparison. Only 71.8 percent of Kenyan households have access to improved water sources. This is below the level 4.4.2. Kenya’s Human Development Index (HDI) of peer countries like Ghana, Rwanda and Uganda. Kenya’s has improved since 2005, but Kenya is still lagging rate of improved water is close to the average for sub- behind Ghana. The HDI is an index measured by the Saharan Africa (68 percent) however, and is in line with its United Nations Development Program (UNDP) in the level of poverty (Figure 48). Kenya performs much better in annual Human Development Report. The index measures access to improved sanitation compared to countries with progress along three dimensions: education, inequality, a comparable poverty headcount (Figure 49). and life expectancy. Kenya has made progress in human development since 2005, gaining 0.07 points in the HDI, A. Literacy and Education reaching 0.55 in 2015. This places Kenya at the top of the 4.4.4. Kenya’s adult literacy rate is among the highest EAC, but it is still behind Ghana (0.58). Given Kenya’s poverty in Africa. In 2015, 84 percent of the population above 15 rate, its level of human development is relatively high years and over could read and write in any language, a (Figure 47), indicating that Kenya performs better on non- larger proportion of the population than in a country like monetary dimensions of poverty. Ghana (71 percent), which has a much lower poverty rate Figure 46: Deprivation in access to services, 2015 Figure 47: Poverty headcount against HDI 50 1 Human Development Index (HDI) 40 0.8 % of households deprived 0.6 GHA 2015 KEN 2015 30 TZA 2015 RWA 2015 UGA 2015 KEN 2005 0.4 20 0.2 10 0 0 0 20 40 60 80 100 Improved sanitation Monetary deprivation Improved water Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank Source: UNDP HDI 24 April 2018 | Edition No. 17 Special Focus Figure 48: Poverty headcount against access to improved water Figure 49: Poverty headcount against access to improved sanitation 100 100 GHA 2012 UGA 2012 RWA 2013 Access to improved sanitation 80 80 Access to improved water KEN 2015 SSF 2013 KEN 2015 RWA 2013 60 60 TZA 2011 KEN 2005 KEN 2005 40 40 SSF 2013 20 20 UGA 2012 TZA 2011 GHA 2012 0 0 20 40 60 80 100 0 0 20 40 60 80 Poverty Headcount (% of population) Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank (Figure 50). The literacy rate increased by 11 percentage older have completed secondary education. While this points since 2005, reflecting the progress in enrollment in also marks a substantial improvement over 2005 when Kenya over the past decade. This is in line with results from only 3 percent of Kenyan adults had completed secondary standardized tests suggesting that Kenyan children have school, it is far below rates found in other countries with somewhat better learning outcomes in primary school comparable poverty rates.13 than children in other countries in the region12. 4.4.6. Kenya’s net school enrollment rates have Figure 50: Poverty headcount against literacy rates improved over the last decade. The net primary school 100 enrollment rate, the proportion of age-eligible children who are currently enrolled in primary, is estimated at 84.6 Adult literacy rate (% population 15+) KEN 2015 80 GHA 2012 UGA 2012 percent in 2015/16. This is lower than expected given Kenya’s RWA 2013 KEN 2005 poverty headcount (Figure 53). Within the EAC, Uganda and 60 Rwanda both have higher net enrollment rates. However, 40 the net secondary school enrollment rate in Kenya is now the highest among countries of the EAC, at 42.2 percent14. 20 It more than doubled since 2005 (21.0 percentage points) and is in line with expectations given Kenya’s poverty level 0 0 20 40 60 80 100 (Figure 54). Increases in secondary enrollment in recent Poverty Headcount (% of population) years are expected to boost educational attainment among Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank young adults in the near future. 4.4.5. In line with increasing enrollment rates, levels 4.4.7. Gains in secondary enrollment have been of educational attainment among the adult population pronounced among both the poor and the non-poor; have increased. Over half (57.8 percent) of all Kenyan adults but significant gaps remain. Between 2005/06 and above the age of 24 have completed primary education. 2015/16, net (gross) secondary enrollment has increased This marks a notable increase from 2005 (44.2 percent). by 16.4 (29.2) percentage points among the poorest 20 Adult primary educational attainment is high compared percent and by 12.7 (34.5) percentage points among the with countries that have a similar poverty rate (Figure 51). top 20 percent, suggesting broad-based improvements in However, Kenya’s rate of adult primary school completion access to secondary education. However, while the gross is lower than in Ghana and Tanzania. When considering enrollment ratio in 2015/16 was greater than 100 percent higher levels of educational attainment, Kenya performs for the top 20 percent, it was only 44.6 percent among the worse (Figure 52). Only 14.4 percent of adults aged 25 and bottom 20 percent. 12 Sandefur, Justin (2017): International comparable Mathematics Scores for Fourteen African Countries. Economics of Education Review. 13 The results might exaggerate differences as primary education in Kenya is eight years but only seven and six years in Tanzania and Ghana. Kenyan primary school children also score higher on standardized tests than Tanzanians. 14 The net secondary school enrollment rate is similarly defined as the ration of secondary school-aged children who are currently enrolled in secondary school to the population of all secondary school-aged children. April 2018 | Edition No. 17 25 Figure 51: Poverty headcount against adult educational Figure 52: Poverty headcount against adult educational attainment, primary attainment, secondary 100 100 Completed secondary education (% population Completed primary education (% population 25+) 80 80 GHA 2012 TZA 2012 KEN 2015 60 60 GHA 2012 25+) 40 UGA 2012 KEN 2005 40 RWA 2013 UGA 2012 20 20 KEN 2015 RWA 2013 TZA 2012 0 KEN 2005 0 0 20 40 60 80 100 0 20 40 60 80 100 Poverty Headcount (% of population) Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Figure 53: Poverty headcount against net primary school Figure 54: Poverty headcount against net secondary school enrollment enrollment 100 80 UGA 2012 RWA 2013 Prevalence of stunting (% of children under 5) GHA 2012 KEN 2015 Net primary school enrollment rate KEN 2005 80 60 SSF 2013 RWA 2013 KEN 2005 60 40 UGA 2012 SSF 2013 TZA 2011 40 GHA 2012 20 KEN 2015 20 0 20 40 60 80 100 0 Poverty Headcount (% of population) 0 20 40 60 80 100 Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank B. Health height-for-age z-score that is more than two standard 4.4.8. Under-five mortality has declined rapidly in deviations below the median of a reference population.17 recent years, particularly among the poor. Mortality As of 2015, nearly 1 out of every 5 children under the age among children below the age of five has declined from of 4 (24.4 percent) is stunted in Kenya. While this is the 114.6 deaths per 1,000 live births in 2003 to only 52.4 in lowest stunting rate among countries of the EAC, it is still 2014. This decline has been driven mostly by the increased higher than in Ghana. When considering Kenya’s level provision and uptake of low-cost, high-impact measures, of poverty, the rate of stunting is lower than expected particularly the use of insecticide-treated bed nets (ITNs) (Figure 55). The prevalence of child stunting has that protect children from contracting malaria.15 The substantially improved since 2005, when 40.1 percent of decline has been particularly pronounced among children Kenyan children were stunted. from poorer families and those residing in rural areas; in fact, differences in mortality between the bottom 40 percent 4.4.10. The rate of children immunized against measles and the top 20 percent16 and rural and urban children were has improved in the past decade. The percentage of not statistically significant in 2014. children aged 12 to 23 months vaccinated against measles increased from 72.5 percent in 2003 to 87.1 in 2014. Kenya 4.4.9. Kenya has also made substantial gains in performs better than expected given its level of poverty, reducing child stunting; it now has one of the lowest but still lags behind comparison countries Rwanda (95.2 stunting rates in the region. Stunting is defined as a percent) and Ghana (89.3 percent). 15 The share of children under the age of five that sleeps under an ITN increased from only 4.6 percent in 2003 to 54.3 in 2014. 16 The statement is based on comparisons across quintiles of a wealth index that uses assets to proxy the material standard of living, not consumption expenditures. 17 The reference used here is that of the World Health Organization. 26 April 2018 | Edition No. 17 Figure 55: Poverty headcount against child stunting Figure 56: Poverty headcount against under five mortality 80 200 Prevalence of stunting (% of children under 5) Under 5 child mortality (deaths per 1,000 live 160 60 KEN 2003 120 RWA 2013 KEN 2005 births) 40 UGA 2012 SSF 2013 TZA 2011 80 UGA 2016 TZA 2015 GHA 2014 RWA 2015 GHA 2012 40 KEN 2014 20 KEN 2015 0 0 20 40 60 80 100 0 Poverty Headcount (% of population) 0 20 40 60 80 100 Poverty Headcount (% of population) Source: Kenya National Bureau of Statistics (KIHBS 2005 & 2015) and World Bank Source: USAID DHS 4.5 Conclusion However, Kenya’s poverty incidence remains relatively 4.5.1. Poverty declined in Kenya over the last high when considering Kenya’s recently gained lower decade, especially among households engaged in middle-income status. Kenya’s HDI has improved since agriculture, but these remain vulnerable to climate 2005, but still has space for further improvements. and price shocks. Increased consumption among the Access to improved sanitation is relatively high while poorest of the poor has reduced the depth of poverty access to improved water is lagging. Kenya’s literacy rate in the past decade, but progress among the population is amongst the highest in Africa but secondary school living between the US$ 1.90 and US$ 3.20 poverty completion presents a significant barrier. Kenya has also lines was considerably less pronounced. Growth in the made substantial gains in reducing child stunting and agriculture sector accounted for the largest share of children immunization against measles and has one of poverty reduction, but also revealed a vulnerability to the lowest stunting and immunization rates in Africa. shocks like droughts that can force households back into Thus, Kenya has made considerable progress but further poverty. Building resilience against shocks can help to gains will be needed to reach comparable levels with avoid recurrent spells of poverty. other lower-middle income countries. 4.5.2. With similar progress in poverty reduction as 4.5.4. Poverty has a significant spatial dimension observed in the last decade, Kenya will not be able to that is omitted in the international comparison. eradicate poverty by 2030. Poverty reduction is driven Already in 2005, most poor in Kenya lived in rural areas, by a growth and a redistribution component. Even especially in the Northeastern parts of the country. though Kenya had experienced moderate GDP growth As the March 2018 KNBS Basic Report on Well-Being in the last decade, transmission of growth to increased in Kenya indicates, poverty is spatially concentrated consumption of households is low. Therefore, GDP and there is considerable variation across Counties in growth did not translate into higher poverty reduction Kenya. Poverty and social protection programs must than observed. Furthermore, redistribution in Kenya is be targeted adequately to ensure efficiency and equity. limited, thus, constraining overall poverty reduction. This requires continued effort on a spatial dimension To accelerate the pace of poverty reduction, Kenya will to socio-economic policy to tackle specific needs for require higher and more inclusive growth rates coupled selected parts of the population. with a sharper focus on poverty reduction policies. 4.5.5. The forthcoming World Bank Kenya Poverty 4.5.3. Kenya’s compares favorably in monetary and and Gender Assessment (KPGA) will provide a non-monetary poverty with peer countries, but not more detailed analysis combined with policy yet with other lower middle-income countries. Poverty recommendation for poverty reduction. Using the in Kenya is below the average in sub-Saharan Africa and KIHBS 2015/16 survey, the KPGA will provide a more is amongst the lowest in the East African Community. detailed analysis of poverty characteristics and trends April 2018 | Edition No. 17 27 Special Focus in Kenya, incorporating sectoral and spatial lens. The consumption survey was implemented in 2015/16, the KPGA will also zoom into the gender aspects of poverty, previous survey dates back one decade to 2005/06. contrast poverty profiles in urban and rural areas, and Even though simulations can attempt to track poverty, examine poverty through education, health and social they are based on strong assumptions and inherently protection lenses. The objective of the KPGA is to foster retrospective. Therefore, progress in poverty reduction an evidence-based debate about policy options to cannot be monitored closely and timely, neither can accelerate poverty reduction in Kenya. policies and programs be designed based on up-to-date data and their impact be assessed. As this undermines 4.5.6. The decade-long gap between the two most efforts to effectively and efficiently reduce poverty, an recent household consumption surveys makes it improved monitoring system should be put in place. The difficult to monitor poverty reduction and analyze the plans to establish a continuous household survey by the impact of policies. While Kenya’s most recent household KNBS are very timely. 28 April 2018 | Edition No. 17 SPECIAL FOCUS I: ANNEX 1 Annex 1: Poverty trajectory simulation, sectoral and non-sectoral growth GDP sectoral growth simulation Overall GDP growth simulation Year Poverty rate, Poverty rate, Poverty rate, Poverty rate, Poverty rate, Poverty rate, $1.25 a day $1.90 a day $3.20 a day $1.25 a day $1.90 a day $3.20 a day 2005 22.7 43.6 68.7 22.7 43.6 68.7 2006 21.5 42.9 68.2 21.7 43.1 68.2 2007 20 41.8 67.6 20.4 42.1 67.5 2008 20.9 42.2 67.7 20.4 42.1 67.5 2009 21.3 42.4 67.5 19.7 41.6 67.3 2010 18.8 40.6 66.7 18.3 40.3 66.5 2011 18.2 39.6 66.1 17.5 39.2 66 2012 17.6 38.7 65.6 17 38.5 65.5 2013 16.7 37.8 65 16.2 37.5 64.8 2014 15.9 36.5 64.5 15.6 36.5 64.3 2015 15 35.3 63.9 14.8 35.6 63.6 30 April 2018 | Edition No. 17 Part 3: Special Focus II Policy Options to Advance The Big 4 Photo: © Mumias Sugar Company Special Focus 5. Policy Options to Advance The Big 4 5.1 The Big 4 – an ambitious development the ability of Government to allocate resources to the agenda Big 4 or for the private sector to contribute to the Big 4 5.1.1. The Big 4. The Government of Kenya has outlined will be seriously constrained. Indeed, much of the robust four big priorities over the next five years, also known as the growth performance of Kenya in recent years has been Big 4. These are food security and agricultural productivity, underpinned by the stability of its macroeconomic affordable housing, increased share of manufacturing, environment. Given the narrowing of the fiscal space in and universal health coverage. The attainment of these recent years, advancing the Big 4 calls for the rebuilding goals should help advance the Vision 2030 agenda – of fiscal buffers to safeguard macroeconomic stability as helping Kenya to move forward towards a middle-income well as create the fiscal space to help drive Big 4 areas. economy with a high standard of living. Fiscal consolidation is recognized in the Budget Policy Statement where the deficit is projected to decline to 7.2 5.1.2. Support from the public and more importantly percent in FY 2017/18 and continue steadily on the path the private sector will be required to achieve the Big of consolidation to 3.0 percent by (FY 2020/21). However, 4. This section proposes specific macroeconomic and for this to occur, reforms to domestic revenue mobilization, structural policy reforms options that could be part of expenditure rationalization and improvements in debt the policy mix in support of the advancement of the management will be are required. Big 4. Underpinning the proposed policy reforms is the view that for the Big 4 to be realized support from both 5.2.2. The quality of fiscal consolidation matters the public and the private sector will be required. Given for advancing the Big 4. While fiscal consolidation is narrowing of fiscal space and the extent of resources important, of equal importance, in particular if the Big 4 needed to achieve the Big 4, the public sector could play is to be advanced, is the quality of fiscal consolidation. the important role of creating a conducive environment In other words, fiscal consolidation will need to be to catalyze private sector resources to achieve the Big 4. carried out in a growth-friendly manner and with equity Public sector resources devoted to the Big 4 would need considerations safeguarded. A mixed strategy is generally to be contained within a fiscally sustainable resource desired when consolidating. On the revenue side, envelope and should seek to reduce inefficiencies in targeting eliminating tax leakages and broadening the spending in order to maximize impact. tax base are some desirable measures that could be used to raise revenue in a growth friendly manner. On 5.1.3. This chapter proposes policy options that the expenditure side, eliminating inefficiencies in public could support the attainment of the Big 4. The chapter is spending, while re-allocating funds to can enhance divided in two main sections. The first section focuses on private sector productivity and raise physical and human policy options that will safeguard macroeconomic stability capital to increase the long-term growth potential of the -a foundational requirement to re-ignite private sector economy could lead to desired outcomes. The following dynamism and to crowd in private investment to the Big section outlines specific policy options for ensuring a 4. The second section, considers specific policy options stable macroeconomic environment. in the agriculture, health, manufacturing, and affordable housing sectors, which if, implemented could bring Macro Fiscal Policies to Support the Big 4 significant progress towards the realization of the Big 4. A. Improve Domestic Revenue Mobilization to Provide Fiscal Space 5.2 Policies to create an enabling macroeconomic environment to support 5.2.3. Revenue measures that can help recreate the Big 4 fiscal space in support of the Big 4. Rationalize the Tax 5.2.1. A stable macroeconomic environment Exemption regime. The special focus of the previous is foundational to sustaining robust growth and edition of the Kenya Economic Update shows that there advancing the Big 4. Without macroeconomic stability remains significant scope to boost domestic revenue 32 April 2018 | Edition No. 17 Special Focus mobilization. Indeed, with tax exemptions estimated at capital spending in order not to undermine the underlying some 5 percent of GDP, plugging these leakages can play growth potential of the economy. However, much of an important role in helping to rebuild fiscal buffers while the consolidation from the expenditure side is coming creating some fiscal room to address some of the Big 4 from development spending, thereby suggesting that agenda items – for instance targeted provision of Universal there remains scope for recalibrating Kenya’s pathway Health Care subsidies to the informal sector is estimated for fiscal consolidation. As discussed in previous Kenya at 0.6 percentage points of GDP (see table 4 on options Economic Updates specific areas of recurrent spending for achieving Universal Health Coverage section). For this include, wages and salaries, and reforming State-Owned to occur the ongoing FY 2018/19 budget should seek to Enterprises. This could lead to potentially significant public- include sunset clauses to allow a significant number of tax sector savings that help rebuild fiscal buffers while creating exemptions (which are not core to the Big 4) to expire over some fiscal room to advance the Big 4, particularly in the the short to medium term. agriculture and health sectors where spending in Kenya lags behind international benchmarks. 5.2.4. Implement a Governance Framework on tax exemptions that will prevent the creep up of 5.2.7. Beyond rationalizing expenditures, improving tax incentives. The elimination of non-Big 4 priority efficiency in public spending could help realize tax exemptions could help boost domestic revenue significant fiscal savings across sectors. mobilization. However, to avoid future creeping of • Despite increased spending on infrastructure which exemptions it would be important for a governance is expected to complement private investment, the framework to be adopted. This could seek to strengthen contribution of net investment to GDP growth remains the role of National Treasury to be the solitary institution weak, reflecting weakness in private investment and for the granting of exemptions. Further to improve raising questions on the efficiency of public investment. transparency, all tax expenditures should be published as Furthermore, growth in Kenya’s total factor productivity part of the Budget and a fiscal objective could be included (TFP), though rising, is well short of productivity growth in the framework that limits the maximum amount of tax in other Sub-Saharan economies such as Rwanda, exemptions that can be provided. Ethiopia and Ghana. An earlier Kenya Economic Update (November 2016) finds that the causes of low B. Expenditure Measures to Support a Growth efficiency of investment can be attributed to weakness Friendly Consolidation Pathway in the system of public investment management 5.2.5. Expenditure measures are needed to (PIM), particularly project appraisal, selection and complement revenue measures. While boosting domestic management. Furthermore, the process of land revenue mobilization remains integral to the policy mix acquisition poses a unique challenge. in recreating fiscal space to support the Big 4, it cannot • In education spending where on average about 90 shoulder the entire fiscal consolidation load. A slowdown percent of expenditure is recurrent, there is scope in the pace of fiscal expansion is of necessity to safeguard for efficiency gains through improved teacher fiscal and macroeconomic stability. The 2018 Draft Budget management to address the uneven pupil-teacher Policy Statement recognizes this, given that compared ratio. Indeed, the apparent shortage of teachers in to an annual growth rate of 17.5 percent observed over the past four years, the projected growth in total public some counties could be addressed by considering the spending is expected to adjust downward to 11.7 percent option to re-allocate the existing stock of teachers from over the next four years. Nonetheless, while the pathway over supplied areas towards more deprived areas, after to reducing the pace of overall spending over the medium which new recruits could be considered to fill in gaps. term is commendable, to achieve it will require some Further, given over 70 percent of secondary schools difficult choices. have less than 400 learners compared to a target of at least 540 students there appears to be scope for savings 5.2.6. Rationalizing recurrent expenditures. Growth in regulating the opening of new schools, save for friendly fiscal consolidation entails greater downward counties that have historically low levels of enrollment adjustment on recurrent spending and lesser so on the rates and expansive distances to nearest school. April 2018 | Edition No. 17 33 Special Focus Expenditures on the opening of new schools could be 5.2.11. Other debt management measures that could be rationalized by placing a moratorium on the opening of supportive include a steady lengthening of the maturity new primary and secondary schools until the national profile of government debt securities. The successful target is reached, particularly in high population density issuance of a 30-year Eurobond is commendable as areas and an already high enrollment rate. it lengthens the maturity profile of the debt structure. • Another potential area for efficiency gains could be in Further, addressing implementation challenges that the health sector. Kenya spends double the per capita holds back the disbursement of significant concessional funds from official sources. sed. (Further, the large health spending of EAC peers yet health outcomes Kenyan diaspora remains an untapped pool of savings/ (under five mortality, maternal mortality, percent living source). A funding source that is likely to be cheaper and with AIDS, life expectancy) are no better than that of less influenced by market conditions compared to the other EAC countries. traditional commercial sources (e.g. of countries that have or are moving in this direction). 5.2.8. Current plans to safeguard equity considerations despite fiscal consolidation are commendable. While D. Restore the Potency of Monetary Policy to Help Re- restraining recurrent spending it is important to factor in ignite Private Sector Lending equity considerations and preserve and protect the poorest 5.2.12. Restore potency of monetary policy and create and vulnerable in society. In this regard, it is commendable a conducive environment that incentivizes banks to that under the projected fiscal consolidation pathway lend to the private sector. In recent years, while the the government intends to expand its social protection contribution of the public sector to economic activity has program — doubling the number of vulnerable citizens remained robust, while that of the private sector has been (elderly, disabled, and orphans) supported through cash remarkably subdued. The Big 4 is unlikely to be achieved transfers and the provision of health insurance coverage without the participation of a dynamic and healthy private for citizens above the age of 70. sector. Indeed, whether it is improving agricultural sector C. Improving Debt Management productivity, increasing manufactured exports, building affordable housing units or providing quality health 5.2.9. Creating fiscal space to support the Big 4 calls services, the private sector can and should play an out- for reining in the rising debt service payments (interest sized role. To achieve this, an important role to be played and amortization) to open up some fiscal room to by government is to create a conducive environment to support the Big 4. To do so will require an ambitious fiscal incentivize the private sector in the delivery of the Big 4. consolidation plan that targets a primary surplus. Being a Notwithstanding the green shoots of a recovery in private bit more ambitious on the primary surplus target will help sector activity, demand pressures remain subdued and to put a lid on the rising stock of debt and by extension the rising interest payments. a robust private investment driven growth is yet to take hold. Unshackling monetary policy, an important lever in 5.2.10. Debt management could support lower yields the policy toolkit, by removing the interest rate cap should on government securities, and thereby crowd in the allow it to better respond to the slack in the economy. As private sector. Given the central role of the private sector discussed in detail in the December 2017 KEU, the removal in achieving the Big 4, it is imperative that the benchmark of the cap also needs to be supported by complementary government yields drop to levels that incentivize banks macroeconomic (e.g. lower deficit and lower benchmark to lend to SME’s — the backbone of the economy. Hence rates) and microeconomic (e.g. improve universal credit the debt management strategy could consider a level of scoring, implement moveable asset registry etc.) measures borrowing in the domestic market that is commensurate to help boost private sector credit. with crowding in of the private sector. For instance, the current domestic borrowing can be lowered to help drive 5.3 Structural Policies in support of the Big 4 down yields on government securities to levels seen in 5.3.1. While prudent macroeconomic policies are 2010 (about 3-5 percent range), when the contribution of necessary to lay down an appropriate foundation for private investment to GDP growth was at a high, in contrast the Big 4, they will be insufficient to realize these goals. to negative growth observed over the past two years. Critical sectoral and structural policy reforms will be required 34 April 2018 | Edition No. 17 Special Focus to actualize the Big 4. This section seeks to articulate a of the sector to adverse weather conditions, unfortunately policy agenda that could be supportive of each of the Big 4 has been occurring with increasing frequency. Further, areas, while not compromising macroeconomic and fiscal as noted in the special focus section on Poverty, most of sustainability. This section deliberately focuses on policy the poor are employed in the agriculture sector, hence measures (rather than specific investments) that could addressing the binding constraints to productivity in the help create the enabling environment for the resources of sector should go a long way in accelerating the pace of the economy (both public and private) to move in support poverty reduction, as well as reducing food insecurity and of the Big 4. The measures proposed represent some early boosting overall growth and employment. thinking on some key policy measures that could help move the needle forward in the quest to achieve the Big 4. Policies to Support Increased Agricultural Sector Productivity and Improve Food Security Pillar I: Agricultural Productivity and Food security A. Re-allocate more resources to the agricultural 5.3.2. The Agriculture sector is one of most important sector sectors of the Kenyan economy, yet productivity remains 5.3.3. Re-allocate more resources to high-return disappointingly low. Agriculture contributes about 51 public goods in the agricultural sector. While the percent to GDP: 26 percent directly and another 25 percent agriculture sector contributes some 25 percent to GDP and indirectly. Consequently, the sector remains a major driver over 60 percent to employment, less than 2 percent of total of the Kenyan economy, with years of strong agricultural expenditures in FY 2016/17 were allocated to the sector in sector growth reflecting in overall GDP growth and vice- Kenya. This is well short of the 4.5 percent average in sub versa. Further, the sector accounts for some 60 percent of Saharan Africa and the recommended 10 percent agreed employment and 65 percent of the country’s exports. Yet to under the AU Malabo Declaration. Productivity growth notwithstanding this, productivity in the sector remains in Kenya’s agriculture sector, especially for small scale low, particularly in grains: indeed, yields per acre/hectare farmers is hindered by lack of access to public goods, of maize, Kenya’s main staple was lower in 2014 (1628 such as rural roads, rural electricity, irrigation, improved kg/ha) than in 1994 (1918 kg/ha). Given low levels of productivity in the sector and a growing population, seeds and breeds, regulatory and extension services. The there remains a structural food deficit (and adds to the weak growth in agricultural productivity growth in Kenya trade deficit) which contributes to the trade deficit, food contrasts with productivity growth in Ethiopia, where insecurity and poor nutritional outcomes. Compounding spending on agriculture has been boosted in recent the challenges in the sector is the increasing vulnerability years (Box B.2). Boosting agricultural productivity and food security will require re- allocating more resources to agriculture and improving the efficiency of current spending in the sector. Photo: © Dasan Bobo/World Bank April 2018 | Edition No. 17 35 Special Focus 5.3.4. Returns to public spending could be significant. input use has been identified as one of the main reasons For instance, only 2 percent of the total arable land in agricultural productivity growth has lagged behind. Kenya is irrigated compared to 6 percent in sub-Saharan Targeted input subsidy programs that are able to raise Africa (SSA) and 37 percent in Asia. Recent studies show small holder crop productivity remains critical to raising that for SSA economies returns to irrigation range from overall productivity in the agricultural sector. In Kenya 17 percent for large scale farmers to 43 percent for small studies show that the current untargeted and regressive scale farmers, and can triple per capita farm incomes, fertilizer input subsidy scheme apart from being costly, with significant impacts on poverty reduction. Further, disproportionately benefits large and medium sized aggregate returns to research spending is 93 percent farmers and crowds-out private investment in the purchase and ranges between 8-49 percent for extension services. and distribution of fertilizers. This suggest there is scope for Given the low level of resources devoted to such high agricultural productivity gains through the implementation return activities in the agricultural sector, there remains of a smart subsidy (better targeted) scheme. Indeed, significant scope for Kenya to re-allocate resources to impact evaluations suggest that a previous smart subsidy these areas to boost productivity in the sector (Goyal and programs — Kilimo Plus — which targeted resource poor Nash, 2017). small holder farmers succeeded in raising their yields, increasing incomes and reducing food insecurity (Mason 5.3.5. Yet not all public spending in the agriculture et al, 2015). sector is productive. In some cases, public spending in the agriculture sector can be counterproductive or even reduce 5.3.7. Does the producer subsidy scheme in maize productivity. Studies show that public spending on public enhance food security? First, studies show that price goods (e.g. research and development, extension services support to maize farmers is regressive as it benefits etc.,) are much more productive and tend to reduce large and medium sized farmers and small farmers who poverty more than public spending on private goods (e.g., are located close to the storage depots. Second, the fertilizer subsidies). Indeed, when governments provide artificially higher maize prices, induced by the producer private goods they end up displacing a more efficient subsidy, also serves as a tax on consumers, including to provider of the good — the private sector. Unfortunately, poor households, many of whom are net buyers of maize much of agricultural spending in Kenya is skewed towards — the main staple food. Further, the higher price of the provision of private goods, rather than public goods. maize creates an adverse incentive structure encouraging Hence this calls for the need to revisit how efficiency gains farmers to grow maize on marginal lands, when drought can be actualized from the current agricultural sector resistant crops might have been more suitable, thereby resource envelop. depleting natural resources and compromising food security (Kamau et al, 2012; World Bank, 2015). Given To Improve the Efficiency of Spending, Critical Policy these adverse environmental and social-economic Constraints Need to be Addressed consequences, and its exorbitant fiscal cost, there remains significant scope for reform. Specifically, the re-allocation B. Key Policy Questions to be Addressed to advance of public spending from supporting producer subsidies Agricultural Sector Productivity to investing in high return public goods (R&D, advisory 5.3.6. Is the fertilizer input subsidy program working or extension services, rural infrastructure — roads and in the interest of small scale farmers? The lack of modern irrigation etc.) to boost agricultural productivity. Box B.2: Ethiopia Box- Case Study Budgetary allocations to the agriculture sector are among the highest in Africa, close to 13 percent on average from 2003-14 period, almost of which is spent on extension. The government has devoted significant resources to expanding extension services in Ethiopia, and there is currently one extension agent for every 472 farmers (in SSA the ratio is 1:3000- 4000) — which is one of the highest ratios in the world. The high levels of spending on agriculture appear to have paid off. This has aided high rates of inclusive agricultural sector growth experienced in Ethiopia in the 2000s (Bachewe et al. 2015), consequently driving poverty reduction in rural areas. 36 April 2018 | Edition No. 17 Special Focus 5.3.8. Does the current seed policy support the wider Pillar II: Universal Health Coverage distribution of good quality to small scale farmers? Parastatals dominate the procurement of breeder seed; and 5.3.12. Kenya is in a strong position to make rapid multiplication and marketing of certified seeds, while at the progress to expand health coverage given the high same time regulating the seed industry. This perpetuates a level of political commitment and strong institutional situation where parastatals are both producers of limited foundations. Health insurance coverage is currently quantities of early generation seed (EGS) needed by concentrated among formal sector workers (public and the private sector to produce certified seed for farmers; private sector), for which employee income-related and regulators of the seed industry. Reforming the seed contributions are automatically deducted from salaries. industry to allow for wider participation of the private This population group, along with dependents, accounts sector could make improved seeds available to farmers, for around 18 percent of the population and benefits from thereby boosting agriculture productivity. a generous benefit package. Approximately 70-80 percent of Kenya’s population are currently not covered by health 5.3.9. How can access to finance in the agricultural insurance. Most of the uncovered population are in the sector be enhanced? Many farmers are often hindered informal sector. in the purchase of productivity enhancing inputs (e.g., seed, fertilizer, pesticides etc.,) due to limited access to Policies to Support Universal Health Coverage finance. Alliance for a Green Revolution in Africa (AGRA) and the Government of Kenya estimate that in 2015 the 5.3.13. Some level of government subsidies will be annual credit needs of key commodity chains amounted required if Universal Health Coverage is to be realized. to KSh130 billion, whereas credit to the sector was only Rapidly expanding health insurance coverage based KSh 40 billion. One potential area of reform to help ease on voluntary contributions of KSh 6,000 per annum (the the situation could be through passing the warehouse current cover offered by NHIF for a family of 5) is likely to receipts bill to allow farmers use the receipts as collateral. be exceedingly difficult, even with intensified marketing Improving the use of crop and livestock insurance as and awareness raising. These challenges are not unique collateral would also be welcome as another way to to Kenya. Very few countries have achieved high levels of increase agricultural credit. coverage of voluntary health insurance, despite significant effort. Where high coverage has been achieved, it has been 5.3.10. Introduce property taxes on agricultural land to the result of either high levels of government subsidies to encourage the utilization of large tracts of fertile but idle reduce household contributions, or a degree of coercion agricultural land to increase access to land for smallholder (or both). Building on experiences from other countries, farmers and to support the food security agenda. This has such as Thailand, China, Mexico and Ghana, achieving become pertinent given large tracts of idle arable land financial protection for universal health coverage, Kenya owned by absentee landlords, that go unused, pushing can consider different approaches to increase coverage. many smaller farmers to move into marginal lands. 5.3.14. Though fiscally conservative, adopting a 5.3.11. Climate proofing the agriculture sector. Kenya is targeted subsidy could have high administrative costs. among the countries most susceptible to adverse weather In considering different options, it is important to note conditions, facing such conditions with a frequency of that although there is a targeting system in place (Social about once every three years. Hence building resilience Protection Single Registry), it currently only covers around to climate change risks in the agriculture sector remains 10 percent of the population and would hence need to essential to boosting productivity growth. The December be significantly strengthened to support a target health 2017 edition of the KEU discussed in detail some measures insurance subsidy to a broader segment of the population. that can be taken to mitigate the impacts of climate on the This would have cost implications and would take time (at agriculture sector. These included: increasing the adoption least 1-2 years). The benefits of mobilizing contributions of drought resistant or tolerant varieties; investing in soil from the informal sector must then be weighed against and water management; and providing timely climate and the administrative costs associated with collection of weather information services to farmers to improve their contributions (and retention after original registration) and production decision-making. targeting subsidies. April 2018 | Edition No. 17 37 Special Focus Kenya is in a strong position to make rapid progress to expand health coverage given the high level of political commitment and strong institutional foundations Photo: © Sarah Farhat /World Bank 5.3.15. Various options for financing an expansion of Pillar III: Manufacturing Sector government spending on health could be considered. Notwithstanding the need for fiscal consolidation, as 5.3.17. Given underlying demographic trends, it discussed in the first chapter, it is important to take into is imperative for economic growth to be driven by account equity considerations when considering the sectors with potential for high job creation, such as quality of fiscal consolidation. Hence, making progress manufacturing. The manufacturing sector holds such towards universal health coverage, while rebuilding fiscal potential as evidenced in the millions that have been buffers is commendable. Creating the fiscal space to be pulled from poverty in Asia. For this to occur, Kenyan able to support increased health coverage will require manufacturing firms need to be competitive both re-prioritization of current budget envelope, additional domestically (competing against imports) and externally domestic revenue generation by addressing VAT and (both regionally and on the global front). Unfortunately, corporate tax exemptions, and new taxes and levies. the share of manufacturing output in GDP and exports Options for sharing the fiscal cost of subsidizing across has been on the decline, reflecting competitiveness central and local government as well as more effectively challenges. To reverse this decline and attain the Big 4 leveraging donor support during the initial phase could goal of raising the share of manufacturing and supporting also be considered. value-addition will require policy measures on both the domestic and external front. 5.3.16. Achieving Universal Health Coverage will require reforms to NHIF. Finally, it will be critical that 5.3.18. Policies to advance manufacturing in Kenya the expansion of health insurance is accompanied by need to adapt to the changing nature of global continued and intensified efforts to strengthen NHIF manufacturing. A recent World Bank study finds that systems and capacity, especially in the areas of costing the location of future manufacturing hubs in the global benefit packages and provider payment mechanisms, and economy will be disrupted by ongoing technological to address outstanding issues regarding the flow of funds advances in “The Internet of Things”, advanced robotics, to counties and public facilities, and their earmarking for and 3-D printing (World Bank, 2018). Indeed, it observes use in the health sector. In addition, strong systems for that the earlier labor cost advantage that successful monitoring and evaluation will be important to ensure manufacturing hubs in low and middle-income countries that there is timely information about progress in financial successfully used to attract foreign direct investment may protection, service coverage, utilization, and quality of care. no longer be sufficient for countries seeking to become 38 April 2018 | Edition No. 17 Special Focus Table 4: Options for Universal Health Coverage Approach Likely outcomes and issues Fully subsidize health insurance for poor and vulnerable groups; • Requires robust systems for identifying poor and vulnerable, no subsidies for others which is costly to establish and maintain • Achieves full coverage of these groups • Significant coverage gaps likely to remain for non-poor/ vulnerable Partially subsidize everyone (e.g. central/county government • Administratively simple and more affordable than full pays 50 or 70 percent of KSh6,000 contribution and households subsidy pay remainder) • Likely to contribute to significant expansion of coverage, albeit with gaps • Coverage may still be unaffordable for poor, with coverage gaps among this group Fully subsidizing health insurance for poor/vulnerable; partial • Requires robust systems for identifying poor and vulnerable subsidies for others • Achieves full coverage of these groups • Likely to achieve higher coverage among non-poor, albeit with some gaps • More modest fiscal implications than fully subsidies for everyone Fully subsidize everyone in the informal sector • Everyone covered • No identification of poor or cost of collection • Subsidies will be costly the manufacturing hubs of the future. Given global trends, 5.3.20. Nonetheless microeconomic policy the study recommends that countries seeking to become interventions are also critical. Over the past 3 years, the manufacturing hubs of the future to focus on the Kenya has improved its ranking in the Ease of Doing 3Cs — competitiveness, capabilities and connectedness. Business ranking by some 50 places. Similarly, it has On the 3Cs scale Kenya is observed to be among the completed a railway between the two main commercial countries with low connectedness and capabilities but cities, added over 2000km in new roads and extended the with medium level competitiveness. However, for Kenya national electricity grid. Nonetheless, this has not reversed to gain a solid footing into the global value chains in the lackluster performance in the manufacturing sector. areas it has identified as priority, including textile and Often mentioned competitiveness disadvantages for apparel, agro processing and leather products it will need Kenyan firms compared to regional competitors include to improve in all dimensions of the 3Cs (Figure 57). The higher unit cost of electricity, labor costs, government policy recommendations suggested in this section seek bureaucracy and corruption. The most recent Global to incorporate how the 3Cs can be addressed from both a Competitiveness Report lists the most pertinent competitive domestic and external perspective. challenges facing Kenyan firms to be: corruption, tax rates, access to finance, government bureaucracy, inadequate Policies to Support Raising the Share of infrastructure, labor costs, regulations and taxes (Figure Manufacturing Output 58). By one estimate, Kenya’s factory floor productivity could be close to China’s but when one accounts for costs 5.3.19. On the domestic front, competitiveness can be such as transport, regulations, and taxes, Kenyan firms lose enhanced through macroeconomic and microeconomic some 40 percent of their productivity advantage).18 Hence, interventions. At the macroeconomic level, a stable efforts to address these competitiveness concerns in Kenya macroeconomic environment, with low inflation, stable will need to address these issues. and competitive real exchange rate and interest rate are critical as they influence the profitability of firm 5.3.21. The development of industrial enclaves with level operations. The policy measures earlier discussed reliable infrastructure and procedures can help. Given to safeguard macroeconomic stability remain valid in limited fiscal room, it will not be possible to address all providing a macroeconomic environment conducive for these challenges at scale. However, a move to develop enhancing manufacturing activity. more Special Industrial Parks and Export Processing Zones 18 Guiseppe Larossi, 2009, Benchmarking Africa’s Costs, in “Africa Competitiveness Report, 2009”. April 2018 | Edition No. 17 39 Special Focus Figure 57: Country Distribution in Space of Competitiveness, Figure 58: Most problematic factors for doing business in Kenya Capabilities, and Connectedness, Circa 2012-14 Corruption 17.8 Tax rates 13.7 Access to nancing 11.5 Ine cient government bureacracy 9.6 Inadequate supply of infrastructure 8.1 Policy instability 7.3 In ation 6.1 Crime and theft 5.8 Tax regulations 3.9 Poor work ethic in national labor force 3.3 Restrictive labor regulations 2.8 0 5 10 15 20 Score corresponding to the responses weighted according to rankings Source: World Bank, 2018 Source: World Economic Forum, Executive Opinion Survey 2016 can help address these issues within selected localities, engineering and coding), while also investing in the as is currently being undertaken in Ethiopia with some development of advanced skills for people with access measure of success. This strategy could be complemented to higher education. Further skills programs need to be with enhanced commercial diplomacy and an aggressive offered to be responsive to industry, hence having private marketing strategy to court foreign direct investors sector actors involved in the setting of curricula can be (multinational companies) into these special parks and helpful. Beyond worker skills, the increasing need for more zones. To maximize spillovers to the rest of the economy, flexible manufacturing production processes and the it would be important to cluster university linked research autonomy for production and decision making, calls for institutes in these enclaves to facilitate knowledge sharing the need to strengthen firm level capabilities by improving and technology adoption. management and organizational practices that support the adoption of new technologies and international 5.3.22. To foster technology adoption, it will be certification of quality standards (World Bank, 2018). important for worker and firm-level capabilities to be enhanced. Developing worker level capabilities within the 5.3.23. On the external front, measures to strengthen changing global context where job skills are increasingly regional integration and seizing opportunities under becoming nonroutine and cognitive requires the need various preferential trade agreements can boost to prioritize literacy and numeracy, basic ICT (software manufactured exports. To further strengthen regional Policy options to advance manufacturing in Kenya need could focus on the 3Cs - competitiveness, capabilities and connectedness Photo: © Ethan Liku/World Bank 40 April 2018 | Edition No. 17 Special Focus trade (including with COMESA), there is a need to revisit residential housing market through the development of some of the restrictive rules of origin and address other the housing finance market can provide a wide range of non-tariff barriers such as Sanitary and Phyto Sanitary (SPS) income opportunities through the construction sector which affect food products (including processed foods) and related industries as evidenced in Columbia, India, and and technical barriers to trade and standards required South Africa. In Colombia it is estimated that 5 additional for manufactured exports. There is the need to establish jobs are added for every US$10,000 spent on housing regional protocols on mutual recognition agreements construction. In India, each housing unit creates 1.5 direct to enhance trade in manufactured products. Further, and 8 indirect jobs; in South Africa, each housing unit addressing some of the bottlenecks to trade logistics, creates 5.62 jobs for every housing unit. In Kenya, the such as multiple border check points, cumbersome border government estimates that by supporting the building clearance processes, and competition in the transportation of some 500,000 affordable homes by 2022, it could sector will smoothen trade between countries in the create some 350,000 jobs. Indeed, by not addressing the region and elsewhere, thereby improving connectivity. housing deficit, particularly at the level of low income The recent signing of the African Continental Free Trade households, Kenya is missing a major opportunity for Area provides further opportunities for increased market job creation and economic growth. Addressing this will access for Kenyan firms beyond the traditional East Africa help create a productive cycle of savings and growth market. Beyond the regional level, there are immense by fostering increased construction and financing of opportunities for Kenya to seize benefits under the various affordable housing. preferential trade agreements with major trading partners including the US (AGOA), EU (EPA). Beyond, preferential 5.3.26. In considering its role, the Government of Kenya agreements, however, Kenya could also pursue options to should balance its fiscal capacity with its ability to create diversify its market into other non-traditional markets. meaningful change in the housing sector. The best approach at present would seem to be to rely on markets Pillar IV: Increasing the Supply of Affordable Housing to provide funding while role of government is limited to improving access to land, providing basic infrastructure 5.3.24. The housing deficit in Kenya is large and and improving credit environment. Over time as the growing. There is an estimated housing shortfall of 2 million system grows and becomes more relevant to middle and units, and with an additional 500,000 new city dwellers lower income households, some form of subsidy could be every year, this is aggravating an already untenable considered, targeted at the most needy. situation where, 61 percent of urban households live in informal settlements (compared to 50 percent in Nigeria Policies to Support an Increase in the Supply of and 23 percent in South Africa). Indeed, many Kenyans are Affordable Housing unnecessarily living in slum dwellings, because of limited supply and lack of affordability. Hence, there is a critical A. Address Supply-side Bottle necks to Housing need to deliver housing at the lower end of the income Supply spectrum. Given Kenya’s growth and urbanization rates, 5.3.27. Measures to boost the supply of housing. On the the problem will only become more acute over the next supply side cumbersome property registration processes, decades without a serious focus on housing and the finance expensive land, and construction costs including the lack of housing for the average Kenyan. Indeed, outstanding of access to serviced land are among the main factors that bank mortgage loans in Kenya are fewer than 25,000 have held back the supply of affordable housing. Adopting (corresponding to less than 0.3 percent of households the below measures may be supportive of reducing some in Kenya) and mortgage debt is only 3 percent of GDP of the supply-side bottle-necks in Kenya. (compared to, for instance, 32 percent in South Africa). 5.3.28. Implement supporting regulations to Lands Act. 5.3.25. Addressing this housing deficit will be good To increase the efficiency of land registration and unlock for economic growth, creating jobs, and deepening the ability of developers to build affordable units on a large the financial sector. Beyond the social benefit of scale, regulations are needed to be enacted to support the addressing this basic human need, economically, it could Land Act 2012 and Land Registration Act of 2012. be transformative as a growth engine. Unlocking the April 2018 | Edition No. 17 41 Special Focus 5.3.29. Implement land records management. 5.3.32. Yields on government securities need to come Implementation of land records storage systems and down. The most important impediment for borrowing for regulations for electronic conveyance could boost title housing is the lack of long term funding at affordable rates. transfers significantly. At the same time, the establishment Government efforts to manage the government bond of a one-stop-shop for property registration. market more efficiently and lower the benchmark, risk- free rate would be the most critical policy reform to unlock affordable housing. Removing the interest rate cap will also 5.3.30. Amend the Sectional Properties Act. Amending unlock housing finance, as housing loans have significantly the Sectional Properties Act to allow titles to multi-story declined since the imposition of the cap, already from a units; and reviewing the valuation act to remove the low starting point. requirement for a government valuer to value property could also unleash the supply of affordable housing. 5.3.33. Standardization of documents. The standardization of mortgage contracts to lower the cost B. Address Constraints to Housing Demand of mortgage financing and accelerate the time taken to 5.3.31. Measures to boost demand for affordable provide a mortgage instrument to borrowers. housing. On the demand side of the affordable housing market, policies which remove roadblocks for lenders to 5.3.34. Stamp duty. Reviewing the stamp duty for first provide mortgages and housing loans will enable more time buyers, which is a significant cost for borrowers financing of affordable homes to final borrowers. These and purchasers. policies include: Policy options to increase the provision of affordable housing could be advanced by addressing both supply and demand side bottlenecks Photo: © Karibu Homes 42 April 2018 | Edition No. 17 REFERENCES Bachewe et al. (2017). An assessment of the livestock economy in mixed crop-livestock production systems in Ethiopia. Ethiopia Strategy Support Program Working Paper 101. Central Bank of Kenya. Quarterly Economic Review (QER) July – September 2017. Volume 2, No.3. Hallward-Driemeier, Mary; Nayyar, Gaurav. 2017. Trouble in the Making?: The Future of Manufacturing-Led Development. Washington, DC: World Bank. Goyal, A. and Nash, J., (2017). Reaping Richer Returns: Public Spending Priorities for African Agriculture Productivity Growth. Africa Development Forum; Washington, DC: World Bank. © World Bank Kenya National Bureau of Statistics. (2017). Economic Survey 2017. Nairobi. Kenya National Bureau of Statistics. 2018. ‘Basic Report on Well-Being in Kenya’. Nairobi. Kenya National Bureau of Statistics. (2007). Kenya Integrated Household Budget Survey (KIHBS) 2005/06. Nairobi. Kenya National Bureau of Statistics. (2018). Kenya Integrated Household Budget Survey (KIHBS) 2015/16. Nairobi. Kamau, M., Mathenge, M., and Kirimi, L., (2012). How can Kenya better manage maize prices? Effects of import tariffs, regional trade and producer price support. Tegemeo Institute of Agricultural Policy and Development, Policy Brief, No.7. Land registration Act 2012 (Kenya). Larossi, G., (2009). Benchmarking Africa’s Costs, in “Africa Competitiveness Report”, Geneva. World Economic Forum, pp 83- 107. National Treasury. Quarterly Budget and Economic Review, various issues. Nairobi. National Treasury. (2018). Medium Term Budget Policy Statement. January 2018. Nairobi. National Land Commission Act 2012 (Kenya). Nauschnigg, F. (2006) ‘Macroeconomic policymaking – lessons from Austro-Keynesianism’, in A. Watt and R. Janssen (eds.) Delivering the Lisbon goals – The role of macroeconomic policy, Brussels: ETUI, pp. 151-160. Nauschnigg, F. (2010) ‘Growth-Friendly Fiscal Consolidation’, European Economic and Employment Policy: ETUI Policy Brief 4/2010 Ravallion, M,. (1994), Measuring Social Welfare With and Without Poverty Lines. The American Economic Review, Vol. 84, No. 2, Papers and Proceedings of the Hundred and Sixth Annual Meeting of the American Economic Association. (May 1994), pp. 359-364. Sandefur, J., (2017). International comparable Mathematics Scores for Fourteen African Countries. Economic of Education Review, Vol. 62, pp 267-286. Otieno, C., Kirimi, L., and Odhiambo, N., (2015). Can Irrigation be an Answer to Kenya’s Food Security Problem? Tegemeo Institute of Agricultural Policy and Development, Policy Brief, No.9. World Bank. (2017). Kenya Economic Update, Edition 16. World Economic Forum. (2017). The Global Competitiveness Report 2017-2018. Geneva. April 2018 | Edition No. 17 43 STATISTICAL TABLES Statistical Tables Table 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 2016 2017e GDP growth Rates (percent) 3.3 8.4 6.1 4.6 5.9 5.4 5.7 5.8 4.8 Agriculture -2.3 10.1 2.4 3.1 5.4 4.3 5.5 4.0 2.3 Industry 3.7 8.7 7.2 4.2 5.3 6.1 7.3 5.8 2.9 Manufacturing -1.1 4.5 7.2 -0.6 5.6 2.5 3.6 3.5 Services 6.2 7.3 6.1 4.7 5.4 6.0 5.9 7.1 6.7 Fiscal Framework (percent of GDP)/1 Total revenue 19.4 19.1 18.7 19.2 19.2 19.0 18.4 18.3 19.0 Total expenditure 24.0 23.8 23.7 25.1 25.6 28.1 26.6 27.6 26.8 Grants 1.0 0.6 0.4 0.5 0.5 0.5 0.4 0.3 0.7 Budget deficit (including grants) -5.8 -3.5 -4.5 -5.7 -6.1 -8.1 -7.4 -8.9 -7.2 Total debt (net) 40.7 43.1 40.6 42.1 47.8 48.8 53.9 57.5 58.0 External Account (percent of GDP) Exports (fob) 12.2 13.1 13.6 12.5 10.6 10.4 9.8 8.1 7.3 Imports (cif ) 25.6 28.7 33.0 31.3 29.3 28.3 23.4 19.3 20.3 Current account balance -4.6 -6.0 -9.2 -8.3 -8.8 -10.4 -6.7 -5.2 -6.5 Financial account -10.2 -8.1 -8.2 -11.0 -9.4 -11.4 -8.0 -5.9 -7.5 Capital account 0.7 0.6 0.6 0.5 0.3 0.4 0.4 0.3 0.3 Overall balance -3.0 -0.4 2.1 -2.4 -0.7 -2.4 0.4 -0.2 1.1 Prices Inflation 9.2 4.0 14.0 9.4 5.7 6.9 6.6 6.3 8.0 Exchange rate (average Ksh/$) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 101.5 103.4 Source: Kenya National Bureau of Statistics, National Treasury, Central Bank of Kenya and World Bank End of FY in June (e.g 2009 = 2009/2010) 1 /Figures for 2017 are actuals for 2017/18 Table 2: GDP growth rates for Kenya and EAC (2011-2017) 2011 2012 2013 2014 2015 2016 2017e Kenya 6.1 4.6 5.9 5.4 5.7 5.8 4.8 Uganda 9.4 3.8 3.6 5.1 5.2 4.7 4.0 Tanzania 7.9 5.1 7.3 6.9 7.0 7.0 6.4 Rwanda 7.8 8.8 4.7 7.6 8.9 6.0 6.1 Average 7.8 5.6 5.3 6.2 6.7 5.9 5.1 Source: World Bank Note: “e” denotes an estimate 46 April 2018 | Edition No. 17 Statistical Tables Table 3: Kenya annual GDP GDP, GDP, 2009 GDP/capita, Years GDP growth current prices constant prices current prices Ksh Billions Ksh Billions US$ Percent 2007 2151 2766 839 6.9 2008 2483 2772 917 0.2 2009 2864 2864 920 3.3 2010 3169 3104 967 8.4 2011 3726 3294 987 6.1 2012 4261 3444 1155 4.6 2013 4745 3647 1229 5.9 2014 5402 3842 1335 5.4 2015 6261 4062 1350 5.7 2016 7159 4299 1455 5.8 Source: Kenya National Bureau of Statistics and World Development Indicators Table 4: Broad sector Contribution to GDP growth (y-o-y, percentage points) Year Quarterly Agriculture Industry Services GDP Q1 0.8 0.7 2.6 4.1 Q2 0.5 1.2 2.5 4.2 2012 Q3 0.6 2.3 2.3 5.2 Q4 0.8 1.0 2.9 4.7 Q1 1.4 2.7 2.0 6.1 Q2 1.7 2.1 3.7 7.5 2013 Q3 1.1 1.7 3.6 6.4 Q4 0.7 0.1 2.7 3.5 Q1 1.1 1.7 2.4 5.2 Q2 1.1 2.2 2.8 6.0 2014 Q3 1.4 1.1 2.1 4.6 Q4 0.3 1.7 3.6 5.6 Q1 2.1 1.6 2.1 5.8 Q2 1.1 1.7 2.8 5.6 2015 Q3 0.8 2.3 2.9 6.1 Q4 0.8 1.8 2.9 5.5 Q1 1.1 1.2 3.1 5.3 Q2 1.7 1.5 3.1 6.3 2016 Q3 0.7 1.5 3.4 5.6 Q4 0.0 1.5 4.6 6.2 Q1 -0.3 1.4 3.6 4.7 2017 Q2 0.3 1.0 3.6 5.0 Q3 0.6 1.0 2.9 4.4 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Agriculture = Agriculture, forestry and fishing Industry = Mining and quarrying + Manufacturing+Electricity and water supply+Construction Services = Whole sale and retail trade + Accomodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Proffessional administration and support services +Real estate +Education +Health + Other services +FISIM. April 2018 | Edition No. 17 47 48 Table 5: Contribution by Broad sub-sectors (y-o-y, percentage points) Industry by sub sector contribution Service by sub sector contribution Agriculture Industries contribution Information Services Mining and Electricity and Accomodation Transport and Financial and Quarterly to GDP Manufacturing Construction Real estate and communi- Other quarrying water supply and restaurant storage insurance cation Q1 0.8 0.1 -0.1 0.2 0.7 0.9 0.2 0.5 0.4 0.4 0.0 1.0 2.4 April 2018 | Edition No. 17 Q2 0.5 0.2 -0.2 0.1 0.3 0.4 0.0 0.5 0.3 -0.2 0.3 2.3 3.3 2012 Q3 0.6 0.2 0.1 0.2 0.5 1.0 0.0 -0.1 0.3 -0.4 0.4 3.5 3.6 Q4 0.8 0.2 0.0 0.2 0.4 0.9 0.1 -0.1 0.3 0.5 0.6 1.6 3.0 Q1 1.4 0.2 1.0 0.1 0.4 1.7 -0.5 -0.6 0.3 0.4 0.6 2.7 3.0 Q2 1.7 -0.2 0.8 0.2 0.4 1.3 0.0 0.1 0.3 0.3 0.6 3.3 4.6 2013 Q3 1.1 0.0 0.6 0.2 0.4 1.2 0.2 0.2 0.4 0.4 0.4 2.6 4.1 Q4 0.7 -0.1 0.1 0.1 -0.1 -0.1 0.0 0.7 0.4 0.5 0.3 1.1 2.9 Q1 1.1 0.1 0.5 0.1 0.3 1.1 -0.3 0.2 0.4 0.4 0.4 1.9 3.0 Q2 1.1 0.2 0.8 0.1 0.7 1.8 -0.3 0.4 0.4 0.3 0.4 1.9 3.1 2014 Q3 1.4 0.0 0.1 0.2 0.4 0.7 -0.4 0.6 0.5 0.6 0.5 0.8 2.6 Q4 0.3 0.2 -0.3 0.2 0.9 1.0 0.0 0.3 0.5 0.7 0.6 2.1 4.2 Q1 2.1 0.1 0.3 0.2 0.6 1.2 -0.1 0.5 0.5 0.3 0.6 0.8 2.5 Q2 1.1 0.1 0.3 0.3 0.6 1.3 0.0 0.6 0.6 0.2 0.5 1.3 3.1 2015 Q3 0.8 0.2 0.5 0.2 0.8 1.7 0.0 0.7 0.6 0.2 0.7 1.3 3.5 Q4 0.8 0.1 0.4 0.1 0.7 1.3 0.1 0.4 0.7 0.3 0.5 1.4 3.4 Q1 1.1 0.1 0.2 0.2 0.5 0.9 0.1 0.5 0.7 0.4 0.5 1.1 3.3 Q2 1.7 0.1 0.6 0.2 0.4 1.3 0.1 0.5 0.7 0.3 0.5 1.2 3.3 2016 Q3 0.7 0.1 0.5 0.1 0.4 1.1 0.1 0.5 0.7 0.3 0.5 1.7 3.8 Q4 0.0 0.1 0.3 0.1 0.6 1.1 0.2 0.8 0.8 0.5 0.3 2.5 5.0 Q1 -0.3 0.1 0.3 0.1 0.4 0.9 0.2 0.6 0.7 0.4 0.3 1.8 4.1 2017 Q2 0.3 0.1 0.2 0.2 0.4 0.8 0.1 0.6 0.8 0.3 0.3 1.8 3.8 Q3 0.6 0.1 0.2 0.1 0.3 0.7 0.1 0.4 0.8 0.3 0.2 1.5 3.2 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Other = Whole sale and retail trade + Public administration + Proffessional, administration and support services + Education + Health + Other services + FISIM Statistical Tables Table 6: Quarterly growth rates (percent) Agriculture Industry Services GDP Statistical Tables Four Four Four Four Year Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving Average Average Average Average Q1 48.2 3.1 2.4 -5.1 5.2 6.6 -1.1 4.3 5.2 6.9 4.1 5.2 Q2 -10.2 2.2 2.1 -0.6 2.1 4.5 -1.2 5.3 5.2 -3.1 4.3 4.6 2012 Q3 -21.9 3.1 2.0 4.3 5.2 4.7 5.1 4.4 4.8 -0.7 5.2 4.5 Q4 0.3 4.2 3.1 6.0 4.2 4.2 2.1 4.9 4.7 1.7 4.7 4.6 Q1 49.8 5.3 3.8 -0.5 9.4 5.2 -2.0 4.0 4.6 8.3 6.1 5.1 Q2 -8.9 6.8 5.0 -2.8 6.9 6.4 1.3 6.7 5.0 -1.8 7.0 5.9 2013 Q3 -22.7 5.8 5.6 3.7 6.2 6.6 4.3 5.8 5.3 -1.7 6.4 6.2 Q4 -1.9 3.6 5.4 -0.8 -0.6 5.3 1.5 5.2 5.4 -1.1 3.5 5.9 Q1 50.7 4.2 5.1 5.9 5.8 4.5 -1.6 5.6 5.8 10.1 5.2 5.6 Q2 -8.7 4.4 4.4 0.9 9.9 5.3 1.6 5.8 5.6 -1.0 6.0 5.3 2014 Q3 -20.7 7.0 4.7 -2.4 3.5 4.6 3.6 5.1 5.4 -2.9 4.6 4.8 Q4 -6.6 1.8 4.3 0.9 5.3 6.1 3.8 7.5 6.0 -0.2 5.6 5.4 Q1 59.8 8.0 5.5 7.0 6.4 6.2 -3.8 5.2 5.9 10.3 5.8 5.5 Q2 -11.5 4.6 5.6 1.5 6.9 5.6 2.6 6.2 6.0 -1.2 5.6 5.4 2015 Q3 -21.1 4.1 5.0 -0.4 9.1 6.9 4.3 6.9 6.5 -2.5 6.1 5.7 Q4 -6.4 4.3 5.5 -1.4 6.7 7.3 2.4 5.4 5.9 -0.7 5.5 5.7 Q1 59.2 4.0 4.2 5.3 5.0 6.9 -2.4 7.0 6.4 10.1 5.3 5.6 Q2 -8.9 7.1 4.9 3.2 6.8 6.8 2.3 6.7 6.5 -0.3 6.3 5.8 2016 Q3 -23.5 3.8 4.9 -1.3 5.7 6.0 4.6 7.0 6.5 -3.0 5.7 5.7 Q4 -9.8 0.1 4.0 -1.3 5.8 5.8 3.0 7.6 7.1 -0.3 6.1 5.8 Q1 57.3 -1.1 2.4 4.5 5.0 5.8 -2.3 7.7 7.2 8.6 4.7 5.7 2017 Q2 -6.5 1.4 0.9 2.6 4.4 5.2 1.5 6.8 7.3 0.0 5.0 5.3 Q3 -22.2 3.1 0.7 -2.2 3.4 4.6 3.2 5.6 6.9 -3.6 4.4 5.0 April 2018 | Edition No. 17 Source: World Bank and Kenya National Bureau of Statistics 49 Statistical Tables Table 7: Growth Outlook Annual growth (percent) 2014 2015 2016 2017e 2018f 2019f 2020f BASELINE GDP Revised projections 5.4 5.7 5.8 4.8 5.5 5.9 6.1 Revised projections (KEU 16) 5.4 5.7 5.8 4.9 5.5 5.9 Previous projections (KEU 15) 5.4 5.7 5.8 5.5 5.8 6.1 Private consumption 4.3 5.1 4.8 4.6 5.2 5.7 5.7 Government consumption 1.7 13.0 7.0 9.9 5.9 4.1 2.0 Gross fixed capital investment 14.2 6.7 -9.3 1.5 9.2 9.5 12.1 Exports, goods and services 5.8 6.2 0.6 2.8 5.8 6.8 7.0 Imports, good and services 10.4 1.2 -4.7 3.8 7.8 7.4 7.6 Agriculture 4.3 5.5 4.0 2.3 3.9 4.3 4.6 Industry 6.1 7.3 5.8 2.9 4.0 4.8 5.0 Services 6.3 5.9 7.1 6.7 6.8 7.0 7.1 Inflation (Consumer Price Index) 6.9 6.6 6.3 8.0 6.8 6.5 6.5 Current Account Balance, % of GDP -10.4 -6.7 -5.2 -5.5 -6.5 -7.2 -8.4 Fiscal balance, % of GDP -8.1 -7.4 -8.9 -7.2 -6.0 -4.3 -3.4 Debt (% of GDP) 48.2 51.0 54.8 57.8 57.6 56.1 53.2 Primary Balance (% of GDP) -4.2 -4.7 -4.9 -4.6 -3.0 -1.6 -0.6 Sources: World Bank and the National Treasury Notes: “e” denotes and estimate, “f” denotes forecast * Fiscal Balance is sourced from National Treasury and presented as Fiscal Years 50 April 2018 | Edition No. 17 Statistical Tables Table 8: National Fiscal position Actual (percent of GDP) 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18* Revenue and Grants 19.8 18.9 20.5 19.7 19.1 19.7 19.7 19.5 18.8 18.6 19.7 Total Revenue 18.7 18.2 19.4 19.1 18.7 19.2 19.2 19.0 18.4 18.3 19.0 Tax revenue 17.1 17.0 17.9 18.0 17.1 17.2 18.1 17.7 17.2 17.1 17.2 Income tax 6.8 6.9 7.2 7.9 7.8 8.3 8.9 8.7 8.4 8.2 8.2 VAT 4.8 4.7 4.9 5.0 4.4 4.1 4.6 4.5 4.3 4.4 4.4 Import Duty 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.2 Excise Duty 2.7 2.6 2.5 2.3 2.0 1.9 2.0 2.0 2.1 2.2 2.1 Other Revenues 1.4 1.4 2.0 1.5 1.6 1.7 1.3 1.3 1.3 1.1 1.2 Railway Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 Appropriation in Aid 1.5 1.2 1.6 1.1 1.7 2.0 1.1 1.3 0.9 1.0 1.6 Grants 1.1 0.7 1.0 0.6 0.4 0.5 0.5 0.5 0.4 0.3 0.7 Expenditure and Net 23.1 22.3 24.0 23.8 23.7 25.1 25.6 28.1 26.6 27.6 26.8 Lending Recurrent 17.4 16.3 16.9 16.9 16.3 18.1 14.8 14.8 15.3 15.4 16.2 Wages and salaries 6.3 5.8 5.7 5.7 5.5 6.1 5.5 5.1 4.6 4.4 4.6 Interest Payments 2.1 1.9 2.1 2.3 2.1 2.7 2.7 2.9 3.2 3.5 3.5 Other recurrent 9.0 8.5 9.1 8.9 8.8 9.3 6.6 6.7 7.5 7.5 8.1 Development and net lending 5.7 6.0 7.1 6.8 7.4 6.8 6.3 8.7 7.2 8.4 7.0 County allocation 0.0 0.0 0.0 0 0 0.2 3.8 3.9 3.9 3.7 3.5 Contigecies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 Parliamentary Service 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.4 0.3 0.3 Judicial Service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.2 Fiscal balance Deficit excluding grants -4.4 -4.0 -4.6 -4.6 -4.9 -6.6 -6.4 -9.1 -8.2 -9.3 -7.9 (commitment basis) Deficit including grants -3.3 -3.4 -3.6 -4.1 -4.5 -5.4 -5.9 -8.7 (commitment basis) Deficit including grants (cash 0.3 -4.4 -5.8 -3.5 -4.5 -5.7 -6.1 -8.1 -7.4 -8.9 -7.2 basis) Financing -0.3 4.4 5.8 3.5 4.5 5.7 6.1 8.1 7.1 9.1 7.2 Foreign Financing 0.3 1.5 0.8 0.8 2.8 1.9 2.1 3.7 4.0 5.0 3.7 Domestic Financing -0.6 2.8 5.0 2.6 1.6 3.8 4.0 4.3 3.0 4.0 3.4 Total Public Debt(net) 37.7 39.7 40.7 43.1 40.6 42.1 47.8 48.8 53.9 57.5 58 External Debt 19.1 20.2 18.9 21.0 19.6 18.7 22.4 24.4 26.8 30.0 30.2 Domestic Debt (net) 18.6 19.5 21.9 22.2 21.5 23.3 25.3 24.4 27.1 27.6 27.8 Memo: GDP (Calender year current 2,483 2,864 3,169 3,726 4,261 4,745 5,402 6,261 7,159 market prices, Ksh bn GDP (Fiscal year current 2,317 2,673 3,017 3,448 3,994 4,503 5,072 5,811 6,710 7,658 8654.6 market prices, Ksh bn) Source: 2017 Budget Review Outlook Paper (BROP) and Quarterly Budgetary Economic Review (Fourth Quarter, Financial Year 2016/2017), National Treasury Note: *indicate Preliminary results April 2018 | Edition No. 17 51 Table 9: Kenya’s Public and Publicly Guaranteed Debt, June 2014 to September 2017 KShs. Millions 14-Jun 14-Sep 14-Dec 15-Mar 15-Jun 15-Sep 15-Dec 16-Mar 16-Jun 16-Sep 16-Dec 17-Mar 17-Jun 17-Sept* TOTAL PUBLIC DEBT (Net) 2217315 2103447 2275952 2394450 2,601,432 2,723,628 2,844,004 2,938,291 3,210,775 3,276,654 3,448,699 3,675,734 3,972,526 4,048,978 52 Lending -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 Government Deposits (199,815) (239,554) (298,879) (275,083) (236,565) (208,869) (305,496) (320,041) (394,856) (426,911) (373,016) (364,909) (428,774) (432,113) Total Public Debt (Gross) 2422831 2348702 2580532 2675234 2,843,698 2,938,199 3,155,200 3,264,033 3,611,331 3,709,266 3,827,417 4,046,344 4,407,001 4,486,793 External Debt 1138504 1087828 1272583 1278108 1,423,253 1,550,233 1,615,183 1,617,506 1,796,198 1,854,711 1,896,443 2,101,391 2,294,736 2,310,198 April 2018 | Edition No. 17 Bilateral 289914 278547 389083 384607 445,057 482,203 481,282 478,883 548,351 545,652 641,763 689,119 724,823 742,064 Multilateral 597340 608022 612353 618456 684,631 754,599 751,154 762,089 798,842 839,936 781256 806922 841899 842,814 Commercial Bank & Supplier 251250 201259 271147 275044 293,565 313,430 382,747 376,534 449,005 469,123 473424 605350 728014 725320 Credit Commercial Banks 234799 185163 255188 259746 276,937 295,642 366,231 360,175 432,377 452,495 458122 594140 712100 708,231 Suppliers Credit 16451 16096 15959 15298 16,628 17,788 16,516 16,359 16,628 16,628 15,302 11,210 15,914 17,089 Domestic Debt 1284327 1260874 1307949 1397126 1,420,444 1,387,966 1,540,017 1,646,527 1,815,133 1,854,555 1,930,973 1,944,953 2,112,265 2,176,595 Central Bank 65700 63580 58286 64835 63,335 107,637 101,386 102,648 99,856 58,945 85,528 85,316 55,061 79,201 Commercial Banks 617221 601426 649940 715011 730,419 682,694 764,399 829,688 927,307 969,790 947,030 975,803 1,141,889 1,148,296 Non Banks & Nonresidents 601406 595868 599723 617280 626,689 597,635 674,232 714,192 787,970 825,820 898,415 883,834 915,316 949,098 (%) of Total public debt(gross) External Debt 47.0 46.3 49.3 47.8 50.0 52.8 51.2 49.6 49.7 50.0 49.5 51.9 52.1 51.5 Domestic Debt 53.0 53.7 50.7 52.2 50.0 47.2 48.8 50.4 50.3 50.0 50.5 48.1 47.9 48.5 % of External debt Bilateral 25.5 25.6 30.6 30.1 31.3 31.1 29.8 29.6 30.5 29.4 33.8 32.8 31.6 32.1 Multilateral 52.5 55.9 48.1 48.4 48.1 48.7 46.5 47.1 44.5 45.3 41.2 38.4 36.7 36.5 Commercial Bank & Supplier 22.1 18.5 21.3 21.5 20.6 20.2 23.7 23.3 25.0 25.3 25.0 28.8 31.7 31.4 Credit Commercial Banks 20.6 17.0 20.1 20.3 19.5 19.1 22.7 22.3 24.1 24.4 24.2 28.3 31.0 30.7 Suppliers Credit 1.4 1.5 1.3 1.2 1.2 1.1 1.0 1.0 0.9 0.9 0.8 0.5 0.7 0.7 % of Domestic debt Central Bank 5.1 5.0 4.5 4.6 4.5 7.8 6.6 6.2 5.5 3.2 4.4 4.4 2.6 3.6 Commercial Banks 48.1 47.7 49.7 51.2 51.4 49.2 49.6 50.4 51.1 52.3 49.0 50.2 54.1 52.8 Statistical Tables Non Banks & Nonresidents 46.8 47.3 45.9 44.2 44.1 43.1 43.8 43.4 43.4 44.5 46.5 45.4 43.3 43.6 Source: National Treasury (Quarterly Economic Budgetary Review,November 2017) Note: *Provisional Table 10: 12-months cumulative balance of payments BPM6 Concept (US$ million) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-Nov A. Current Account, n.i.e. -505 -796 -1821 -1713 -2371 -3821 -4205 -4838 -5998 -4322 -3653 -5157 Merchandise A/C -3243 -4222 -5593 -4952 -6216 -8355 -9315 -10243 -11319 -9577 -7890 -10243 Statistical Tables Goods: exports f.o.b. 3509 4153 5067 4526 5248 5834 6212 5846 6219 5985 5747 5770 Goods: imports f.o.b. 6752 8375 10659 9479 11464 14189 15527 16089 17538 15563 13637 16013 Oil 1745 1919 3051 2192 2673 4082 4081 3838 4026 2500 2087 2654 Services 1013 1263 1377 1084 1744 1994 2602 2926 2405 2329 1689 1679 Services: credit 2431 2938 3260 2904 3789 4131 4990 5130 5066 4496 4526 5024 Services: debit 1418 1675 1883 1820 2045 2138 2387 2204 2662 2167 2837 3345 Income 1725 2162 2395 2156 2101 2540 2507 2479 2889 2795 2548 3407 B. Capital Account, n.i.e. 168 157 94 261 240 235 235 158 275 257 206 223 C. Financial Account, n.i.e. -677 -2247 -1423 -3782 -3252 -3425 -5542 -5183 -7008 -5070 -4137 -5916 Direct investment: net -27 -1001 -384 -1452 -1117 -1364 -1142 -920 -1045 -1088 -235.1 -360.6 Portfolio investment: net 21 16 25 -81 -156 1 -218 -273 -3716 156 384.5 929.6 Financial derivatives: net 0 0 0 0 0 0 0 0 0 0 0 0 Other investment: net -671 -1262 -1064 -2249 -1979 -2062 -4182 -3990 -2248 -4139 -4287 -6484.8 D. Net Errors and Omissions 235 -805 -189 -1215 -947 -734 -348 -134 168 -1260 -561 -1861 E. Overall Balance -575 -802 493 -1115 -174 896 -1223 -369 -1453 255 -129 880 F. Reserves and Related Items 575 802 -493 1115 174 -896 1223 369 1453 -255 129 -880 Reserve assets 618 941 -480 1322 154 246 1455 859 1333 -361 38 -953 Credit and loans from the IMF -6 116 -17 199 -34 284 193 177 -119 -107 -91 -73 Exceptional financing 48 23 30 8 13 858 38 312 0 0 0 0 Gross Reserves (USD Million) 3331 4557 4641 5064 5123 6045 7160 8483 9738 9794 9588 8971 Official 2415 3355 2875 3847 4002 4248 5702 6560 7895 7534 7573 6657 Commercial Banks 916 1202 1765 1217 1121 1797 1458 1923 1843 2259 2015 2314 Imports cover (36 mnths import) 3.9 4.4 3.1 3.9 3.9 3.4 4.0 4.3 4.9 4.8 5.0 4.5 April 2018 | Edition No. 17 Memo: Annual GDP at Current prices (USD 25,826 31,958 35,895 37,022 40,000 41,953 50,411 55,101 61,445 63,767 70,526 78,948 53 Million) Source: Central Bank of Kenya Statistical Tables Table 11: Inflation Year Month Overall Inflation Food Inflation Energy Inflation Core Inflation January 5.5 7.7 4.5 4.1 February 5.6 8.7 3.3 4.1 March 6.3 11.0 2.9 3.9 April 7.1 13.4 1.5 4.0 May 6.9 13.2 0.3 4.2 June 7.0 13.4 0.2 4.4 2015 July 6.6 12.1 0.6 4.4 August 5.8 9.9 1.1 4.3 September 6.0 9.8 1.5 4.4 October 6.7 11.3 2.0 4.4 November 7.3 12.7 2.3 4.2 December 8.0 13.3 2.9 5.1 January 7.8 12.7 2.9 5.4 February 7.1 10.8 1.7 5.4 March 6.5 9.4 2.1 5.4 April 5.3 6.8 2.0 5.2 May 5.0 6.6 1.8 4.7 June 5.8 8.9 1.4 4.5 2016 July 6.4 10.8 0.9 4.4 August 6.3 10.9 0.1 4.6 September 6.3 10.9 0.2 4.6 October 6.5 11.0 0.1 4.6 November 6.7 11.1 0.6 4.7 December 6.3 11.2 0.1 3.8 January 7.0 12.5 0.7 3.3 February 9.0 16.7 3.0 3.3 March 10.3 18.8 3.3 3.3 April 11.5 21.0 3.7 3.5 May 11.7 21.5 3.5 3.6 June 9.2 15.8 3.4 3.5 2017 July 7.5 12.2 2.9 3.5 August 8.0 13.6 3.1 3.4 September 7.1 11.5 3.3 3.2 October 5.7 8.5 3.0 3.2 November 4.7 5.8 4.8 3.4 December 4.5 4.7 5.4 3.6 January 4.8 4.7 6.1 4.0 2018 February 4.5 3.8 6.2 4.2 Source: World Bank, based on data from Kenya National Bureau of Statistics 54 April 2018 | Edition No. 17 Table 12: Credit to Private Sector Growth (%) Total Private Trans- Building Finance Mining Private sector Agricul- Mafuctu- port and Real Consumer Business Other Year Month Trade and con- and insur- and quar- house- annual ture irng communi- estate durables services activities struction ance rying holds growth cation rates January 21.8 25.2 30.1 19.8 17.6 43.0 76.1 33.4 -3.8 35.2 14.2 24.8 -31.3 Statistical Tables February 20.7 24.7 27.5 21.5 11.6 38.6 79.6 29.1 -16.2 38.7 15.3 19.3 -31.4 March 19.6 22.3 21.1 18.8 12.7 31.3 47.5 19.6 -20.1 28.0 12.4 27.8 -8.9 April 19.9 20.8 21.6 23.6 12.6 32.3 49.2 17.7 -17.1 29.5 13.1 19.7 -8.9 May 20.9 20.5 25.8 23.0 14.5 27.0 50.8 21.3 -13.7 31.5 11.6 16.4 -3.9 June 20.5 24.0 20.0 25.9 15.5 33.8 43.3 19.4 -22.1 31.2 21.6 15.8 -11.1 2015 July 21.2 28.5 22.3 26.7 19.8 33.4 46.8 15.5 -17.9 28.6 21.5 25.3 -12.6 August 21.0 28.7 25.3 25.9 22.1 30.0 50.5 15.0 -18.0 28.5 21.0 22.5 -14.2 September 20.8 21.4 19.3 29.7 27.9 29.0 45.7 12.5 -5.4 26.6 19.0 15.9 -0.9 October 19.5 17.2 20.2 23.6 37.6 32.1 26.4 9.8 -15.5 18.2 18.0 24.1 8.6 November 18.7 12.5 20.8 22.2 34.0 32.3 28.5 10.6 -22.8 16.7 15.3 19.3 14.6 December 18.0 14.1 16.2 21.3 30.7 26.5 0.0 6.2 -11.3 9.1 14.3 63.5 -1.0 January 16.6 17.3 15.9 28.4 25.3 30.2 12.2 9.1 -9.3 14.6 12.8 13.8 4.1 February 15.5 21.0 18.7 25.4 20.5 27.7 11.1 10.2 1.7 12.0 7.3 16.2 -3.8 March 15.2 18.6 20.6 21.8 23.2 22.6 10.8 15.0 12.5 10.1 10.0 13.4 -8.6 April 13.2 15.5 15.2 21.8 23.1 20.5 13.4 13.4 5.3 10.2 7.5 7.8 -15.5 May 10.7 20.2 12.2 18.1 16.1 16.9 8.1 10.1 3.2 7.8 9.5 8.5 -18.7 June 8.9 13.7 13.3 12.3 13.2 14.1 9.1 11.9 -1.6 5.7 2.5 5.1 -11.8 2016 July 7.0 6.1 12.5 13.8 9.2 12.4 13.5 8.8 -4.5 3.1 4.3 -4.4 -12.9 August 5.3 1.8 -0.3 16.4 8.3 16.8 -2.5 9.4 -32.8 7.2 9.2 -11.1 -17.1 September 4.4 -0.5 -2.0 15.2 1.3 13.6 2.7 8.9 -33.7 10.5 5.6 -10.2 -24.3 October 4.6 0.4 -4.3 12.8 -4.9 14.7 1.2 9.3 -36.4 10.1 10.1 -2.0 -20.1 November 4.2 3.5 -4.1 15.7 -5.3 16.1 0.1 8.8 -21.3 10.6 10.6 -11.7 -30.6 December 4.1 0.9 -2.4 15.9 -2.8 14.9 16.7 11.0 -19.1 19.7 11.3 -34.8 -27.0 January 3.9 -2.6 -6.8 13.4 -0.8 10.2 -0.6 10.3 -17.5 14.7 11.1 -13.0 -31.3 February 3.5 1.4 -8.6 10.1 8.3 8.0 -4.6 9.7 -25.5 15.6 11.1 -13.7 -29.2 March 3.0 -7.7 -7.8 11.6 0.6 9.6 -9.2 12.4 -34.0 13.3 10.1 -15.5 -23.5 April 2.2 -8.8 -6.8 8.0 -2.3 7.6 -11.9 13.2 -34.2 10.4 11.9 -15.1 -19.8 May 1.9 -12.6 -5.2 8.8 2.5 5.6 -2.8 11.8 -39.5 9.8 11.3 -21.8 -20.0 June 1.5 -12.3 -7.1 10.7 -0.7 3.2 -4.4 10.1 -37.8 10.9 7.5 -15.8 -25.0 2017 July 1.4 -11.6 -6.6 9.0 0.5 0.6 -8.5 11.8 -41.0 12.1 3.3 -10.8 -28.1 August 1.6 -7.6 3.3 4.3 -1.5 -2.3 5.4 9.7 -7.6 6.2 -1.6 -6.5 -27.4 April 2018 | Edition No. 17 September 1.7 -2.0 6.1 6.9 1.8 -4.9 -1.4 8.9 -0.8 1.9 -0.5 -6.4 -28.6 55 October 2.0 -1.1 10.2 11.5 4.0 -8.2 -1.3 10.0 9.2 2.9 0.1 -19.2 -35.0 November 2.7 -7.7 10.6 10.0 3.1 -8.0 1.5 9.3 -3.2 2.7 -0.4 -7.6 -23.1 December 2.4 -7.9 13.0 9.0 4.8 -7.2 -4.3 8.6 -5.5 -1.5 -1.6 -6.4 -7.5 Source: Central Bank of Kenya Statistical Tables Table 13: Mobile payments Number of Number of Value of Year Month Number of Agents customers transactions transactions (Millions) (Millions) (Billions) January 125826 25.4 81.7 210.5 February 127187 25.5 80.7 208.1 March 128591 25.7 90.3 231.8 April 129218 26.1 84.9 213.7 May 129735 26.5 89.9 230.2 June 131761 26.5 90.7 227.9 2015 July 133989 26.7 94.0 238.9 August 136042 27.0 94.1 248.2 September 138131 27.3 96.3 247.5 October 140612 27.5 102.8 255.8 November 142386 28.1 101.3 236.4 December 143946 28.6 107.4 267.1 January 146710 29.1 95.5 243.4 February 148982 29.5 101.0 257.2 March 150987 30.7 107.9 273.6 April 153762 31.4 105.5 269.8 May 156349 31.3 107.8 277.9 June 162465 31.4 106.3 271.0 2016 July 167072 32.3 110.5 281.9 August 173774 32.8 114.2 296.9 September 173731 33.4 112.6 283.9 October 181456 34.0 122.5 292.1 November 162441 34.3 120.9 291.2 December 165908 35.0 126.3 316.8 January 152547 33.3 122.0 299.5 February 154908 33.3 117.5 279.4 March 157855 33.9 133.3 320.2 April 160076 34.3 128.9 297.4 May 164674 34.2 132.5 315.4 June 165109 34.2 125.9 299.8 2017 July 169480 34.6 128.1 308.9 August 167353 35.3 120.6 286.3 September 167775 35.5 128.5 300.9 October 170389 36.0 134.2 299.0 November 176986 36.4 131.7 299.0 December 182472 37.4 139.9 332.6 2018 January 188029 37.8 136.7 323.0 Source: Central Bank of Kenya 56 April 2018 | Edition No. 17 Statistical Tables Table 14: Exchange rate Year Month USD UK Pound Euro January 91.4 138.5 106.3 February 91.5 140.2 103.9 March 91.7 137.5 99.4 April 93.4 139.6 100.7 May 96.4 149.1 107.5 June 97.7 152.2 109.7 2015 July 101.2 157.5 111.4 August 102.4 159.8 114.1 September 105.3 161.5 118.2 October 102.8 157.5 115.4 November 102.2 155.4 109.8 December 102.2 153.3 111.1 January 102.3 147.5 111.1 February 101.9 145.9 113.0 March 101.5 144.2 112.6 April 101.2 144.8 114.8 May 100.7 146.3 114.0 June 101.1 144.3 113.7 2016 July 101.3 133.4 112.1 August 101.4 132.9 113.7 September 101.3 133.2 113.5 October 101.3 125.4 111.9 November 101.7 126.3 110.0 December 102.1 127.7 107.7 January 103.7 128.0 110.2 February 103.6 129.5 130.4 March 102.9 126.9 109.9 April 103.3 130.4 110.7 May 103.3 133.5 114.8 June 103.5 132.5 116.2 2017 July 103.9 134.9 119.4 August 103.6 134.2 122.2 September 103.1 137.1 122.9 October 103.4 136.4 121.6 November 103.6 136.8 121.4 December 103.1 138.2 122.0 2018 January 102.9 141.9 125.4 Source: Central Bank of Kenya April 2018 | Edition No. 17 57 Statistical Tables Table 15: Exchange rate (Index January 2016 = 100) Year Month NEER REER USD January 93.0 99.6 89.3 February 92.7 99.2 89.4 March 91.8 97.8 89.7 April 93.4 99.2 91.3 May 97.0 101.3 94.2 June 98.1 102.4 95.5 2015 July 101.2 105.7 98.9 August 102.1 106.2 100.1 September 104.8 108.3 102.9 October 102.4 105.8 100.5 November 100.7 103.4 99.9 December 100.5 101.9 99.9 January 100.0 100.0 100.0 February 100.1 100.5 99.6 March 100.0 100.3 99.2 April 100.6 100.7 98.9 May 99.9 99.7 98.5 June 100.2 99.5 98.9 2016 July 99.7 98.5 99.0 August 100.3 99.1 99.1 September 100.3 99.8 99.0 October 99.3 98.9 99.0 November 99.0 98.5 99.4 December 98.5 98.8 99.8 January 95.8 95.1 101.4 February 100.5 96.5 101.3 March 99.9 94.8 100.5 April 100.6 93.8 101.0 May 101.2 104.3 100.9 June 97.5 101.1 101.2 2017 July 103.6 106.1 101.5 August 103.3 105.7 101.2 September 100.8 October 101.1 November 101.2 December 100.8 2018 January 100.6 Source: Central Bank of Kenya and World Bank 58 April 2018 | Edition No. 17 Statistical Tables Table 16: Nairobi Securities Exchange (NSE 20 Share Index, Jan 1966=100, End - month) Year Month NSE 20 Share Index January 5,212 February 5,491 March 5,248 April 5,091 May 4,787 June 4,906 2016 July 4,405 August 4,177 September 4,174 October 3,869 November 4,016 December 4,041 January 3,773 February 3,862 March 3,982 April 4,009 May 3,828 June 3,641 2017 July 3,489 August 3,179 September 3,243 October 3,229 November 3,247 December 3,186 January 2,794 February 2,995 March 3,113 April 3,158 May 3,441 June 3,607 July 3,798 August 4,027 September 3,751 October 3,730 November 3,805 December 3,712 2018 January 3,737 Source: Central Bank of Kenya April 2018 | Edition No. 17 59 Statistical Tables Table 17: Central Bank Rate and Treasury Bills Year Month Central Bank Rate 91-Treasury Bill 182-Treasury Bill 364-Treasury Bill January 8.5 8.6 9.6 12.1 February 8.5 8.6 10.0 11.0 March 8.5 8.5 10.3 10.7 April 8.5 8.4 10.3 10.6 May 8.5 8.3 10.3 10.7 June 10 8.3 10.4 11.0 2015 July 11.5 10.6 11.0 11.6 August 11.5 11.5 11.5 13.3 September 11.5 14.0 12.5 15.2 October 11.5 21.0 15.7 21.5 November 11.5 12.3 16.3 15.2 December 11.5 9.7 15.7 12.5 January 11.5 11.2 13.0 14.1 February 11.5 10.6 12.8 13.7 March 11.5 8.7 12.6 12.3 April 11.5 8.9 11.7 11.8 May 10.5 8.2 10.7 11.6 June 10.5 7.3 10.2 10.8 2016 July 10.5 7.4 9.9 10.9 August 10.0 8.5 10.8 11.7 September 10.0 8.1 10.8 11.0 October 10.0 7.8 10.3 10.4 November 10.0 8.2 10.3 10.8 December 10.0 8.4 10.5 10.6 January 10.0 8.6 10.5 11.0 February 10.0 8.6 10.5 10.9 March 10.0 8.6 10.5 10.9 April 10.0 8.8 10.5 10.9 May 10.0 8.7 10.4 10.9 June 10.0 8.4 10.3 10.9 2017 July 10.0 8.2 10.3 10.9 August 10.0 8.2 10.4 10.9 September 10.0 8.1 10.4 10.9 October 10.0 8.1 10.3 11.0 November 10.0 8.0 10.5 11.0 December 10.0 8.0 10.5 11.1 January 10.0 8.0 10.6 11.2 February 10.0 8.0 10.4 11.2 2018 March 9.5 April 9.5 Source: Central Bank of Kenya 60 April 2018 | Edition No. 17 Statistical Tables Table 18: Interest rates Short-term Long-term Overall Year Month Average Interest 91-Treasury Central weigheted Interbank deposit Savings Rate Bill Bank Rate lending rate Spread rate January 7.2 8.6 8.5 6.7 1.6 15.9 9.3 February 6.9 8.6 8.5 6.7 1.5 15.5 8.8 March 6.8 8.5 8.5 6.6 1.5 15.5 8.8 April 8.9 8.4 8.5 6.6 1.9 15.4 8.8 May 11.1 8.3 8.5 6.6 1.5 15.3 8.7 June 11.9 8.3 10.0 6.6 1.9 16.1 9.4 2015 July 13.4 10.6 11.5 6.3 1.4 15.8 9.4 August 18.6 11.5 11.5 6.9 1.5 15.7 8.8 September 21.3 14.0 11.5 7.3 1.7 16.8 9.5 October 15.3 21.0 11.5 7.5 1.7 16.6 9.0 November 8.9 12.3 11.5 7.4 1.3 17.2 9.8 December 5.3 9.7 11.5 8.0 1.6 18.3 10.3 January 6.4 11.2 11.5 7.6 1.6 18.0 10.4 February 4.5 10.6 11.5 7.5 1.4 17.9 10.4 March 4.0 8.7 11.5 7.2 1.4 17.9 10.7 April 3.9 8.9 11.5 6.9 1.5 18.0 11.1 May 3.6 8.2 10.5 6.4 1.6 18.2 11.8 June 4.9 7.3 10.5 6.8 1.6 18.2 11.4 2016 July 5.5 7.4 10.5 6.6 1.7 18.1 11.5 August 5.0 8.5 10.0 6.4 1.7 17.7 11.2 September 4.9 8.1 10.0 6.9 3.8 13.9 7.0 October 4.1 7.8 10.0 7.8 6.1 13.7 5.9 November 5.1 8.2 10.0 7.6 6.5 13.7 6.0 December 5.9 8.4 10.0 7.3 6.4 13.7 6.4 January 7.7 8.6 10.0 7.2 6.1 13.7 6.5 February 6.4 8.6 10.0 7.7 6.8 13.7 6.0 March 4.5 8.6 10.0 7.1 5.9 13.6 6.5 April 5.3 8.8 10.0 7.0 5.7 13.6 6.6 May 4.9 8.7 10.0 7.1 5.9 13.7 6.6 June 4.0 8.4 10.0 7.2 5.6 13.7 6.5 2017 July 6.8 8.2 10.0 7.4 6.4 13.7 6.3 August 8.1 8.2 10.0 7.67 5.94 13.65 6.0 September 5.5 8.1 10.0 7.66 6.43 13.69 6.0 October 7.8 8.1 10.0 8.01 6.92 13.71 5.7 November 8.9 8.0 10.0 8.07 6.93 13.68 5.6 December 7.2 8.0 10.0 8.22 6.91 13.64 5.4 Source: Central Bank of Kenya April 2018 | Edition No. 17 61 Statistical Tables Table 19: Money aggregate Year Growth rates (yoy) Money supply, M1 Money supply, M2 Money supply, M3 Reserve money January 11.4 17.0 16.0 15.8 February 10.0 17.2 18.6 11.5 March 11.9 16.4 16.4 11.8 April 13.4 17.2 17.3 12.0 May 10.0 14.8 16.5 15.0 June 9.6 16.4 18.6 14.9 2015 July 13.0 16.0 16.4 25.8 August 10.5 14.3 14.0 2.9 September 8.5 12.7 13.5 16.7 October 10.8 13.6 13.6 24.5 November 7.9 11.6 13.0 13.0 December 8.5 12.4 13.7 3.3 January 10.9 10.8 11.1 9.1 February 9.9 10.0 9.3 9.2 March 10.9 10.7 11.2 16.1 April 10.6 9.9 9.5 9.0 May 12.8 9.8 8.6 7.6 June 13.4 9.2 8.1 4.9 2016 July 9.4 7.8 6.9 4.3 August 9.5 6.9 6.8 6.8 September 26.1 8.8 8.0 4.3 October 24.3 6.8 6.8 -7.4 November 25.3 6.2 6.2 0.5 December 28.1 4.8 3.7 4.8 January 21.9 5.3 5.2 5.1 February 23.7 4.5 5.4 2.9 March 22.1 5.7 6.4 3.2 April 23.6 6.3 7.1 9.0 May 21.8 6.2 6.7 5.2 June 22.5 5.4 6.0 2.9 2017 July 24.6 7.5 8.3 5.0 August 22.5 7.5 7.7 7.7 September 11.6 7.5 7.7 8.1 October 9.5 7.0 7.9 3.8 November 7.8 7.4 7.8 6.2 December 6.7 7.5 8.9 6.7 January 8.0 8.3 9.0 2018 February 8.4 8.4 8.0 Source: Central Bank of Kenya and World Bank 62 April 2018 | Edition No. 17 Statistical Tables Table 20: Coffee production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 2,795 412 2,844 1,307 February 4,837 489 2,884 1,339 March 5,571 378 4,290 2,025 April 3,714 310 3,948 1,901 May 2,969 289 4,383 2,236 June 0 0 4,220 2,068 2015 July 2,086 339 3,938 1,943 August 3,286 371 3,991 1,790 September 2,643 364 3,405 1,617 October 1,768 320 4,400 2,019 November 1,268 337 2,769 1,244 December 1,282 435 2,528 1,092 January 3,432 462 2,449 1,184 February 5,220 486 3,277 1,636 March 6,835 437 4,169 2,206 April 4,513 340 4,804 2,540 May 4,735 263 4,814 2,170 June 1,747 268 4,983 2,369 2016 July 569 324 3,987 1,798 August 3,723 431 3,719 1,637 September 3,284 437 3,173 1,399 October 1,573 410 3,116 1,489 November 2,374 468 3,929 1,691 December 1,666 514 2,886 1,252 January 5,190 590 3,214 1,553 February 6,081 606 3,868 2,094 March 5,460 507 5,447 3,231 April 4,563 299 4,201 2,698 May 1,639 276 5,424 3,117 June - - 4,443 2,501 2017 July 762 420 3,598 1,971 August 2,319 443 2,649 1,311 September 2,465 457 3,134 1,516 October 1,619 409 2,335 1,121 November 2,310 419 3,196 1,566 December 1,320 453 1,955 775 January 5,112 527 2,509 1,286 2018 February 5,832 577 Source: Kenya National Bureau of Statistics April 2018 | Edition No. 17 63 Statistical Tables Table 21: Tea production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 41,653 212 40,970 8,485 February 24,276 221 41,086 9,313 March 15,688 250 35,700 8,796 April 23,837 258 28,262 7,189 May 37,523 297 27,016 7,506 June 32,286 319 35,915 11,263 2015 July 30,942 344 30,623 10,146 August 28,410 330 27,687 9,481 September 36,484 327 33,528 11,413 October 41,343 333 40,246 13,538 November 40,382 313 36,714 12,126 December 46,387 309 42,779 13,768 January 50,308 279 36,575 11,013 February 43,969 253 43,292 12,200 March 45,330 234 37,571 9,887 April 37,571 214 39,313 9,517 May 36,573 223 44,901 10,658 June 35,603 243 52,175 12,613 2016 July 29,285 246 42,751 10,679 August 29,462 234 39,673 9,993 September 36,785 236 33,528 8,454 October 41,342 243 29,656 7,548 November 39,903 273 41,138 11,123 December 45,103 273 39,396 10,811 January 32,991 316 46,434 14,072 February 22,605 317 33,898 10,880 March 34,498 300 33,662 10,693 April 31,458 297 32,091 9,991 May 38,822 304 39,329 12,354 June 40,538 325 42,370 13,485 2017 July 31,565 310 41,437 13,442 August 32,693 300 29,628 9,269 September 38,386 305 43,469 13,570 October 43,420 316 41,173 13,147 November 45,374 309 39,128 12,713 December 47,507 285 44,413 13,634 2018 January 40,834 304 48,447 14,964 Source: Kenya National Bureau of Statistics 64 April 2018 | Edition No. 17 Statistical Tables Table 22: Horticulture Exports Exports value Year Month Exports MT Ksh. Million January 18,170 6,413 February 20,599 7,892 March 21,259 10,510 April 21,410 6,223 May 19,160 6,300 June 16,904 5,140 2015 July 17,359 8,551 August 16,175 5,824 September 25,188 8,187 October 22,179 9,905 November 19,428 8,095 December 20,179 7,399 January 20,160 10,927 February 22,337 10,151 March 24,314 11,140 April 25,931 8,611 May 21,260 7,004 June 20,157 10,293 2016 July 17,981 5,577 August 19,650 7,293 September 20,924 6,659 October 23,327 8,312 November 22,772 7,641 December 22,294 7,906 January 27,045 11,559 February 27,461 10,942 March 27,892 9,094 April 25,658 8,977 May 30,549 10,292 June 26,271 9,395 2017 July 22,179 8,660 August 23,357 9,237 September 23,818 8,962 October 24,337 9,059 November 21,676 8,275 December 23,905 10,871 Source: Kenya National Bureau of Statistics April 2018 | Edition No. 17 65 Statistical Tables Table 23: Leading Economic Indicators year to date growth rates (Percent) Year Month Horticulture Coffee Tea January -1.8 -10.3 6.0 February 1.7 -8.3 13.7 March 5.4 -7.5 7.2 April 5.0 -11.0 -0.8 May 3.3 -9.5 -5.7 June 1.6 -9.3 -6.1 2015 July 1.6 -12.5 -9.6 August 1.2 -9.3 -11.8 September 5.1 -9.7 -11.3 October 5.9 -7.0 -9.4 November 6.6 -8.5 -8.9 December 8.1 -8.1 -7.9 January 11.0 -13.9 -10.7 February 9.6 0.0 -2.7 March 11.3 -1.2 -0.3 April 13.9 5.3 7.4 May 13.3 6.3 16.5 June 14.2 8.5 21.5 2016 July 12.8 7.5 23.8 August 13.7 5.6 25.8 September 9.4 4.3 22.9 October 8.9 0.5 17.1 November 9.6 3.3 16.6 December 9.7 3.9 14.1 January 34.1 31.2 27.0 February 28.3 23.7 0.6 March 23.3 26.6 -2.9 April 16.5 13.8 -6.8 May 21.6 13.5 -8.1 June 22.9 8.6 -10.3 2017 July 22.9 6.0 -9.2 August 22.5 2.0 -11.1 September 21.5 1.7 -7.4 October 19.7 -0.5 -4.0 November 17.3 -2.1 -4.1 December 16.5 -4.1 -2.7 2018 January -21.9 4.3 Source: World Bank, based on data from Kenya National Bureau of Statistics 66 April 2018 | Edition No. 17 Statistical Tables Table 24: Local Electricity Generation by Source Geo-thermal KWh Thermal KWh Total Year Month Hydro KWh Million Million million KWh million January 278 388 109 776 February 230 352 121 703 March 246 377 134 757 April 264 359 121 744 May 301 380 103 784 June 297 362 109 769 2014 July 305 353 143 801 August 319 378 112 808 September 306 389 99 794 October 310 402 100 812 November 300 393 89 782 December 307 387 92 786 January 322 392 93 808 February 297 392 95 784 March 335 383 112 830 April 303 394 102 800 May 334 403 92 830 June 348 342 113 803 2015 July 337 393 110 842 August 364 345 138 850 September 349 335 137 824 October 357 364 135 862 November 315 369 158 848 December 299 371 158 836 January 252 380 197 837 February 214 354 182 758 March 234 388 230 858 April 212 381 223 822 May 229 394 224 849 June 180 376 274 834 2016 July 193 402 271 867 August 251 415 159 829 September 239 403 213 859 October 217 416 224 861 November 305 411 153 877 December 250 436 185 879 2017 January 223 430 244 900 Source: Kenya National Bureau of Statistics April 2018 | Edition No. 17 67 Statistical Tables Table 25: Soft drinks, sugar, Galvanized sheets and Cement Production Soft drinks Litres Galvanized sheets Year Month Sugar MT Cement MT (thousands) MT January 41,348 63,227 21,304 511,298 February 41,440 57,917 20,078 465,471 March 48,865 63,389 22,797 550,556 April 42,148 46,280 20,674 537,452 May 36,874 44,081 23,132 516,513 June 36,274 46,098 20,358 516,185 2014 July 32,086 47,957 18,415 570,904 August 38,432 54,089 20,871 553,929 September 40,176 61,069 20,581 561,235 October 42,936 56,360 26,024 557,589 November 40,025 43,401 25,764 510,747 December 49,966 48,089 16,938 486,306 January 50,502 41,348 21,330 533,490 February 45,237 41,440 20,102 531,813 March 58,038 48,865 20,120 541,438 April 44,429 42,148 23,109 568,253 May 43,189 36,874 21,980 585,929 June 39,191 36,202 20,180 547,238 2015 July 42,393 32,158 18,320 575,193 August 39,331 38,508 24,190 591,612 September 48,884 40,291 21,045 528,494 October 46,131 43,203 18,328 573,034 November 41,877 40,141 19,143 584,780 December 52,185 49,966 19,431 545,956 January 50,491 53,071 23,271 565,440 February 43,941 49,094 21,696 491,307 March 46,585 41,936 22,165 570,522 April 41,814 26,230 21,999 535,061 May 36,483 15,246 22,162 482,762 June 41,265 16,113 21,645 513,313 2016 July 39,575 17,882 22,029 553,631 August 38,228 10,892 21673 451,651 September 35,677 21,649 22,206 498,167 October 39,905 32,296 23,037 498,374 November 39,033 43,175 494,518 December 49,240 502,518 2017 January 56,860 511,328 Source: Kenya National Bureau of Statistics 68 April 2018 | Edition No. 17 Statistical Tables Table 26: Tourism arrivals Year Month JKIA MIA TOTAL January 40,846 10,107 50,952 February 45,141 7,882 53,053 March 66,121 6,958 73,079 April 49,933 4,020 53,953 May 50,764 2,511 53,275 June 59,867 3,218 63,146 2014 July 72,515 5,728 78,243 August 63,332 7,546 70,878 September 54,162 5,114 59,276 October 66,441 6,049 72,490 November 53,622 7,718 61,340 December 50,015 9,070 59,085 January 65,431 9,407 74,838 February 62,856 9,983 72,839 March 49,996 8,551 58,547 April 51,311 3,869 55,180 May 59,294 3,578 62,872 June 64,451 4,182 68,633 2015 July 81,729 7,832 89,561 August 87,141 9,817 96,958 September 67,249 8,381 75,630 October 63,229 9,015 72,244 November 61,224 7,990 69,214 December 67,602 10,267 77,869 January 67,053 12,637 79,690 February 62,119 10,611 72,730 March 63,568 8,382 71,950 April 62,982 4,102 67,084 May 64,866 2,665 67,531 June 74,194 4,734 78,928 2016 July 97,955 7,286 105,241 August 79,053 10,729 89,782 September 78,329 9,111 87,440 October 57,034 7,557 64,591 November 61,617 10,956 72,573 December 90,745 15,117 105,862 Source: Kenya National Bureau of Statistics April 2018 | Edition No. 17 69 Statistical Tables Table 27: New Vehicle registration All body types Year Month (numbers) January 15,366 February 17,409 March 25,067 April 20,730 May 22,837 June 25,070 2014 July 21,132 August 17,360 September 18,596 October 18,740 November 23,209 December 22,308 January 14,652 February 12,771 March 10,280 April 13,699 May 11,855 June 22,428 2015 July 23,442 August 18,288 September 18,527 October 13,018 November 27,286 December 27,431 January 23,889 February 20,748 March 27,720 April 23,074 May 24,720 June 24,509 July 29,346 2016 August 22,422 September 21,137 October 18,889 November 22,954 December 23,264 January 23,676 February 24,123 Source: Kenya National Bureau of Statistics 70 April 2018 | Edition No. 17 Policy Options to Advance the Big 4 Unleashing Kenya’s Private Sector to Drive Inclusive Growth and Accelerate Poverty Reduction The 2010 Constitution of Kenya introduced a devolved system of government aimed at better service delivery. With that foundation laid and 5 years of implementation experience, the Government of Kenya has announced an ambitious development agenda for the next 5 years anchored on “the Big 4”: deliver a ordable housing, roll-out universal health coverage, increase the share of manufacturing in the economy and improve food security. At this critical juncture in Kenya’s development journey, it is my pleasure to present the 17th Edition of the Kenya Economic Update. The report has three key messages. First, after multiple headwinds dampened growth in 2017, the incipient rebound in economic activity in Kenya is gaining momentum. Supported by improved rains, the dissipation of political uncertainty which held back investment, and the ongoing broad-based recovery in the global economy, GDP growth is expected to recover to 5.5 percent in 2018 and steadily rise to 6.1 percent by 2020. Nonetheless, downside risk to this outlook stem from scal slippages that could endanger macroeconomic stability, a continuation of subdued credit growth to the private sector (especially for households and small enterprises), and negative spillovers from the global economy due to tighter nancial market conditions and escalation of tensions in global trade. Second, though ambitious, the Big 4 can be achieved. However, signi cant policy reforms will be needed. This report proposes macroeconomic and sectoral policy options that could help advance delivery on the Big 4 over the medium-term. Underpinning the proposed policy options is the recognition that success will require support from both the public and especially the private sector. Hence the need to provide appropriate incentive structures, through policy reforms, to allow resources to ow to the Big 4 areas. Third, policies to achieve the Big 4 could help foster inclusive growth and accelerate the pace of poverty reduction. In the special focus section of the report, macroeconomic drivers of poverty reduction in Kenya are analyzed, including an assessment of current levels against international benchmarks. The rate of poverty reduction in Kenya outpaces many in the region, but is less responsive to growth and remains higher compared to other lower-middle income countries. Growth in the agriculture sector accounted for the largest share of poverty reduction, but also revealed progress is vulnerable to climatic shocks. The World Bank remains committed to working with key Kenyan stakeholders to identify policy and structural issues that will enhance inclusive growth, keep Kenya on the path to upper middle-income status, and attain its Big 4 policy objectives. The Kenya Economic Update o ers a forum for such policy discussions. We hope that you will join us in debating topical policy issues that can contribute to fostering growth and shared prosperity and poverty reduction in Kenya. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @Worldbankkenya Nairobi, Kenya #KenyaEconomicUpdate Telephone: +254 20 2936000 Fax: +254 20 2936382 http://www.worldbank.org/en/country/kenya Produced by Macroeconomics, Trade and Investment; Poverty and Equity; Finance, Competitiveness and Innovation; Health, Nutrition and Population; and Agriculture Global Practices