104289 Kazi ni kazi Informal should not be normal Cover Photos Sarah Farhat / World Bank Keziah Muthembwa / World Bank Charles Muiru Ngugi Table of Contents FOREWORD................................................................................................................................................ iii ACKNOWLEDGEMENTS............................................................................................................................... iii OVERVIEW................................................................................................................................................. vii Kenya Reaped the Low Oil Price Dividend.......................................................................................................... vii Appropriate Monetary Policy Response Moderated The Impact Of The Global Turbulence............................. viii Tighter Borrowing Conditions And Revenue Shortfalls Complicated Fiscal Management................................. viii The Outlook Remains Positive............................................................................................................................ ix Kenya Is Not Short Of Jobs; It Is Short Of High Productivity Jobs....................................................................... x Young Firms Can Be Key Drivers of Labor Demand in Kenya.............................................................................. x Leverage Changes in The Global Economy to Recalibrate Trade and to Spur Structural Transformation........... xi Connecting Jobs to People, and People to Jobs................................................................................................. xii RECENT ECONOMIC DEVELOPMENT............................................................................................................ 2 A Resilient Economy in Tough Times.................................................................................................................. 2 The Leading Economy Drivers............................................................................................................................ 3 The Wallop From The Head Winds Of Reduced Exports, Insecurity And Money Market Volatility.................... 6 A Hub Under Threat: Will Kenya Maintain its Position....................................................................................... 6 Fiscal Policy: Turning The Corner........................................................................................................................ 7 Fiscal Decentralization and the Deepening of Devolution.................................................................................. 13 Kenya’s External Balance Improved, Thanks to Falling Oil Prices....................................................................... 23 TRADE PERFORMANCE AND EXPORT GROWTH FOR EMPLOYMENT CREATION............................................ 29 Kenya Requires a Clear Export Strategy to Expand Exports in Each of the Trading Blocks EAC and COMESA.... 30 GROWTH OUTLOOK FOR 2016-18............................................................................................................... 34 Risks To The Outlook.......................................................................................................................................... 35 SPECIAL FOCUS: TRANSFORMATIONAL JOBS KEY TO KENYA’S SOCIAL-ECONOMIC DEVELOPMENT.............. 39 Needed: More Job opportunities in Kenya......................................................................................................... 41 The Economy Not Creating Enough Productive Jobs.......................................................................................... 43 Slow Creation of Productive Jobs in the Formal Sector...................................................................................... 49 Low Skills Levels Could Constrain All Sectors of Employment............................................................................ 52 Policy Priorities to Foster More, Better and More Inclusive Jobs....................................................................... 57 LIST OF FIGURES Figure 1: Coffee, tea and horticulture can now ‘pay’ for oil imports thanks to declining oil prices Figure 2: Rising cost of borrowing, the SGR and Transfer to counties drive fiscal expansion Figure 3: World Bank revised Kenya growth projections upward Figure 4: Growth momentum will be sustained to reach 6 percent, which is well above ethe average for SSA Figure 5: There are more jobs created in the recent years, mainly in the informal services sector Figure 6: Many jobs have been created but were not associated with higher value added Figure 7: Exports to traditional markets have stagnated but new markets have emerged Figure 1.1 : Kenya experienced economic resilience Figure 1.2: Financial services and ICT led growth in the services sector Figure 1.3: Kenya is reaping the benefits of ICT development Figure 1.4: Electricity sector experienced astounding growth Figure 1.7: Not accelerating, and export performance lagging Figure 1.8: Fiscal policy turns the corner if course adjustment is maintained Figure 1.9: Foreign borrowing has become a secure means of financing the fiscal deficit Figure 1.10: The drivers of the recent increase in national expenditure Figure 1.11: The gap between recurrent and development expenditure significantly narrowed Figure1.12: Revenue growth remain minimal Figure 1.13: Public debt is accumulating at a faster rate Figure 1.14: Local Revenue collections are improving and Revenue forecasts have become more realis- tic Figure 1.15: On average Counties recorded an overall increase in Local Revenue collection Figure 1.16: 32 counties attained the 30 percent development-spending threshold. Figure 1.17: Almost all counties would attain the 30 percent threshold if development pending bills were paid on time. Figure 1.18: County budget execution has improved Figure 1.19: County governments Wage Bill increased significantly in 2014/15 Figure 1.20: Lower energy price led below-target overall inflation Figure 1.21: Food prices accounted for more than half of overall inflation (Contributions to overall infla- tion) Figure 1.22: Interbank rate volatility increased towards the end of 2015 Figure 1.23: Money market rates rose sharply in September and October 2015 due to tight liquidity conditions caused by government domestic borrowing Figure 1.24: Long-term interest rates rose in response to the change in the Central Bank’s monetary policy stance Figure 1.25: Monetary operations slowed the growth of monetary aggregates Figure 1.26: Credit to the business services and building and construction sectors increased, while cred- it to remaining sectors declined Figure 1.27: The volume of nonperforming loans increased in most sectors Figure 1.28: Security concerns, capital outflows, and depreciation risk reduced the attractiveness of the Nairobi Stock Exchange Figure 1.29: The current account deficit in 2015 is the lowest since 2010 Figure 1.30: Trade balance improved as imports contracted more than exports Figure 1.31: Coffee, tea and horticulture can now pay for oil imports thanks to declining oil prices Figure 1.32: Long-term flows increasingly contribute to financing the current account deficit Figure 1.33: Remittances are the single most important source of foreign exchange inflows in Kenya Figure 1.34: Volatility in foreign exchange market in the third quarter of 2015 affected capital flows Figure 1.35: The Kenyan shilling performed well compared to other regional currencies Figure 1.36: After three years of moderate appreciation, the shilling depreciated in the real term in the second quarter of 2015 Figure 1.37: Foreign exchange reserves fell due to CBK’s intervention, but still high enough to cushion Kenya from short-term shocks Figure 3.1: Exports to EAC and EU have stagnated but Asia & Australia are now at par with EU at 22 % of total exports. Figure 4.1: Jobs and wealth index1: access matters less than quality of jobs Figure 4.2: “Business as usual” growth will not result in better jobs Figure 4.3: Distribution of Kenya’s urban population (thousands, 15-64 age categories) Figure 4.4: Lack of jobs, and lack of productive jobs Figure 4.5: Youth are less likely to have a job, even when they are not in school Figure 4.6: The contributions of growth fail to show significant change into more productive jobs. Figure 4.7: Employment in urban and rural Kenya Figure 4.8: Wage jobs in higher productivity services and industry are needed Figure 4.9: Jobs are dominated by services, and by informal occupations Figure 4.10 : Low intensity of skills used on the job ,Use of skills at work, by occupation status Figure 4.11 : Reasons for inactivity, by gender and age. Figure 4.12 : Age, gender and education levels matter for the kind of job one gets. Figure 4.13 : Labor productivity is significantly higher in the formal sector. Figure 4.14 : Firm creation is limited in the formal sector Figure 4.15 : Distribution of population by age, gender and highest level of education. Figure 4.16 : Primary completion rates by provinces Figure 4.17 : Highest education achieved, by socioeconomic status Figure 4.18 : Highest education completed by age of entry. Figure 4.19 : Mismatch by gender, educational level and age categories Figure 4.20 : Major constraints to doing business, Kenya and Comparators Figure 4.21 : Policy targeting: identifying groups LIST OF TABLES Table 1.1: Revised budget shows fiscal adjustments in development expenditure (% of GDP) Table 1.3: County government budgets indicate a continued in revenues and expenditure expansion (KSh Billion) Table 3.1: Medium Term growth outlook (percent) LIST OF BOXES Box 1.1: Electricity tariff drops as more geothermal power comes online Box 1.2: Capital markets in Kenya Box 2.2: Kenya has lost export market for key manufactured goods Box 3.2: Experience from KENAFRIC Box 3.1: Impact of China’s slowdown on Kenya Box 1 : The STEP Household Survey: Measuring Skills in Kenya Abbreviations and Acronyms AGOA African Growth and Opportunity Act BOP Balance of payments CA Communication Authority of Kenya CBK Central Bank of Kenya CBR Central Bank Rate COMESA Common Market for Eastern and Southern Africa CPI Corruption Perception Index DANIDA Danish International Development Agency DSA Debt Sustainability Analysis EAC East Africa community EU European Union FDI Foreign Direct Investments FERFA Foreign Exchange Rate Fluctuations Adjustments FY Fiscal Year GDP Gross Domestic Product ICT Information Communication Technology IFC International Finance Corporation IMF International Monetary Fund KENGEN Kenya Electricity Generating Company KEU Kenya Economic Update KNBS Kenya National Bureau of Statistics MPO Macro Poverty Outlook MW Mega Watts NSE Nairobi Securities Exchange OECD Organization for Economic Co-operation and Development SCT Single Custom Territory SMS Short Message Service SSA Sub-Saharan Africa STEP Skills towards Employment and Productivity USA United States of America USD US Dollar VAT Value Added Tax WARMA Water Resource Management WDI World Development Indicators March 2016 | Edition No. 13 i Foreword It is my pleasure to present to you the thirteenth edition of the World Bank’s Kenya Economic Update. This economic update reviews economic performance in Kenya in the context of changing trends in the global economy: low commodity prices, the monetary policy in the US which has seen a strengthening of the US dollar, and the cooling and rebalancing of the Chinese economy. This report has three main messages: First, Kenya experienced strong economic performance in 2015 despite global turbulence. Indeed, in the recent years Kenya’s growth has exceeded the average for the countries in Sub Sahara Africa. Growth is projected to reach 6 percent in the medium term underpinned by low oil prices, good agriculture per- formance, supportive monetary policy that is expected to contain inflation within policy bounds, and the ongoing infrastructure investments. Second, Kenya’s economy remains vulnerable to risks that could derail the growth momentum. The forth- coming elections could see a slowdown in growth momentum through two channels; first is the risk that investors defer investment decisions until after the elections; second, that election related expenditure delay the much needed fiscal consolidation and/or see a cut back in infrastructure spending. Security remains a threat not just in Kenya but globally. Finally, changes in the US monetary policy could trigger volatility in financial markets putting the currency under pressure. Overall the prevailing global market conditions call for a more stringent fiscal policy to preserve buffers and will require a mixture of fiscal consolidation, enhanced revenue mobilization and measures to increase efficiency of spending. Third, Kenya is not short of jobs; it is short of high productivity jobs. Kenya’s economy is creating more jobs now than in the past, but these are mainly in the informal services sector and are low productivity jobs. In the next ten years nine million youth will join the labor market and given the scarcity of formal sector jobs, the youth will continue to find jobs in the small household enterprises. To improve productivity of these jobs policy interventions could be geared towards increasing access to broad skills beyond formal education, creating linkages between formal and informal firms, and helping small scale firms enter local and global value chains. Furthermore, to create more and better jobs, it is also imperative to reduce the cost of doing business which is necessary for a robust private sector. As in the past, we are proud to have worked with many key Kenyan stakeholders during the preparation of this report. We hope that you too will join us in debating policy issues that are topical in Kenya today, and in making your contribution to helping Kenya to grow, and to achieve a permanent reduction in poverty. Diariétou Gaye Country Director for Kenya ii March 2016 | Edition No. 13 Acknowledgements T his thirteenth edition of the Kenya Economic Update was prepared by a team led by Jane Kiringai and Maria Laura Sanchez. The core team comprised of Toru Nishiuchi, Angélique Umutesi, Patrick Nderitu, Sara Johansson, Laban Chesang, Christine Awiti, Evans Osano, Benard Kagira and Richard Mugo. The team acknowledges contributions from Angelina Musera, Celestine Kisaka, Keziah Muthembwa, and Charles Muiru. The report benefitted from the insights of several peer reviewers including Birgit Hansl, Jennifer Keller and Eric Aligula. The team also received overall guidance from Albert Zeufack (Practice Manager, Macroeconomic and Fiscal Management), Thomas O’ Brien (Country Program Coordinator for Kenya, Uganda, Rwanda, Uganda and Eritrea), Kevin Carey (Lead Economist, Macroeconomic and Fiscal Management), Apurva Sanghi (Lead economist and Program leader for Kenya, Uganda, Rwanda and Eritrea), and Diarietou Gaye (Country Director for Kenya, Uganda, Rwanda, Uganda and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of this report. On March 23, 2016, a draft of the report was presented at the 19th Quarterly Economic Roundtable. The meeting was attended by senior officials from the National Treasury, the Central Bank of Kenya, the Kenya School of Monetary Studies, the Commission on Revenue Allocation, the Office of the Controller of Budget, the National Economic and Social Council, the Ministry of Planning and Devolution, the Council of Governors and the Centre for Parliamentary Studies and Training. March 2016 | Edition No. 13 iii iv March 2016 | Edition No. 13 Summary T his update comes in the wake of three game changing and mutually reinforcing trends. First, mon- etary policy in the US will determine the direction of capital flows and currency stability. Second, the persistent decline in commodity prices will determine winners and losers and third, the cooling and rebalancing of the Chinese economy is likely to see a recalibration and change in the direction of trade. Kenya’s growth will depend on the net impact of these global trends on the one hand and the domes- tic policy response on the other. Kenya’s current account deficit contracted, thanks to declining oil prices and rising tea export earnings. Appropriate monetary policy response, raising the central bank rate and modestly drawing down reserves, stabilized the shilling and contained inflation. Expansionary fiscal policy provided a stimulus and created jobs in the construction sector, but domestic deficit financ- ing also led to a spike in lending rates as external lending conditions tightened and revenue shortfalls persisted. Growth in 2015 is estimated at 5.6 percent, and is projected to rise to 5.9 percent in 2016 and 6 percent in 2017. The positive outlook is predicated on infrastructure investments to gradually reduce supply side constraints. If realized, fiscal consolidation will ease pressure on domestic interest rates and increase credit uptake by the private sector. Complementary monetary policy will ensure continued pri- vate investments through stable interest rates while keeping inflation in check. The contraction of the current account deficit will continue, supported by prevailing global trends, and ease pressure on the external account and improve the net exports position. Risks to the outlook remain on the downside. The economy has created more jobs in the recent years, but these are low productivity mainly in the informal services sector and are not associated with higher value added. Unemployment and underemployment is still high in Kenya’s urban areas. Labor productivity in Kenya is significantly higher in the formal than in the informal sector. Within the private formal sector, more productive and more established firms offer better job conditions and higher wages, but these opportunities are limited. Available data suggests that the conditions do not favour entrepreneurship and expansion, especially of more productive and competitive firms in the formal sector. In the next ten years, nine million youth will enter the labour market, a majority will continue to find jobs in the informal sector. Even in a scenario with rapid growth in the formal wage sector, formal firms will not create jobs for all young Kenyans. A majority will continue to find jobs in the small house- hold enterprises, working for themselves or their family in the Jua Kali, the informal sector. A vast majority of these firms will remain very small with low levels of productivity. March 2016 | Edition No. 13 v To improve productivity of these jobs, policy interventions could be geared towards increasing access to broad skills beyond formal education, creating linkages between formal and informal firms, and helping small scale firms enter local and global value chains. A transformation into more formal, higher productivity jobs will require a better trained labor force, a flexible skills development system that fosters basic generic skills. Policy interventions could help create linkages between formal and informal firms and connecting suppliers and customers; and connecting firms with technological solutions; and provides opportunities for acquiring labor market relevant technical skills is needed. To encourage private sector growth and create better jobs, the business environment must improve. Comparing the World Bank’s Enterprise Surveys from 2007 and 2013 suggest that the business climate is deteriorating. Firms in 2013 experienced higher financing costs, higher insecurity, and more unre- liable access to infrastructure. Kenyan firms make 30 contributions a year, taking 201 staff hours to calculate, file, and pay their taxes. For traders, logistics are a major hindrance. On average, the pro- cedures and documentation needed to import or export take 26 days; connecting to the power grid in Nairobi requires 6 steps, takes more than 5 months, and costs on average 10 times the Gross National Income (GNI) per capita. Finally, Kenya can leverage the changes in the global economy to recalibrate its trade as a platform for structural change and provide the impetus for higher levels of growth and creation of productive jobs. Overall growth in exports to key traditional markets in EAC and Europe has been weak, averag- ing one percent since 2011.But new export markets have emerged, the Americas, Asia and Australia, growing at 12 and 10 percent respectively between 2010 and 2015. These markets offer hope for expanded production and therefore the creation of productive jobs. The rebalancing of the Chinese economy also holds great potential for expanding exports of consumer goods. However, a clear export strategy would be required if Kenya is to take full advantage of the new markets and expand exports to China. vi March 2016 | Edition No. 13 Overview T hree global factors that influence Kenya’s economic environment and which have been discussed for some time are now in full force: 10 percent to 7 percent of GDP. This contraction was largely driven by the reduction in oil prices, which saw a gradual reduction in the value of oil industrialized countries monetary policy adjust- imports by about 36 percent in 2015. At the same ment, the end of the commodity price boom, and time, although commodity prices declined globally, rebalancing of the Chinese economy. This economic tea export earnings increased by about 13 percent update reviews economic performance in Kenya in and offset the contraction in coffee and horticulture. the context of these changing trends in the global Thus, Kenya emerged a net winner so far from the economy. The cooling and rebalancing of the Chi- ongoing global volatility (figure 1). nese economy, the strengthening US dollar, and the spillover effects into the global economy through a Nevertheless, commodity price and currency vol- softening of growth rates and subdued demand in atility in the global markets subdued demand for Kenya’s export markets will interact with domestic Kenyan goods in the key destination markets, policy and conditions to determine Kenya’s growth but the weaker shilling shored up earnings from in the near term. exports outside the region in local currency. The currencies in the regional EAC and COMESA markets Kenya Reaped the Low Oil Price Dividend weakened against the dollar and the Kenya shilling. Consequently, Kenyan exports became more expen- Overall, Kenya reaped the dividend of low oil sive in the regional markets and earnings declined; prices. The current account deficit contracted from Figure 1 | Coffee, tea and horticulture can now ‘pay’ for oil imports thanks to declining oil prices Source: Authors computation from CBK data March 2016 | Edition No. 13 vii Rwanda (-32%), Tanzania (-37%) and Uganda (-0.2%). contained inflation. For instance, while the Kenya But export earnings from two leading markets, UK shilling depreciated by 13 percent against the dollar and USA increased by 11.5 and 5.5 percent respec- in December 2015, the Tanzania and Uganda shillings tively and protected export earnings and offset the depreciated by 24.4 and 6.6 percent respectively, contraction in other markets. and the South African Rand by 30.2 percent. Appropriate monetary policy response moder- Tighter borrowing conditions and revenue short- ated the impact of the global turbulence. falls complicated fiscal management. The strengthening of the US dollar and more Tighter borrowing conditions in domestic and recently the US Fed rate hike triggered volatility global markets and shortfalls in revenue targets in the global financial markets. The response has exerted pressure through the expansionary fiscal seen a shift in gears in the management of mon- stance (Figure 2). The Government resorted to etary policy to contain the effects on inflation. In domestic deficit financing in response to meet Kenya the Central Bank implemented a raft of policy revenue shortfalls and the rising Eurobond yields measures that maintained confidence in the anti-in- in the range of 8-12 percent. Interest rate on gov- flation stance. These measures included: (i) raising ernment securities reached double digit leading to the CBR rate from 8.5 to 11.5 percent; (ii) running a spike in lending rates to the private sector. Fiscal down Forex reserves to cushion the shilling; (iii) pub- pressure also saw a delay in exchequer releases to lishing commercial bank lending rates to stem a hike the county governments, and a spike in accumula- in lending rates and; (iv) injecting money through tion of arrears (pending bills, particularly by county reverse repo operations to ease tight liquidity condi- governments) which has contributed to the rise in tions. Consequently, the Kenya shilling stabilized and non-performing loans in the banking sector. Figure 2 | Rising cost of borrowing, the SGR and Transfer to counties drive fiscal expansion Expenditure GDP ofGDP Expenditure, % of 30 2.2 2.3 8 SGR 25 3.0 3.0 6 2.7 0.2 4.1 4 6.9 4.0 20 22.3 2 Interest rates 3 19.5 20.2 1.3 1.7 payments 0 0.4 0.9 Percent 15 2.5 -2 3.7 4.1 Transfer to 5.5 -4 7.3 8.1 10 -6 5 Others -8 -10 0 Ethiopia Rwanda Uganda Tanzania Kenya Ghana 2013/14 2014/15 2015/16 Interest payment Source: The National Treasury Source: World Bank Macro Poverty Outlook, 2016 viii March 2016 | Edition No. 13 The outlook remains positive Figure 3 | World Bank revised Kenya growth projections upward Against this backdrop the World Bank estimates growth in 2015 at 5.6 percent, an upward revision from 5.4 in the last KEU; growth is projected to rise to 5.9 and 6 percent through to 2017 (Figure 3). This performance can be attributed to four main drivers: (i) the decline in oil prices eased the pres- sure on the external account and improved the net exports position; (ii) good agriculture performance and supportive monetary policy which contained inflation within target; (iii) ongoing innovations in the ICT sector provided a platform for growth in services; and (iv) ongoing infrastructure invest- ments stimulated growth and employment in the Source: World Bank construction sector and the completion of energy projects resulted in a gradual reduction in the cost competitiveness of Kenyan products persist. Ongo- of electricity. ing infrastructure investments will provide tapering fiscal stimulus. The planned fiscal consolidation and Growth will be driven by private consumption the shift from domestic to external financing for key and investment as fiscal adjustment enables some infrastructure projects is expected to stem the rise crowding in of the private sector. Export perfor- in lending rates and increase access to credit for the mance will remain subdued as a result of declining private sector. Stable food supply and a stable mac- commodity prices and as structural constraints to roeconomic environment will boost consumption. Figure 4 | Growth momentum will be sustained to reach 6 percent, which is well above the average for SSA Source: WDI and Macro Poverty Outlook. March 2016 | Edition No. 13 ix However, this growth outlook is subject to substan- are in the informal services sector. In the formal tial downside risks. These include security threats, sector, only about eight percent new jobs are found the rebalancing of the Chinese economy, the sub- in the services sector. There has been some progress dued prices of coffee and tea. The recent hike in in job creation in the industrial sector in the recent the US Fed rate could reverse the direction of short- years. However in agriculture, which has in the past term flows which finance Kenya’s external account. largely contributed to GDP growth, the sector has The ‘wait and see approach’ for the 2017 elections seen a net loss in jobs to the services sector. Sadly, by private investors could slow down investment. although the service sector created jobs, productivity Overall the prevailing global shocks call for a more declined in the informal segment. stringent fiscal policy to preserve buffers and will require a mixture of fiscal consolidation, enhanced Services account for the highest growth in infor- revenue mobilization and measures to increase effi- mal employment, enhancing productivity of ciency of spending. these jobs can catalyze growth. Kenya is not short of jobs; it is short of high pro- The question of job creation is intrinsically linked ductivity jobs to productivity and competiveness of Kenyan firms in the global market. More productive and A majority of Kenyans, particularly youth, are capital-intensive firms, firms investing in ICT, and locked in low productivity jobs, as the current exporting firms, offer a better contractual situation growth model generates limited quality jobs. than others. Similarly, older and more productive Figure 5 shows that the economy is creating more firms tend to hire more permanent workers, and as jobs now than in the past, but these are mainly in such offer more job security. But such firms are few the informal sector. For instance the economy gen- in Kenya and only constitute twenty five percent erated 800,000 jobs in 2014, compared to 650,000 of non-agriculture employment. Economic growth in 2011. But about eighty percent of the new jobs can also emanate from existing jobs becoming Figure 5 | There are more jobs created in the recent years, mainly in the informal services sector. Source: Authors computation based on KNBS data. x March 2016 | Edition No. 13 more productive. Kenya’s increase in value added Figure 6 | Many jobs have been created but were not associated with higher value added has been driven by more employment rather than productivity of existing jobs. From Figure 6 below, while total factor productivity has been increasing over time, Kenya’s growth has come mainly from growth in capital stock. Young Firms Can Be Key Drivers of Labor Demand in Kenya Firm creation is a pathway to productivity growth and employment creation. Young firms contrib- ute disproportionately to job creation and much less to job destruction. However, creation of new firms and formalization of existing firms in Kenya is sluggish, curtailing growth prospects. For instance, Source: World Bank Staff computations. young firms account for 35 percent of all firms in the US and 30 percent in OECD countries com- Leverage changes in the global economy to recal- pared to only 10 percent in Kenya. Furthermore, ibrate trade, a path to structural transformation more productive firms in Kenya do not create more jobs and the relationship between job creation and Trade, productivity, growth and employment cre- productivity in Kenya is negative. This is a worrying ation are intrinsically linked, yet Kenya is losing trend in the food and textile sectors, which are the market share in its traditional and largest export main sources of employment in the manufacturing markets (figure 5). Kenya can leverage the changes in sector. Kenya’s export performance in these sectors the global economy to recalibrate its trade as a plat- might explain the performance of these sectors. form for structural change and provide the impetus Figure 7 | Exports to traditional markets have stagnated but new markets have emerged Source: Authors computation based on KNBS data March 2016 | Edition No. 13 xi for higher levels of growth and creation of productive Lack of training opportunities after school, under- jobs. Overall growth in exports to key traditional mines labor productivity in Kenya. There is a strong markets in EAC and Europe has been weak, at one correlation between training and formal wage work. percent (figure 5). This has been a declining trend For instance workers who attend on the job train- in Kenya’s largest export market, Uganda, as well ing programs are more likely to use their cognitive as the UK, another significant trading partner, since skills on the job. But such opportunities are rare for 2011. Three factors explain the prevailing trends: (i) the informal wage-worker, and more so for self-em- the weak growth in exports within the EAC coincides ployed. As a survey undertaken in 2013 revealed 30 with start of the fully fledged EAC customs union, percent of formal wage workers had participated which terminated preferential access for goods pro- in a training course compared to only 7 percent of duced under various export promotions schemes; informal wage workers. (ii) the prevalence of non- tariff barriers to trade; (iii) and, economic slowdown notably in Egypt, UK Connecting Jobs to People, and People to Jobs and Malawi. Increase productivity in the informal sector and link the sector with formal firms. In the near term, However, new export markets have emerged which many youth will continue to find jobs in the informal offer hope for expanded production and therefore sector, mainly in household enterprises, and in the the creation of productive jobs. The Americas, Asia jua kali sector. Increasing productivity of these firms and Australia, have emerged as new export desti- requires clear policy interventions. These include but nations, growing at 12 and 10 percent respectively are not limited to increasing their access to broad between 2010 and 2015. Notably, trade with the skills (such as business management, marketing and USA now exceeds the UK and is largely driven by accounting), technology, credit and market. The preferential access through AGOA. The rebalancing support could also create linkages between formal of the Chinese economy also holds great potential and informal firms and connecting suppliers and for export growth for countries that export consumer customers and connecting firms with technological goods (see box on China in the main report). These solutions. Help to small-scale enterprises might also new markets offer an opportunity for policy changes include assisting them to enter into local, regional that could encourage productive job creation. and global value chains. Increasing trade with the USA demonstrates that a targeted export strategy Productive jobs require a skilled labor force. Kenya can go a long way in opening up new markets. has a relatively well-educated labor force, but a majority of adults remain functionally illiterate. Access to primary and secondary education in Kenya For existing firms, it is imperative to reduce the has expanded remarkably. However, despite higher cost of doing business to increase their competive- access to schooling, a majority of adults in Kenya ness. Significant progress has been made to reduce remain functionally illiterate. Even amongst those the cost of doing business through infrastructure with tertiary level education, less than 25 percent investments. Nevertheless, Kenyan firms still iden- achieve functional literacy. But the labor market tify electricity and access to finance as obstacles to requires more than just education; skills also matter. competitiveness. Compared with 2007, firms in 2013 xii March 2016 | Edition No. 13 experienced higher financing costs, higher insecurity, The second group are male youth working in low and more unreliable access to infrastructure; over 20 productivity jobs and have limited skills. This group percent of firms in Kenya considered infrastructure, can benefit through skills building and particularly insecurity, customs and trade regulations, informal on the job training to increase employability (iii) Spe- sector practices, and – importantly – the lack of skills, cial support: This group faces social barriers and as major constraints to expanding their businesses. comprises mainly female both rural and urban with low skills and married. This group requires support To connect people to jobs will require specific policy including child care in light of household responsibil- interventions to match their risk profiles. Four clus- ities, (IV) Hard to support: The last group is hard to ters are identified for support: (i) Market ready: The serve females who are largely unemployable, have first group is the male youth who are market ready little education and are engaged in household work. and only require intermediation in the labor market. These require skills development, functional literacy This group can be served through ICT tools given as well as socio-emotional skills. the high penetration in Kenya (ii) Intensified action: March 2016 | Edition No. 13 xiii Photo: Charles Muiru Ngugi 1 March 2016 | Edition No. 13 State of the Economy Recent Economic Developments A Resilient Economy in Tough Times T he economy experienced solid growth in 2015 amid volatility in money and foreign exchange markets. Kenya grew by 5.5 percent in the first three quarters with a rebound in agriculture, thanks to adequate rains. Industrial growth picked up, driven by all sub-sectors, but manufacturing slowed, while services remained robust despite a contraction in the tourism, accomodation and the food sub-sector. Kenya’s economy grew by 5.5 percent in the first Growth in the first three quarters of 2015 was three quarters of 2015. Growth dynamics reflect underpinned by strong performance in all sectors. continued payoffs from innovations in the ICT and A rebounding agriculture sector (Figure 1.1) con- financial sectors and the decline in global oil prices. tributed significantly to this growth both through The economy is estimated to have grown by 5.6 per- its direct production effect and pass-through to cent in 2015, 0.1 percentage point higher than in retail food prices. Agriculture’s growth of 5.5 per- 2014, but 0.4 percentage points lower than World cent was supported by favorable climatic conditions Bank’s projection in the beginning of 2015. In the that improved crop production, unlike in 2014 when second and third quarters of 2015, Kenya, like other the sector only grew by 3.4 percent. Industrial pro- countries in the region, experienced exchange rate duction picked up, driven by all sub-sectors except volatility, in response to continued strengthening manufacturing. Industry expanded by 6.6 percent of the U.S. dollar, and subsequent inflationary pres- in the first three quarters of 2015 compared to 7.0 sures from import prices. Against these headwinds, percent during the same period in 2014. Services the CBK, on one hand, raised its policy rate in June growth was robust despite a slowdown in the tour- and July and, on the other hand, intervened in the ism, accomodation and food sub-sector. The sector foreign exchange market which stabilized the cur- grew by 5.3 percent in the first three quarters of rency in August. The strengthened macroeconomic 2015, slightly lower than 5.7 percent in 2014. environment supported economic resilience, as evidenced by solid growth at 5.6 percent and 5.8 per- cent in the second and third quarters, respectively. March 2016 | Edition No. 13 2 Figure 1.1 | Kenya experienced economic resilience Source: KNBS The Leading Economy Drivers thousands new jobs were created (Figure 1.3b). The coverage and access of mobile services is expected Information, communication and technology (ICT) to increase as competition increases in the sector. is playing a great role in the services sector. Kenya Equity Bank launched of a new platform (Equitel) hosts the largest ICT sector in Africa (World Bank, for money transfer in July 2015, joining another six 2016)1 with a significant contribution to value added already existing. (4.1 percent in 2014). The number of mobile phone subscription has increased to 37.8 million in Sep- Figure 1.2 | Financial services and ICT led growth in the tember 2015, representing population coverage of services sector 82.1 percent and 141.3 percent of total population above 15 years old. The number of Internet users and mobile money subscriptions also peaked (Figure 1.3a). Mobile payments have reduced the cost of money transfers, extended access by rural house- holds, and have also been a source of employment. In the 12 months ending October 2015, the number of mobile money transfer customers reached 28.5 million (equivalent to 63 percent of the total popula- tion). The number of mobile money agents increased by 9.3 percent in the same period, from 128.7 thou- sand agents to 140.6 thousands; indicating 11.9 Source: World Bank Staff computations. 1 World Bank. 2016. World Development Report 2016: Digital Dividends. Washington, DC: World Bank. 3 March 2016 | Edition No. 13 Figure 1.3 | Kenya is reaping the benefits of ICT development a. Mobile and internet penetration b. Mobile money transfer Source: Communications Authority of Kenya (CA) and CBK Innovations in the ICT sector are also providing a increase in credit to government by commercial bank platform for productivity growth in other sectors in response to a revenue shortage in September of the economy particularly financial services, edu- 2015. cation and trade. These sectors have maintained a growth rate of 8 percent and above on average Electricity generation accelerated to 9.9 percent in in the last five years. However, manufacturing, the 2015 as new projects were completed. This growth second largest sector after agriculture, has been is almost double the 5.2 percent recorded in 2014. experiencing sluggish growth and its contribution This remarkable growth comes as domestic electric- to GDP has gradually declined. The declining cost ity generation increased due to two main factors. of electricity as supply increased also provided a First, hydropower generation rose, supported by growth stimulus to the real sectors of the economy. adequate rainfall in 2015. Second, recent govern- ment investments in energy (geothermal power) Financial services activity increased in 2015 (Figure have started to pay off. Geothermal power genera- 1.2). Despite the volatility in money market in the tion expanded by 32.6 percent in September 2015, third quarter, financial and insurance services grew and has taken the lead, contributing 49 percent of by 9.4 percent in the first three quarters of 2015. total electricity generation (Figure 1.4). Hydropower Growth was outstanding in all the three quarters went up by 10.3 percent while conventional thermal of 2015, at 10.4 percent, 7.6 percent and 10.1 per- contracted by 39.6 percent. This has led to a decline cent respectively. This was supported by a significant in electricity tariffs (Box 1.1). March 2016 | Edition No. 13 4 Figure 1.4 | Electricity sector experienced astounding Geothermal power is now the largest contributor growth to electricity generation. Geothermal now comprise 27 percent of the installed capacities and is providing between 43- 48 percent of the energy produced. The installed generation capacity currently stands at 2,234 MW against a peak demand of 1,549 MW giving a reserve margin of about 31 percent. Hydro plants constitute about 37 percent of the installed capacity and are contributing about 38 percent to the energy mix. Source: World Bank Staff computations. Box 1.1 | Electricity tariff drops as more geothermal power comes online Government investments in renewable Figure 1.b1 | Retail electricity prices fell as fuel cost charge declined energy have expanded electricity generation and realized cheaper retail electricity prices. With an additional 280 MW from Olkaria IV injected in the national grid in December 2014, there has been a drop in the use of expensive thermal power. The reduction in thermal power was also supported by the sus- tained hydro power generation in 2015 due to adequate rainfall. Both geothermal and hydro- power now account for over 80 percent of the total electricity generation. As a result, the fuel cost charges fell remarkably, from 7.2 Ksh/KWh in July 2014 to 2.3 Ksh/KWh in January 2016. Source: Energy Regulatory Commission The reduction of fuel cost charges impacted retail electricity tariff. Fuel cost charges management (WARMA) and inflation adjustments declined by 68.1 % (July 2014 – January 2015) (IA), are factors that are reviewed when setting as new energy projects were completed. Fuel retail electricity prices. Yet FCC is the major cost, cost charge (FCC), foreign exchange rate fluc- accounting for 40 percent of the total retail prices tuations adjustments (FERFA), water resource in June 2014.2 The fall in FCC resulted in a decrease 2 ERC Annual Report (2013-2014) 5 March 2016 | Edition No. 13 Box 1.1 | Electricity tariff drops as more geothermal power comes online (continued) of retail electricity prices for all consumers. As a result of availability of these cheaper Lifeline consumer (electricity consumption renewable energy sources and the low- up to 50 Kwh) paid 13.7 Ksh/Kwh in January er-than-expected growth in electricity demand, 2016 compared to Ksh/KWh 15.5 in July 2014. the thermal plants are being utilized to provide Domestic consumer (average consumption of peaking load and reserve margin. Their dispatch 200 Kwh) paid 5.6 Ksh/Kwh less in January 2016 has declined from over 65 percent in 2013-14 to than what the price was in July 2014. Similarly, less than 15 percent in 2014-15. the electricity-cost of production for the indus- Source: Kenya Electricity Generating Company and Energy Regulatory trial consumer (1,000,000 Kwh) shrank by 27.1 Commission percent over the same period (Figure 1.b1). The Wallop from the Cross Currents of Reduced The manufacturing sector grew less than expected Exports, Insecurity and Money Market Volatility despite lower oil and electricity prices. Manufac- Three factors curtailed growth: economic slow- turing experienced a modest growth of 3.6 percent downs in Kenya’s export destinations, insecurity in the first three quarters of 2015, which was and volatility in the money markets. Insecurity lower than the 5.4 percent in the same period in undermined growth in tourism and related services, 2014. Demand for Kenya’s manufactured exports strains in the regional markets subdued demand declined in 2015 in the EAC region due to volatility for Kenyan goods particularly manufacturing, and in regional currencies which had the net effect of domestic interest rate volatility put pressure on the shilling appreciation against neighboring currencies. financial sector. EAC constitutes the largest market for Kenya’s man- ufactured goods, accounting for over 50 percent of Growth of accommodation and restaurants sub-sec- total manufactured goods’ exports. In addition, vola- tor decelerated due to security uncertainties. This tility in domestic money market in the third quarter continued a trend that has undermined the tourism resulted in high cost of credit and a financing squeeze sector since 2013. Tourism arrivals at Jomo Ken- on banks given rising short-term interest rates. yatta and Moi International Airports declined by Can Kenya Enhance its Position as a Regional 25.1 percent in 12 months ending September 2015, Economic Hub? representing the largest contraction compared to 8.8 percent in 2014 and 12.2 percent in 2013. Conse- Kenya is among solid performers in some of its peer quently, accommodation and restaurants sub-sector groups. Kenya’s growth rate has been above the contracted by 4.1 percent in the first three quarters average for SSA economies since 2010, it grew at 6.0 of 2015, although this represented an improvement percent on average during 2010-2014, higher than compared to a contraction by 17.6 percent during the SSA average at 4.4 percent. Kenya also fares well the same period in 2014. among peer, lower middle-income countries (Figure March 2016 | Edition No. 13 6 1.7a). However, Kenya lags behind other Eastern capacity. Other big economies are export-led econ- Africa peers like Ethiopia and Rwanda. These econo- omies with job opportunities. Kenya is not there mies have sustained a robust annual growth of above yet. Instead, Kenya is a consumption-led economy, 6 percent during 2006-2014. Kenya joined the top with declining exports, particularly in manufacturing ten largest economies in Africa after GDP rebasing exports, and fewer job opportunities, mostly concen- in 2014. Kenya also became a lower middle-income trated in the agriculture sector. Kenya’s exports as country. a share of GDP shrank to 16.4 percent in 2014 from 25.7 percent in 1990 (Figure 1.7b). Yet, countries Nevertheless, the question is how Kenya can with the same level in 1990s have expanded their enhance its position? Kenya will need to increase exports sector to above 30 percent of GDP. exports to capitalize on the economy’s productive Figure 1.7 | Not accelerating, and export performance lagging Source: World development Indicators Fiscal policy: Turning the Corner K enya has pursued an expansionary fiscal policy since FY 13/14, which has seen the budget deficit rise from 5.4 percent to 8.7 percent. The deficit is driven by the shift to devolved governance, the construction of the standard gauge rail and the need to enhance security. The deficit increased by 2 percent of GDP, on account of the cost of constructing the Standard Gauge Railway, (SGR). However, the current fiscal framework suggests a gradual fiscal consolidation aligned with the completion of the SGR. The framework also reflects a shift in deficit financing in favor of external debt to ease pres- sure on domestic money markets. 7 March 2016 | Edition No. 13 Figure 1.8 | Fiscal policy turns the corner if trend stays Source: The National Treasury Kenya’s fiscal policy has turned the corner. After revision deferred projects whose implementation three years of fiscal expansion, the government has not materialized at the end of the first half of has begun a fiscal consolidation phase. In the 2015/16 to the following fiscal year 2016/17. As a past three years, government experienced fiscal result, development expenditure contracted by 90 pressures emanating from administrative cost of basis points, to 10.1 percent of GDP in the revised devolution, increasing interest repayments, increas- budget from 11.0 percent of GDP in the approved ing investment spending, high wage bill and slow budget. growth in revenue collection. This resulted in the widening of the fiscal deficit from 5.4 percent of Figure 1.9 | Foreign borrowing has become a secure means GDP in 2012/13 to 8.6 percent of GDP in 2014/15. of financing the fiscal deficit The 2015/16 revised budget marks the beginning of a gradual fiscal adjustments; cutting down KSh. 93.8 billion from the approved budget. As a result, the fiscal deficit was scaled down to 8.1 percent of GDP from 8.7 percent of GDP as per approved budget (Figure 1.8). For the first time since 2006/07, expenditure increase of 0.9 percentage points over 2014/15 - 2015/16 was matched by revenue expan- sion (excluding grants) of the same magnitude. Proposed fiscal consolidation suggests a downward revision in development expenditure without sac- rificing its role in economic growth (Table 1.1). The Source: The National Treasury March 2016 | Edition No. 13 8 The fiscal framework also reflects a change in deficit The fiscal challenge has been to make room for financing with a larger share in external financing. devolution, debt service, and infrastructure at the After it became clear that domestic borrowing was same time. With devolution in 2012/13, transfers destabilizing the money market, the government from national to county governments increased from issued a syndicated loan of KSh. 77 billion in October 0.2 percent in 2013/14 of GDP to 4.1 percent of 2015 to plug revenue shortage and ease the strain GDP in 2015/16. The national government has also on domestic money markets.3 This, in turn, led to a been spending on infrastructure investment, with shift in the composition of financing budget deficits. the SGR as a flagship project. The cost of the SGR Domestic borrowing declined in the 2015/16 revised held nearly steady at 2.3 percent of GDP in 2015/16 budget to 2.6 percent of GDP, which was lower than (compared to 2.2 percent in the previous year). the 4.4 percent of GDP in 2014/15. Foreign financing Because of increased borrowing since 2012/13, reached 5.4 percent of GDP, 1.6 percentage points interest rate payments increased to 3.0 percent higher than the 2014/15 level when the government of GDP in 2015/16 compared to an average of 2.1 issued a Euro Bond (Figure 1.9). percent of GDP during 2006/07 – 2011/12. Table 1.1 | Revised budget shows fiscal adjustments in development expenditure (% of GDP) 2014/15 2015/16 budget Approved Revised Total Revenue and Grants 19.9 22.0 21.5 Total Revenue 19.4 20.8 20.3 Income tax 8.9 9.6 9.1 VAT 4.6 4.8 4.6 Expenditure and Net Lending 28.7 30.7 29.6 Recurrent 15.7 15.5 15.4 Development 8.9 11.0 10.1 Transfer to Counties 4.0 4.1 4.1 Deficit including grants (cash basis) (8.6) (8.7) (8.1) Financing 8.3 8.7 8.1 Domestic Financing 4.4 3.4 2.6 Foreign Financing 3.8 5.2 5.4 Primary balance (5.5) (5.9) (5.1) Deficit including grants excluding SGR (6.4) (6.9) (6.3) Source: The National Treasury 3 The syndicated loan was arranged by Citi Bank, Standard bank and Standard Chartered Bank. 9 March 2016 | Edition No. 13 Figure 1.10 | The drivers of the recent increase in national expenditure Source: The National T reasury World Bank MPO 2016 Without SGR investments and interest rates pay- double digit for the first time in 2015/16. It reached ment, the fiscal deficit (3.3 percent of GDP) in 10.1 percent of GDP, surpassing the average of 6.5 2015/16 would be less than a half of what it actually percent since 2006/07. On the contrary, recurrent is (8.1 percent of GDP) (Figure 1.10). expenditure gradually contracted since 2012/13. This was linked to a drop in the wage bill as devolved Despite the pressures from recurrent spending functions and personnel were transferred to county and debt service, the fiscal expansion in the past governments (Figure 1.11b). As county systems three years has seen a gradual increase in the get up to speed, this drop is likely to be reversed. share of development spending. The gap between However, the contraction in the wage bill can be mis- development and recurrent expenditures narrowed leading as it could also reflect the transfer of county (Figure 1.11a). Development expenditure reached a staff payroll from national government to counties. Figure 1.11 | The gap between recurrent and development expenditure significantly narrowed Source: The National Treasury March 2016 | Edition No. 13 10 Figure 1.12 | Revenue growth remain minimal Source: The National Treasury Figure 1.13 | Public debt is accumulating at a faster rate Source: The National Treasury (Quarterly Budget and Economic Review, September 2015) 11 March 2016 | Edition No. 13 Revenue as a share of GDP has been stable but below the thresholds in the medium term, implying is insufficient to match the rising fiscal pressure. low risks of debt distress. However, the total debt Total revenue in the 2015/16 revised budget rose (net) has increased by 22.8 percent in nominal terms, by 0.9 percentage points, exceeding 0.2 percentage and 10.9 percentage points as a share of GDP in the points as average growth over 2012/13-2014/15. year to September 2015. The increase in public debt This marginal increase was driven by income tax and was driven by a rapid hike in external debt. External excise duty, while other taxes remained stagnant debt reached 27.2 percent of GDP in September (Figure 1.12). Income tax growth was supported 2015 from 19.1 percent of GDP in September 2014 by collections from corporations and capital gains. (Figure 1.13a). Excise duty brought in more than KSh 30.7 billion as the Excise Duty Bill 2015 took effect in the second Domestic debt composition remained dominated half of 2015/16. VAT and import duty remained stag- by treasury bonds. They accounted for 75.4 percent, nant at 4.6 percent of GDP and 1.3 percent of GDP while T-bill accounted for 21.1 percent in September respectively in 2015/16, a position they held since 2015. 2013/14. Income tax and VAT constituted the main source of revenue, accounting for 73.4 percent of The composition of external debt is changing. A total tax revenue. large share of external debt still remains conces- sional. The composition, however, has been shifting Public debt remains sustainable, although it has toward non-concessional. Now the share of conces- been accumulating at a faster rate. According to the sional borrowing stands at 61.8 percent in 2014, September 2015 Debt Sustainability Assessment by falling from 77.5 percent in 2006 (Figure 1.13b) after the IMF and the World Bank, all indicators remained the Euro Bond issue in 2014. March 2016 | Edition No. 13 12 Fiscal expansion and the Deepening of Devolution Intergovernmental transfers, local revenue collection and grants to counties increased during the second year of devolution. Overall the fiscal balance at the devolved level remains positive. However, a high level of pending bills reported at the end of the second financial year indicates a need to align procurement plans and cash flow projections in the counties. The 2014/15 and 2015/16 budget shows a signifi- This is explained by an increase in the equitable cant expansion in both revenue and expenditure by share in Kenya’s intergovernmental spending for- county governments (Table 1.3). During the second mula, leading to an increase in the allocation for and third financial years, counties budgeted for Ksh. both development and recurrent expenditure to 326.2 (5.7 percent of the GDP) and 361.1(6.3 percent Ksh. 144.9 billion and Ksh.181.3 billion from Ksh. of the GDP) compared to Ksh. 228.6 billion (3.9 per- 123.4 billion and Ksh. 165.2 billion in the previous cent of the GDP) during the first year of devolution. year, respectively.4 Table 1.2 | County government budgets indicate a continued expansion in revenues and expenditure (KSh Billion) 2013-14 2014-15 2015-16 Budget Actual Budget Actual Budget Expenditure 228.6 169.4 326.2 258.9 361.1 Development 123.4 36.6 144.9 90.4 160.7 Recurrent 165.2 132.8 181.3 167.5 200.4 Revenue 280.8 224.0 338.1 304.2 373.7 Equitable Share 213.4 193.4 242.4 226.7 259.7 Equalization Fund 190 226.7 Local revenue 67.4 26.3 50.4 33.9 56.6 Grants 16.5 2.57 27.2 Conditional Grants 15.8 1.87 25.9 DANIDA Grant5 0.7 0.7 0.8 World Bank 6 0.5 Balance brought forward 4.3 38.1 41.7 30.2 Balance (7.8) 54.6 17.9 46.2 12.6 Pending Bills (as of end-June) 37.6 Source: Office of the Controller of Budget 4 The counties receive annual transfers from national government to carry out devolved functions. This financing is primarily provided through an unconditional transfer – called the “Equitable Share” – of nationally collected revenues. 5 DANIDA Grant to supplement financing for county health facilities 6 World Bank Grant to supplement financing of county health facilities 13 March 2016 | Edition No. 13 County revenue collections increased by 28.7 per- compared to 2013/14. The decline in reported reve- cent and revenue forecasting appears more realistic nues is unusual and is could be attributed to pilferage (Figure 1.14). Based on the ambitious local reve- arising from a possible lack of proper internal con- nue targets for the previous fiscal year, the county trols on local revenue management. government revised their local revenue projections from KSh. 67.4 billion in 2013/14 to KSh. 50.4 bil- Figure 1.14 | Local Revenue collections are improving and Revenue forecasts have become more realistic lion in 2014/15 and 56.6 in 2015/16. Actual amount collected was KSh. 26.3 billion in 2013/14 (66 per- cent shortfall) and KSh. 33.9 in 2014/15 (33 percent shortfall). Overall underperformance in local revenue collections means construction and maintenance of roads, heath facilities, ECD centers, water supply infrastructure, purchase of agricultural machinery and other planned development activities were not fully implemented and therefore a need to review local revenue collection mechanism and strategies. Most counties recorded a significant increase in local revenue collection. However, five counties, Man- dera, Samburu, Busia, Turkana and Vihiga, recorded Source: Office of the Controller of Budget. a decline in local revenue realized in 2014/15 Figure 1.15 | On average Counties recorded an overall increase in Local Revenue collection Change in local revenue collection from the counties Source: Office of the Controller of Budget March 2016 | Edition No. 13 14 Overall, allocation to capital spending increased amount shows that almost all the counties would by 17.4 percent, but the rising stock of pending have attained the 30 percent threshold if develop- bills is worrying. A total of 32 counties attained the ment pending bills were paid in time (Figure 1.17). 30 percent development spending threshold in the High level of pending bills suggest that either pro- 2014/15 compared to only 10 counties in 2013/14 curement remains a challenge at the county level, (Figure 1.16). But there is a worrying trend of the or the National Treasury delayed the disbursement rising share of development pending bills to total of funds to counties, or both. pending bills. Unfolding the total pending bills Figure 1.16 | 32 counties attained the 30 percent development-spending threshold. Expenditure on development (% of total expenditure), 2014/15 Source: Office of the Controller of Budget Figure 1.17 | Almost all counties would attain the 30 percent threshold if development pending bills were paid on time. Development spending (including pending bills), % of total Source: Office of the Controller of Budget 15 March 2016 | Edition No. 13 Better planning and continued efforts to build there is a significant improvement in the absorption staff capacity in the counties is driving the focus of development budget from KSh. 36.6 billion (29.6 towards development. In aggregate, the counties percent) in 2013/14 to KSh. 90.4 billion (62.4 per- underspent in first two years of devolution, arriv- cent) in 2014/15. ing at an overall absorption rate of 64.9 percent in 2013/14 and 79.1 percent in 2014/15 respectively. Total wage bill in county governments increased Although the overall budget execution remains low, significantly (Figure 1.19). County governments recorded an increase in nominal wage bill from Figure 1.18 | County budget execution has improved KSh. 77.4 billion (1.5 percent of GDP) in 2013/14 to KSh. 103.1 billion (1.8 percent of GDP) in 2014/15. The increase can be attributed to three factors; first, counties embarked on an ambitious hiring process during the first year of devolution and most of the staffs were not on the payroll until the second year. Second, in 2013/14 the national government covered the wage bill for some of the staff working in the counties prior to the transfer of payrolls; and third, there was a wage increase for former local authority staff working in the county assemblies. Source: Office of the Controller of Budget Figure 1.19 | County governments Wage Bill increased significantly in 2014/15 Source: Office of the Controller of Budget March 2016 | Edition No. 13 16 The CBK Intervened in The Foreign Exchange Market by Keeping its Benchmark Rate Inflation remained low throughout 2015 thanks to lower energy prices, despite double-digit food price inflation and accelerated depreciation of the shilling. Money markets were destabilized when the government resorted to domestic borrowing to meet revenue shortfalls in August. Following the CBK’s policy rate hikes in June and July 2015, long-term lending rate gradually rose in the third quarter of 2015. Increased government borrowing and higher lending rate, in turn, led to decelerated credit growth to the private sector and deteriorated banks’ asset quality. Inflation tested the CBK’s upper bound set at 7.5 Energy inflation fell to 1.9 percent in 2015 from 6.9 percent, as lower energy price inflation attenuated percent in 2014, on account of lower international the impact from double-digit food price inflation. A oil prices. Crude oil prices sharply fell by 38.5 percent 12-month average overall inflation fell to 6.6 percent in 2015 from US$ 57.3 in December 2014 to US$ in December 2015 from 6.9 percent in December 37.2 in December 2015. The sharp decline translated 2014 (Figure 1.20). 6-month average overall infla- into lower gas and transport prices. Notably, trans- tion in the second half of 2015 slightly rose to 6.7 port price inflation was negative at −0.4 percent. percent from 6.4 percent in the first half, but still Contrarily, food price inflation was high at 11.4 per- below the CBK’s upper bound. Core inflation, which cent, caused by the El Niño effect disrupting the food excludes food and energy, remained below the CBK’s supply chain. In 2015, food prices accounted for 64.1 5 percent target since September 2014. 6-month percent of total inflation, up from 45.8 percent in average core inflation stands at 4.5 percent in the 2014 (Figure 1.21). Energy prices merely accounted second half of 2015. for 10.4 percent, and core inflation accounted for 25.6 percent. Figure 1.21 | Food prices accounted for more than half of Figure 1.20 | County budget execution has improved overall inflation (Contributions to overall inflation) Source: Central Bank of Kenya. Source: Central Bank of Kenya 17 March 2016 | Edition No. 13 By year-end, the disinflationary benefits from 2015, the interbank rate and the 91-day Treasury bill energy prices had unwound while other sector rates rose by 880 basis points and 750 basis points, pricing pressures remained, pushing year-on-year respectively. The liquidity conditions improved in overall inflation over the target of 7.5 percent in November when the CBK injected money through December 2015, for the first time since August reverse repo operations, and the National Treasury 2014. Year-on-year overall inflation reached 8.0 per- took fiscal measures including issuing the syndicated cent in December 2015, again led by food prices, loan in October 2015. The interbank rate quickly which increased by 13.3 percent. Similarly, core fell below the central bank rate, while the 91-day inflation exceeded the CBK’s 5 percent target by 0.1 Treasury bill rates sluggishly declined, standing at percentage points because of new excise taxes on 14.6 percent. alcoholic beverages and tobacco products, whose Figure 1.22 | Food prices accounted for more than half of prices rose 15.0 percent in December 2015. overall inflation Despite the breach, the CBK’s Monetary Policy Com- mittee meeting held in January 2016 maintained its monetary policy stance, keeping its policy rate at 11.5 percent. The CBK lifted its policy rate in July 2015 from 8.5 percent to contain inflationary pres- sures stemming from the steep depreciation of the shilling since March 2015. Since raising the policy rate, the pace of depreciation moderated despite the rise in U.S. interest rate, slowdown of the Chinese economy, and volatility in the global financial mar- kets. The CBK views the current inflationary pressure caused by food prices as temporary. However, the Source: Central Bank of Kenya current monetary policy stance well anchors inflation Figure 1.23 | Money market rates rose sharply in September and October 2015 due to tight liquidity conditions caused by expectations. government domestic borrowing The money market saw magnified volatility along the treasury bill term structure due to the policy (Figures 1.22 and 1.23). The tight liquidity condi- tions were caused first by the CBK’s interventions in the foreign exchange market in August 2015 against the continued strengthening of the U.S. dollar. Sec- ondly, the tight liquidity conditions were caused by government domestic borrowing in September and October 2015 to meet fiscal pressures amidst rev- enue shortfalls, which led to sharp overshooting of money market rates. While the central bank rate rose by 300 basis points between May and October Source: Central Bank of Kenya March 2016 | Edition No. 13 18 Figure 1.24 | Long-term interest rates rose in response to the change in the Central Bank’s monetary policy stance Source: Central Bank of Kenya. Bank lending and deposit rate changes were more Figure 1.25 | Monetary operations slowed the growth of monetary aggregates muted but the already high interest rate spread increased by 70 basis points. Long-term lending rates, rose 190 basis points from 15.5 percent in June 2015 to 17.4 in December 2015, while deposit rates sluggishly rose 130 basis points from 6.6 percent to 7.9 percent in the same period (Figure 1.24). As a result, interest rate spreads (lending rates minus deposit rates) expanded 70 basis points, standing at 9.5 percent in December 2015. CBK’s currency intervention also contributed to tight liquidity conditions. The increased volatility and steep depreciation of the shilling vis-à-vis the dollar and other major currencies forced the CBK to Source: Central Bank of Kenya draw down its foreign exchange reserves by injecting Growth of credit to the private sector decelerated dollars into the banking system in the second and due to the rise in long-term lending rate, increased third quarters of 2015. This, in return, led to mopping government borrowing and prudent banks’ behav- up liquidity as the CBK absorbed the shilling from the ior. In the first nine months of 2015, the growth rate financial markets in exchange to the injected dollar. of private sector credit remained unchanged at 20 This is reflected by the slowdown of the growth of percent. Since October 2015, however, the growth monetary aggregates by about 5 percentage points of private sector credit started to fall moderately to during 2015. 19 March 2016 | Edition No. 13 Figure 1.26 | Credit to the business services and building and construction sectors increased, while credit to remaining sectors declined Source: Central Bank of Kenya data. 18.0 percent in December 2015, reflecting higher The higher lending rates has led to accumulation lending rate, reduced availability of credit to the pri- of nonperforming loans. Nonperforming loans vate sector, and prudent banks’ behavior in response increased from 5.4 percent of total loans in Decem- to increasing nonperforming loans. ber 2014 to 6.1 percent in December 2015. Volume of nonperforming loans broadly accumulated across Credit to private sector expanded in construction all sectors but personal and household sector (Figure and business services and contracted in all other 1.27). Nonperforming loans are concentrated in sectors. Despite the deceleration in credit growth trade (28.5 percent of total) and personal and house- to the private sector, credit increased significantly in hold (18.9 percent) sectors. Notably, the pace of business services (from 25.0 percent in 2014 to 63.5 accumulation in nonperforming loans accelerated percent in 2015), building and construction (from in November and December 2015, following the 13.6 percent to 30.7 percent). On the contrary, credit central bank rate hike and the government revenue growth to transport and communication decelerated shortage. Nonperforming loans increased because from 45.6 percent to 26.5 percent, manufacturing the rate hike made repaying existing loans expensive declined from 30.7 percent to 16.2 percent, agri- and the revenue shortage resulted in delayed dis- culture fell from 27.9 percent to 14.1 percent, and bursement to ministries and counties, and in delayed private households decreased from 39.1 percent to payment to government contractors. 9.1 percent (Figure 1.26). March 2016 | Edition No. 13 20 Figure 1.27 | The volume of nonperforming loans increased Figure 1.28 | Security concerns, capital outflows, and in most sectors depreciation risk reduced the attractiveness of the Nairobi Stock Exchange Source: Central Bank of Kenya Source: Nairobi Securities Exchange. The stock market was bearish throughout 2015 25 percent sliding of the NSE index. The NSE index (Figure 1.28). The Nairobi Securities Exchange (NSE) underperformed not only against the U.S stock index marked its record high at 5,491 in February market but against other emerging markets, which 2015, but ended at 4,041 in December 2015. Con- also suffered from the rising of U.S. interest rate and tinued security concerns, capital outflows induced currency depreciation. In 2015, Dow Jones Industrial by anticipated rise in U.S. interest rate, and currency average fell merely 2.2 percent, while the MSCI Fron- depreciation risk exacerbated market sentiment, tier Market index fell by 14.1 percent.7 especially of foreign investors, triggering more than Frontier market countries include Kenya, in addition to Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kuwait, Lebanon, 7 Lithuania, Kazakhstan, Mauritius, Morocco, Nigeria, Oman, Pakistan, Romania, Serbia, Slovenia, Sri Lanka, Tunisia and Vietnam. 21 March 2016 | Edition No. 13 Box 1.2 | Capital markets in Kenya The Kenyan capital market is the third largest in terms of capitalization in Sub-Saharan Africa, after South Africa and Nigeria. The capital market is dominated by equities and government bonds. A total of 63 companies are listed on the Nairobi Securities Exchange (NSE), which has a total market capitalization of about US$ 20 billion, amounting to 31 percent of GDP in 2015. The market is highly concentrated with the top five stocks accounting for over 60 percent of the market capitalization. The ten largest listed companies, the majority of which are commercial banks, accounted for 76 percent of market capitalization and over 80 percent of traded values in 2015. The fixed income market in Kenya is dominated by government securities, which are fairly developed within the Sub-Saharan African context. The outstanding government bond market (US$ 10.5 billion) represents about 16 percent of GDP. There has been considerable improvement in its debt structure. Between 2000 and 2015, the debt structure shifted from 78 percent in T-bills and 22 percent in T-bonds to the reverse, 77 percent in T-bonds and 23 percent in T-bills. However, issuances are highly fragmented with 55 issues outstanding at the end of 2015. The non-government bond market in Kenya is still at the early stage of development. Outstanding issues of non-government bonds stood at Ksh. 99.7 billion (US$ 974 million) in 2015, representing only 1.6 percent of GDP. There are only a handful of issuers and non-government bonds represent an insignificant holding in institutional investor portfolios, which is understandably due to the small supply of corporate paper. There is a relatively large variety of issuers represented amongst the issuers but with a general bias towards financial institutions. Most have tenors of between 5 and 7 years. Kenya’s Capital Market Master Plan 2014-2023 envisages that the country will be transformed into an open, competitive market place and a choice market for domestic, regional and international issuers. This can be achieved through the development of dynamic and liquid markets based on lead- ing standards on regulatory frameworks, financial market structure, infrastructure and strong and independent supervision. The master plan has established ambitious short, medium and long-term targets to achieve this goal. For instance, the plan envisages Kenya being reclassified from a frontier to an emerging market in 2016. In addition, the plan targets a twenty-fold increase in the relative size of the corporate bond market in the 10-year period. Several structural challenges need to be addressed to realize the potential of the capital markets as a funding source in the coming years in line with vision 2030 vision and Kenya’s regional aspirations. The Government bond market is still short of providing a long-term, risk-free yield curve to be used March 2016 | Edition No. 13 22 Box 1.2 | Capital markets in Kenya (continued) as a reference to price the rest of the financial assets in the economy. Areas that need strengthening include the primary market, which can be improved by implementing a benchmark issuance strategy with regular and predictable issuance of bonds in key benchmark maturities; automation towards more competitive and transparent wholesale market auctions; and the implementation of the Over the Counter wholesale market with greater liquidity and more competitive price formation in second- ary market. Additionally, the post-trade infrastructure, namely clearing and settlement, is misaligned with current market needs (processes and institutional arrangements), as well as not complying with international best practice. Kenya’s External Balance Improved, Thanks to Falling Oil Prices The vulnerability of the external sector relaxed in 2015 as a result of a lower oil import bill despite weak export performance. While tea exports rebounded, most of Kenya’s merchandise exports con- tracted. Although total imports sharply contracted, non-oil imports grew to meet continued import demand for machinery and equipment. CBK successfully intervened in the foreign exchange market by selling foreign reserves. After CBK’s intervention in the foreign exchange market, the authorities built up international reserves to the previous level sufficient to cushion external shocks, thanks to the narrowing current account deficit. Figure 1.29 | The current account deficit in 2015 is the lowest since 2010 The lower oil price bill is the main contributor to improving current account. The current account deficit contracted from 10.0 percent of GDP in December 2014, to 7.2 percent in the 12 months ending in November 2015. This was the lowest since 2010 (Figure 1.29).8 The contraction is attributable to significant decline in imports (Figure 1.30). While exports of goods and services marginally fell from 15.7 percent to 15.6 percent, imports of goods declined from 31.0 percent to 27.2 percent of GDP thanks to a lower oil import bill. Source: Central Bank of Kenya Balance of payment data is 12-month cumulative up to November 2015, not the first 11 months in 2015. 8 23 March 2016 | Edition No. 13 Merchandise exports contracted as low commodity accounting for 34 percent of Kenya’s total imports. prices and currency volatility in the global markets Double-digit growth (12 percent in 2015) in machin- subdued demand for Kenyan goods in key desti- ery and transport equipment imports was led by nation markets. Despite favorable performance infrastructure projects, such as the SGR project. of Kenya’s tea exports (figure 1.31), total exports Figure 1.30 | Trade balance improved as imports contracted contracted by 4.8 percent in 12 months ending more than exports November 2015. This was due to negative growth experienced in all other exports (manufactured goods, raw materials, horticulture and coffee). Merchandise imports registered negative growth, driven by oil imports. This is the first time since 2009 when oil price was low due to the global economic slowdown. The negative import growth was again led by oil imports, which contracted 34.5 percent. Non- oil merchandise imports, on the other hand, grew 1.5 percent in 12 months ending November 2015. However, imports of machinery and equipment have become the main driver of Kenya’s imports, Source: Data from Central Bank of Kenya. Figure 1.31 | Coffee, tea and horticulture can now pay for oil imports thanks to declining oil prices Source: Authors computation from CBK data March 2016 | Edition No. 13 24 The current account deficit was mostly financed errors and omissions) fell from US$ 3.5 billion (5.7 by long-term capital inflows (Figure 1.32). Out percent of GDP) in 2014 to US$ 0.3 billion in 2015. of US$4.4 billion of the current account deficit, The decline reflected significant revision by the CBK long-term flows, which marginally increased to 6.6 of net errors and omission, which fell from US$ 0.7 percent of GDP in November 2015 from 6.5 percent billion (1.2 percent of GDP) to US$ -2.7 billion (-4.5 in 2014, accounted 89.3 percent of the deficit. Espe- percent of GDP).9 The sum of short- and long-term cially, official long-term flows increased from US$2.3 flows, however, marginally fell short of the current billion (3.8 percent of GDP) in December 2014 to account deficit, leaving overall balance of payment US$3.4 billion (5.5 percent of GDP) in November slightly negative by US$60 million in November 2015. 2015, thanks to the government’s syndicated loan in October 2015. Despite the increased long-term Remittances from Kenya’s diaspora are the leading capital inflows, the financial account, in addition to source of foreign exchange and support the local the capital account, marginally fell short to offset the economy. In 2015, remittances to Kenya grew 8.4 current account deficit, leaving the overall balance percent to US$1.5 billion, equivalent to 2.6 percent of payments slightly negative. of GDP (Figure 1.33). The growth of remittances from Kenya’s far exceeded the Sub-Sahara Africa Short-term capital flows declined but the picture is average at 1.9 percent.10 Increased remittances not obscured by long-standing issues with interpreta- only supported the local economy, but also mitigated tion of the statistics. Short-term flows (including net downward pressure on the exchange rate. Figure 1.32 | Long-term flows increasingly contribute to Figure 1.33 | Remittances are the single most important financing the current account deficit source of foreign exchange inflows in Kenya a. Selected currencies against KSh b. selected currencies against the US dollar Source: Central Bank of Kenya Source: Central Bank of Kenya 9 Short-term flows (excluding net errors and omissions) increased from US$2.8 billion (4.5 percent of GDP) in December 2014 to US$3.0 billion (4.9 percent of GDP) in November 2015. 10 World Bank (2015). “Migration and development brief 25”. 25 March 2016 | Edition No. 13 Figure 1.34 | Volatility in foreign exchange market in the third quarter of 2015 affected capital flows Source: Data from Central Bank of Kenya. The shilling-US dollar exchange rate exhibited sig- of the shilling since 2008. Furthermore, Kenya saw nificant volatility in the second and third quarters reduced capital inflows due to decline in tourism of 2015, due to anticipated rise in U.S. interest receipts and poor export performance. The excess rate (Figure 1.34). The anticipated rise in U.S. volatility, however, was tamed in the fourth quarter interest rate led to shrinking interest rate differen- of 2015 thanks to CBK’s successful intervention to tial between shilling-denominated assets and U.S. the foreign exchange market and the government’s dollar-denominated assets. The shrinking of the syndicated loan bringing U.S. dollar inflows back to interest rate differential led to reversal of capital Kenya. flows, which Kenya enjoyed along with strengthening Figure 1.35 | : The Kenyan shilling performed well compared to other regional currencies Source: Authors computation from CBK data March 2016 | Edition No. 13 26 The Kenyan shilling appreciated against the euro despite the rise in U.S. interest rate, the slowdown of and regional currencies (Figure 1.35). In the 12 Chinese economy, and volatility in the global finan- months ending December 2015, it depreciated 13.0 cial markets. percent against the U.S. dollar, moving from KSh. 90.4 to KSh 102.2. Against the British pound, the Kenya’s nominal and real effective exchange rates shilling also depreciated 8.4 percent, moving from continued to depreciate but at a slower pace KSh. 141.5 to KSh. 153.3. In contrast, the shilling towards the end of 2015. In the 12 months ending appreciated 0.4 percent against the euro, moving in November 2015, the effective exchange rates, from KSh. 111.5 to KSh. 111.1. Against regional cur- measured as a trade-weighted average of bilateral exchange rates, depreciated 7.6 percent and 1.3 per- rencies, the shilling appreciated 10.3 percent against cent in nominal and real terms, respectively (Figure the Tanzanian shilling and 7.5 percent against the 1.36). The pace of depreciation has been relaxed Ugandan shilling. It appreciated 13.6 percent against since September 2015 when it hit the peak, depre- the South African rand. Notably, thanks to the suc- ciating 11.9 percent and 5.1 percent in nominal and cessful intervention, month-on-month exchange real terms, respectively. Compared to other coun- rates of the shilling have been appreciating against tries in the region, Kenya has been less tolerant of both world major currencies, including the U.S. the potential for large and rapid depreciation against dollar, and regional currencies since October 2015, the US dollar. Figure 1.36 | After three years of moderate appreciation, Figure 1.37 | Foreign exchange reserves fell due to CBK’s the shilling depreciated in the real term in the second intervention, but still high enough to cushion Kenya from quarter of 2015 short-term shocks Source: Central Bank of Kenya Source: Central Bank of Kenya 27 March 2016 | Edition No. 13 Though slightly declined from 2014, by intervening external borrowing in October 2015, helped quickly in the foreign exchange markets,gross international rebuild official reserves, reaching US$7.2 billion, reserves remain sufficient (Figure 1.37). After the equivalent to 4.6 months of imports as of November intervention in September 2014, Kenya’s interna- 2015. This level of reserves is above the conventional tional reserves fell to US$6.7 billion, equivalent to level in low-income countries and the target set by 4.3 months of imports, from the peak of US$7.9 the East African Community convergence criteria at billion on 2014. The narrowing current account defi- 4.5 months of imports.11 cit, thank to lower oil import bill and government’s Drummond, P., Wajid, S.K., and Williams, O. (eds). 2014. “Quest for Regional Integration in the East African Community. 11 March 2016 | Edition No. 13 28 Trade Performance and Export Growth for Employment Creation T he declining performance of Kenya’s merchan- dise exports is not new, yet reversing it is key to robust growth and employment creation. Overall Notably, exports to Asia and Australia account for similar share with EU, accounting for 22 percent of total exports. But by far the most significant growth exports growth averaged 3 percent for the period on exports recorded was to the Americas, at rates 2010-2015, which was below average economic above 10 percent. growth of 6 percent during the same period. More importantly, export growth to Kenya’s largest mar- Exports to EAC region started declining in 2011. kets, EU, EAC and COMESA, was only 1-2 percent. This coincided with the entry of the fully-fledged At the same time, exports to Asia, Australia and the Customs Union. The customs union abolished pref- America’s recorded remarkable growth at about 10 erence access of Kenya’s manufactured products percent. from Export Promotion Schemes. These products Figure 2.1 | Exports to EAC and EU have stagnated but Asia started to attract full Common External Tariff instead & Australia are now at par with EU at 22 % of total exports. of being traded on duty free basis. Box 2.1 shows the export products that have declined in the EAC market. These products are from the manufacturing sector. Notably, Tanzania and Uganda now source these products from other markets outside the region (trade diversion). This market loss, which in real sense means loss of trade related jobs in Kenya, needs to be accompanied by a reallocation of factors to sectors that can compete in a deepened regional trade. Source: Central Bank of Kenya 29 March 2016 | Edition No. 13 Box 2.1 | Kenya has lost export market for key manufactured goods Tanzania, where Kenya has lost export market valued at USD200m, leads in the EAC market decline. This represents a decline of 27% of exports between 2012 and 2015. The products behind this market loss include the following: Products of milling industry (HS11), Animal and vegetable fats and oils (HS15), Processed meat and fish products (HS16), Cocoa and cocoa preparations (HS18), Soaps and washing lubricants (HS34), Plastics (HS39), Apparel and clothing (HS61 - 63), Electrical machinery and equipment (HS85), Motor vehicles (HS87) and Furniture (HS94). Kenya exports to Uganda recorded a decline of 12% or USD96 million between 2011 and 2014. The products behind this decline include: Meat (HS02), Animal or vegetable oils (HS15), Sugar and sugar confectionery (HS17), Tobacco (HS24), Pharmaceutical Products (HS30), Soaps (HS34), Alumi- num products (HS35), Plastics (HS39), Paper and paper boards (HS48), Apparel (HS 60 - 63), Footwear (HS64), Iron and Steel products (72), Electrical machinery (HS85), and Glass and glassware (HS70). A clear strategy will be required to reclaim a competitive edge in these more integrated markets. Impetus for Kenya products to reclaim the market share lies in the revealed export potential target- ing Tanzania’s extra regional imports of similar products. A case in point is plastics, where Tanzania’s imports from outside the EAC stood at USD604million in 2013 against Kenya’s exports that had plum- meted to USD17.4m by 2014. In Uganda, Kenya exports of Animal or vegetable oils stood at USD11m in 2014, Uganda imports of similar products from Rest of the World stood at USD251m in 2014. This implies a trade potential of USD240m in this one chapter alone! Kenya Requires a Clear Export Strategy to Expand exporters into the COMESA market and the restric- Exports in Each of the Trading Blocks EAC and tive Rules of Origin will need to be addressed. Equally COMESA important is need for an export strategy targeting Retaining and expanding these regional markets growth of exports in strategic markets in COMESA. requires a genuine commitment to the partner- ship by all member countries. The factors that have The prospect for Kenya, and indeed other EAC Part- largely been attributed to the decline in exports ner States, to increase their intra-regional exports include restrictive rules of origin across most of the lie in the recently concluded reforms in the EAC. products of Kenya’s, and indeed other EAC countries’, One such reform is the revised EAC Rules of Origin intra-regional export interest. SPS and Standards are (2014) that have introduced the flexibility that was also specific NTBs that may have a role in explaining lacking in the previous rules and as well as ushering the decline. Equally restrictive were customs proce- in very generous cumulative principle that allows dures on intra-regionally traded products that ended Kenya and other EAC Partner States to cumulate up making it difficult for exports of certain products with raw materials from more countries than was into the EAC region. Non-Tariff Barriers, especially the case under the previous rules. SPS and Standards that have been reported by Kenya March 2016 | Edition No. 13 30 The immediate effect of this is to open up duty access EAC market on duty free basis as a result of free market access for products that were pre- the restrictive rules of origin. vious denied such privilege on account of origin criteria. Cereals, pasta, bread, pastry, cakes and bis- The prospect for Kenya, as well as other EAC Part- cuits, among other processed foods of HS chapter 9, ner States, of enhancing their intra-regional trade are some the key beneficiary products, where the is further explained by the recent Single Customs ‘wholly obtained’ criteria was dropped in favour of Territory reforms, particularly the destination coun- the more flexible ‘Change in Tariff Heading.’ The try model of customs clearance. This model has latter allows all products from EAC milling industries removed red tape in intra-regional trade and intro- to be traded within the EAC on duty free basis, irre- duced efficiency in intra-regional trade facilitation, spective of where the raw material was sourced. leading to enhanced predictability of export/import business in terms of customs and other trade facil- This transformative change in the Rules of Origin itation agencies treatment, reduction in time and is expected to see a steady substitution of break- cost of transaction. fast cereals imported from outside the EAC region with EAC originating products manufactured using The revised rules of origin, reforms in the SCT and raw material obtained from most competitive global the ongoing reforms of the EAC Customs Manage- source countries. This will no doubt see investments ment Act to address CET and Stay of Duty/Duty and new jobs being created as Kenya and EAC Partner Remission and related restrictions are low hanging States exploit this potential. This story is replicated in fruit which Kenya could capitalize on, in working many other manufactured products that could not towards regaining the EAC market. Box 2.2 | Kenya has lost export market for key manufactured goods African countries, mainly concentrated in neighboring countries (such as Sudan, DRC, EAC, Zambia, Angola, and Zimbabwe among others), and Western Africa (Senegal and Cote d’Ivoire). However, KENAFRIC exports share and destination markets have reduced over time. The company exports represented 70 percent of its products in 1980-1990s, but now exports only accounts for 50 percent of total production. Lost markets include Western Africa (including Mali and Guinea Conakry) due to high transport costs that made their products uncompetitive (Western Africa, DRC) and to competition from cheap imports from China (Ethiopia). Like other manufacturing companies, KENAFRIC has shelved expansion plans for now. Electricity bill is still high and unpredictable; despite a decline in fuel cost charges. Power outages have reduced in the last months, but electricity tariffs remain high compared to other countries. In addition, labor cost is more expensive in Kenya compared to that of the neighboring countries like Uganda, since minimum wage is adjusted every year. 31 March 2016 | Edition No. 13 Box 2.2 | Continued Imports clearing procedures are still a constraint and impose a significant burden to importers as government introduces new customs clearing procedures to seal revenue leakage. The numbers of clearing days have been reduced from 7 days to 4 days, which is good. However, going beyond four days attracts steep demurrage charges per extra day spend in the Container Freight Services (CFS). Such delays are expected especially for companies that have many containers that need clearance. Four days are often not enough. KENAFRIC imports raw materials for confectionery (including indus- trial sugar from Egypt), and glucose among others. There are other challenges that undermine KENAFRIC operations. These include delays in VAT refund by government, unreliable KRA online system, inability of KRA to audit companies’ books on annual basis, corruption and additional licenses required by different counties. There is need for government to initiate dialogue with manufacturers. The government has put efforts in improving the ease of doing business. But, proper execution is a challenge. Listening to man- ufacturers will help reduce the bottlenecks preventing the industry from expanding and creating more jobs. Furthermore, putting polices in place without consulting stakeholders was cited as a challenge. Expanding The COMESA Market growth as well as penetrating other EU countries. Analysis of Kenya exports to the EU by broad product Kenya’s export growth in COMESA has largely been categorization (HS chapter level) shows that exports driven by Ethiopia and Congo DR, where exports from 15 broad product categories accounted for grew by 6% and 5% respectively during 2010-15, 95% of Kenya’s total exports to the EU between despite these countries not implementing the full 2010 and 2014. A further analysis of EU imports COMESA FTA. Exports to Egypt and Malawi recorded of products in these 15 broad product categories negative growth attributed to a decline that was over the same period revealed huge export potential experienced between 2013 and 2015 for Malawi, for Kenya. For instance Annex Table 2A shows that and 2013 and 2015 for Egypt. Kenya’s cut flowers account for 19 percent share of Exports To The EU the market, vegetables 7 percent, and coffee and tea only 2 percent. The signing and ratification of Prospects for increasing exports into the EU market the EPA, which is envisaged by 1st October 2016 will are also demonstrated by low market share by provide further impetus of accessing the EU market some of the principal export products into the EU. through the flexible rules of origin that are part of Kenya has opportunity to increase its exports to the this agreement and robust framework of managing EU by increasing exports to lead countries through SPS and TBT issues between the EU and the EAC. addressing of factors that have been behind slow March 2016 | Edition No. 13 32 Exports to Asia and Australia Exports To The Americas These regions hold significant potential for expand- The U.S.A takes the lead in the share of Kenya’s ing Kenya’s exports. They now account for 22 exports to North and South America. This is driven percent share of exports, which are growing at 8 largely by the preferential market access terms percent annually. Eleven countries, which accounted under AGOA. The following product categories for 87% of Kenya’s export to the region, were behind have been behind the tremendous increase in Ken- the growth of exports. The lead countries in terms ya’s exports to the US: Cut flowers; fruits and nuts; of the average growth rate were South Korea, Aus- coffee, tea and spices; animal or vegetable fats and tralia, China, Iran and Saudi Arabia. In terms of the oils; preparations of vegetables (frozen vegetables); value of exports, the lead destination countries are essentials oils and cosmetic products; leather goods; Pakistan, United Arab Emirates, Afghanistan, India, textile and apparel. Future growth in this market will China, Yemen and Saudi Arabia. be aided by the extension of the AGOA by a further 10 years to 30th September 2025. Analysis of the products destined to this region shows that products similar to those exported to The other prospect for increased exports of Kenya’s the EU dominate the list, although there are addi- products to the U.S. market lie in the untapped tional products. This product mix offers opportunity potential of the eligible 4,600 products and to scale up production of existing products. Asia and AGOA-eligible 1,800 tariff lines. Among the products Australia will, therefore, play a pivotal role in the in the AGOA-eligible list which Kenya is not exporting growth of Kenya’s exports, primarily because Kenyan to the U.S. include the following: meat; dairy prod- companies that are already producing for the EU ucts; dried fruits; processed fish and meat products; market can expand their production to meet the fruit juices and tobacco. growing demand in Asia and Australia. The region also provides an opportunity for Kenya to grow her Exports To Eastern Europe exports of products such as processed fish and meat Eastern Europe is emerging as an important destina- and other agro-processed foods, which have suffered tion for Kenya’s exports largely driven by Russia and from narrow destination export market. By offering Kazakhstan. There are prospects for Kenya to grow opportunity for Kenya’s export growth, Asia and Aus- its exports to Eastern Europe as demonstrated by the tralia will be contributing towards promotion of the high growth rate of its limited exports, especially to competitiveness of Kenyan firms that will now have Russia and other Eastern European countries. There an opportunity to produce at full capacity as well as may be need to further understand the demand of contributing to employment creation as companies other products that Kenya is producing and exporting increase their production to meet this demand. to EU and other countries, with a view to broadening export base beyond the above four broad categories. These opportunities will need to be tapped through This should be integrated in the export development an export development strategy geared towards strategy for Kenya’s export to Eastern Europe. understanding the market and linking various Kenyan value chains to this market, in order to ensure sus- tainability and continued growth of the exports. 33 March 2016 | Edition No. 13 Growth Outlook for 2016-18 Current growth momentum will be sustained in Private consumption: Prudent monetary policy is the medium term rising from 5.6 percent in 2015 expected to keep inflation within the policy target to reach 6 percent in the medium term (table 3.1). range. Monetary policy actions will be comple- Four factors underpin the growth outlook: (i) pru- mented by the prevailing low oil prices, relatively dent monetary policy is expected to keep inflation lower cost of electricity due to the enhanced energy within the policy bounds and mount pressure on production and declining food prices. Overall stable commercial banks to reduce lending rates; (ii) Oil domestic prices will boost household disposable prices are projected to reach a low US $ 37 per barrel incomes and free up more income for other forms in 2016 rising gradually to US $ 51 in 2018, which will of spending and/or saving. reduce the cost of production while keeping infla- tion low and further contracting the current account Private investment: If realized, the ongoing fiscal deficit; (iii) realized fiscal consolidation will ease the consolidation will ease competition for credit with pressure from domestic credit market to spur growth the private sector to spur private sector investments. in credit to private sector; (iv) and, favorable weather Central bank vigilance is also expected to mount conditions will catalyze growth in agriculture with pressure on commercial banks to reduce lending positive spillovers to the rest of the economy. rates. Falling energy cost (from oil and electricity Table 3.1 | Medium Term growth outlook (percent) 2014 2015e 2016f 2017f 2018f Real GDP growth, at market prices 5.3 5.6 5.9 6.1 6.2 Private consumption 5.5 5.2 6.0 6.0 6.4 Government consumption 2.7 14.7 10.4 7.6 5.8 Gross fixed capital investment 11.1 8.4 9.0 9.3 9.5 Exports, goods and services 2.3 2.0 3.0 4.8 4.8 Imports, goods and services 9.7 8.7 8.7 8.2 8.0 Agriculture 3.5 3.9 3.5 3.6 3.6 Industry 6.5 5.0 5.0 5.2 5.4 Services 5.8 5.5 5.7 5.2 6.0 Current account balance, % of GDP -10.4 -7.1 -6.0 -5.4 -5.3 Fiscal balance, % of GDP -7.2 -8.3 -7.5 -6.4 -4.4 Revenue 19.4 19.8 20.6 21.0 21.3 Expenditure 27.3 29.2 29.1 28.1 27.1 Source: World Bank and National Treasury Note: e (estimate), f (forecast) March 2016 | Edition No. 13 34 prices) is expected to be a catalyst of lower cost of general elections, the rebalancing of the Chinese production and operations in the industry sector. economy, the signal for further hikes in the Fed rate, The sector is expected to realize some gains from the subdued prices of commodity prices and the ever the huge government investment in power gener- present security threat particularly from terrorism. ation projects. The business environment has also This security threat remains a risk to tourism and improved in terms of reduced cost of doing business. related investments. According to the World Bank, Kenya moved up 21 places in the ranking in the beginning of 2016, up There are two elements pertaining to run up to from position 129 in 2015. This is expected to boost the 2017 elections. First, Kenya’s elections years investor confidence. The exchange rate is expected are characteristically associated with low growth, to stabilize, and this will stabilize imports as well, except in the 2013 election, as elections delay pri- vate investments due to political uncertainty. Second given that most investments rely on imported with election spending in 2016/17, it may be hard machinery and transport equipment. to maintain low recurrent expenditure; as a result, election spending may increase at the expense of Government Investment: The medium-term fiscal development expenditure. framework outlines a fiscal consolidation program. Fiscal consolidation will be achieved through cutback The recent hike in the US Fed policy rate and the in recurrent spending supported by a drop in interest signal for similar hikes is likely to see reversal in rates payments and wages and salaries. Revenue short inflows which in the past years helped finance will remain steady, but with low buoyancy. External Kenya’s external account. A decline in capital inflows financing for key flagship projects will ease pressure is likely to put pressure in the currency markets. It in the domestic credit market. is also likely to see a rise in interest rates globally, rendering international bond markets as expensive Exports: Export growth will remain muted in the deficit financing options. However, the recent IMF near term. Weak export performance is attributed to Stand-By Arrangement (SBA) and the Standby Credit low commodity prices (coffee and tea) and subdued Facility (SCF), mitigate against these risks. demand in European markets. Structural constraints to regional trade will undermine export potential. The rebalancing of the Chinese economy from These include non-tariff barriers to trade, high trans- export to domestic consumption is also likely to port and logistics costs within the region, among impact Chinese financing of key flagship projects others. However, net export position will improve in the region. As China puts a break on the rapid largely supported by the drop in oil imports. growth witnessed in the last decade and rebalances from exports to consumption the composition of Risks To The Outlook imports is also likely to change from raw materials The update identifies five key risks to the outlook; to consumer goods. The likely impact on Kenya is the risk of electoral violence in the run up to 2017 discussed in Box 3.1 . 35 March 2016 | Edition No. 13 Box 3.1 | Impact of China’s slowdown on Kenya Impact of China’s slow down and rebalancing: Boom or doom? China’s reform blue print aims to (i) rebalance the economy away from investment to consumption and; (ii) to put a break on fast growth witnessed in the last decade. After averaging 10% annual growth for 30 years, growth is projected in the single digit range in the coming years and investment as a share of GDP will decline to about one third of GDP. This share is taken up by consumption. China’s cooling down has tempered the demand for commodities (food and natural resources) and the decline in prices has played out with an overall negative spill overs for commodity exporters. The rebalancing will increase the demand for imported consumer goods and services is expected to see a gradual rise in wages in the services sector in China. Who are the winners and losers? The likely winners from the rebalancing are countries that export consumer goods to China. The losers are the countries that export industrial inputs and intermediate commodities. So what about Kenya. A World Bank simulation model estimates show that Kenya along with Madagascar, Nigeria and Cameroon are likely to gain from China’s rebalancing. The simulations estimate a 7.5 percent gain in additional GDP compared to the baseline. How can Kenya leverage China’s rebalancing to maximize the gains? The net impact for Kenya will depend on how it recalibrates its trade with China. Kenya’s imports from China are three times Kenya’s exports to China. Ores and concentrates rank among her major exports to China, growing from 7% [Ksh. 0.3bn] in 2014 to 56% [KSh. 2.3bn] of major exports in 2015, the growth emanating from exports of titanium. Investment in the extractives sector remains a risky affair for Kenya, for now. Other leading exporters of ore and allied extractives are already feeling the effect. Taiwanese machine-tool makers have seen exports to China fall by more than 20% since 2012 and Australian iron ore for delivery to China recently hit its lowest price in 21 months. More tepid Chinese demand means lower prices for many raw materials. The spending power of Chinas 1.3 billion and a burgeoning middle-class presents significant oppor- tunity for Kenya to bolster its non-extractive consumer goods such as processed tea and coffee which constitute 3.3 and 1.2 percent of the exports to China, (value of tea exports to China stood at KSh. 206 million in 2015, a decline from KSh. 233 million in 2013). March 2016 | Edition No. 13 36 Box 3.1 | continued Coffee and tea jointly account for about 4.5 percent of total exports to China. Figure B 3.1.1. | Composition of Kenya’s exports to China Strikingly, dairy products do not feature at all 2015 (percent) in the list of Kenya’s top-exports to China. Milk exports from New Zealand to China have seen the term “white gold” coined with significant fortunes for the former. Transformative and urgent change to the trade and logistics landscape is needed for Kenyan dairy products to make meaningful entry into the giant Chinese market including matters relating to sanitary and phytosanitary standards. Kenya’s trade with China remains a delicate balancing act that can be strengthened by diver- sification and recalibration to meet the changing tastes of the growing middle-class. Of more imme- Source: Computations from KNBS. diate need is a lesson from China itself where the reform of State Owned Enterprises (SOEs) to unleash domestic entrepreneurship. Sources: Africa’s Pulse and World Bank Group analysis. 37 March 2016 | Edition No. 13 Special Focus: Transformational Jobs Key to Kenya’s Social-Economic Development Photo: Sarah Farhat / World Bank March 2016 | Edition No. 13 38 Special Focus: Transformational Jobs Key to Kenya’s Social-Economic Development K enya’s Vision 2030 aims at transforming “Kenya into a newly industrializing, middle-income coun- try providing a high quality of life to all its citizens.” Kenya plans to achieve this by building a globally competitive and prosperous economy, a just and cohesive society with social equity in a clean and secure environment, and a democratic political system that protects rights and freedoms of every individual.12 Availability of job opportunities, particularly more productive and transformational jobs, will be key to realizing this vision. This section of the Kenya Economic Update provides a diagnostic of jobs and workers in Kenya, focusing on youth and jobs in urban areas. It draws extensively on different sources of firm data and on a new household level survey in Kenya’s urban areas, the Skills Towards Employment and Productivity (STEP) household survey done in 2013, to analyse the links between individual characteristics, skills, and labour market outcomes. Jobs are fundamental to development. They impact living standards, bring about economic growth, For Kenyan citizens, finding good employment is and help foster a sense of identity and belonging. among their greatest concerns. When asked about In both developed and industrialized countries, key challenges in their society, Kenyans overwhelm- jobs matter tremendously for welfare. Economic ingly cite unemployment, sometimes understood growth can result not just from more job creation to include underemployment, as one of the major but also from jobs becoming more productive or issues that need to be tackled by the Government. In from workers moving from low to higher productivity urban areas, unemployment is rated second only to jobs. Widely shared job opportunities are essential crime and security as a key issue for policy, while in to sharing economic prosperity in the population rural areas; it falls only behind deficient infrastruc- at large. Whether an individual has a job, and the ture and food shortages.14 kind of job that person holds, influences his or her identity and role in the community. After all, jobs Lack of good jobs is slowing down poverty reduc- and work places bring people together. Conversely, tion. Several socio-economic indicators15 suggest lack of job opportunities is critical source of social that there has been little reduction in many indica- unrest in many places.13 tors of poverty.16 Lack of access to good jobs is a key 12 Government of Republic of Kenya, 2007, Kenya’s Vision 2030 13 World Bank (2012), World Development Report 2013: Jobs, World Bank: Washington, DC 14 Afrobarometer (2015), Summary of Results, Afrobarometer Round 6 Survey in Kenya, 2014. 15 Recent poverty data is not available, with the most recent household survey from 2005. 16 World Bank (2013), Kenya Economic Update: Time to shift Gears – Accelerating Growth and Poverty Reduction in the New Kenya, World Bank: Washington, DC. 39 March 2016 | Edition No. 13 factor in slowing down progress in the fight against of them, or three million, will be made up of young poverty. Whereas the ratio of employed family people, between ages 15 and 24. These youths will members to total family size is very similar across want jobs, but to find better jobs than is currently the household income levels in Kenya, individuals living case, the current level and composition of economic in the 30 percent of households at the bottom of the growth will not be sufficient. In the past decade, wealth distribution have had virtually no access to Kenya’s increase in value added was largely driven better paid jobs. This limits their ability to transition by the need for more employment, rather than more out of poverty. Such Kenyans are likely to work in productivity. While the employment-to-growth elas- low paid activities for themselves or their families, ticity was high, with job creation matching value or in the informal wage sector. They have effectively added growth one-for-one, the quality of jobs did no access to better-paid wage jobs in formal firms. not improve. Indeed, if past growth patterns con- tinue, productivity will continue to play a very limited Kenya will continue to face significant demographic role in value added growth (Figure 4.2, a and b). If pressures for job creation. This requires higher and Kenya is to realize better quality and higher paying more productivity-driven growth. Between 2015 and jobs, there will be a need to change the incumbent 2025, the working age population will increase, on growth model. a net basis, by nearly nine million people. One third Figure 4.1 | Jobs and wealth index1: access matters less than quality of jobs Source: Estimates based on STEP survey. The wealth index is calculated using information on current household dwelling characteristics and assets. Low Wealth Index refers to those in the Bottom 30%, Mid Wealth Index corresponds to those in the middle 30%, and the High Wealth Index represent those in the top 40%. March 2016 | Edition No. 13 40 Regionally balanced job creation in both urban impressive 800,000 jobs per year between 2006 and rural areas will be necessary. Relative to its and 2013. Thus, employment grew at 4.5 percent income level, Kenya is “under-urbanized,” with only per year, by far exceeding working-age popula- 25 percent of the population living in urban areas. In tion growth at 2.8 percent per year. However, high comparison, 53 and 40 percent of the population live growth was not enough to make a sizeable dent in in urban areas in Ghana and Zambia, respectively. unemployment and underemployment. The lack of However, Kenya is now a rapidly urbanizing nation. jobs is evident in urban labor markets: nearly two The advantages that urban agglomeration offers, in million urban residents between ages 15 and 64 terms of concentration of skills and resources, and are jobless, not counting college students. Affecting the need for prioritized policies in terms of sector some 20 percent of the active population, or about and location suggest that it would be important to 0.9 million people, urban unemployment is clearly focus on policies that foster sustainable urbanization pervasive. Another 0.9 million adults are inactive and ”job clusters” in cities and smaller towns. At the (not employed, but not looking for a job), but are same time, it is clear that a majority of the popu- not enrolled in education or training (Figure 4.3). lation will remain in rural areas for the foreseeable Moreover, unemployment is therefore not fictional. future. They, too, will need more productive jobs.17 Almost one third of the unemployed have been look- ing for a job for at least one year. Needed: More Job opportunities in Kenya Many jobs have been created but unemployment and underemployment still high in Kenya’s urban areas. The Kenyan economy on average created an Figure 4.2 | “Business as usual” growth will not result in better jobs Source: Estimates based on data from the UN and from the Kenya National Bureau of Statistics (KNBS) 17 Lack of data complicates the analysis of the labor market in Kenya. There is no recent data on labor market trends, particularly in on the rural areas. The most recent comprehensive analysis on a national basis was based only on census data from 2009 and the latest nationally representative household survey was administered ten years ago (another one is being fielded in 2015/1016). 41 March 2016 | Edition No. 13 Figure 4.3 | Distribution of Kenya’s urban population (thousands, 15-64 age categories) Figure 4.4 | Lack of jobs, and lack of productive jobs Source: Estimates based on STEP survey (left), and World Development Indicators (right) March 2016 | Edition No. 13 42 Productivity level of jobs is low and productivity Even when they are not in school, young people are growth has stagnated. A majority of Kenyans do less likely than older people to be jobless (Figure 4.5). work, notwithstanding high unemployment and inac- There are indications that the private sector is not tivity rates (Figure 4.4, a). However, Kenyan workers a preferred option for youth. The public sector jobs are predominantly locked into low productivity jobs can absorb only a small share of the youth enter- and sectors. Between 2006 and 2013, value added ing the labor market. Most youth will need to find and total employment increased at roughly the same jobs in the private sector. However, job preferences rate. As a result, value-added per worker, a measure among youth reveal a preference for public sector of labor productivity remained stagnant, limiting the jobs. Not only do they offer high potential earnings, potential for improving earnings. In fact, GDP per but other non-pecuniary rewards such as job security employed person is lower in Kenya than in many and career opportunities are also important factors. African peers (Figure 4.4, b), and has been increasing Results from a Discrete Choice Experiment Survey, at a slower rate than in other countries, including undertaken to ask young people to choose between poorer ones like Ethiopia, and richer ones like Ghana, different job options, shows that Kenyan youth rate Burkina Faso, and Cambodia. the public sector highly compared to the private Figure 4.5 | Youth are less likely to have a job, even when sector. The job stability of public sector employment they are not in school carries a high premium. Consequently, the youth would be prepared to forego 1,700 KES per month in a private sector job in order to hold a public sector one. They are also prepared to forego some salary in exchange for job benefits such as pension and vacations. Together with job stability, these benefits explain why the public sector is a preferred employer to the private sector. The Economy Not Creating Enough Productive Jobs Kenya’s growth model is not generating sufficient good jobs. Economic growth in Kenya has been Source: Central Bank of Kenya fuelled by public investment in infrastructure, including railways, roads and energy, and domestic Feelings of the youth on their exclusion from better consumption. This growth model has generated high jobs. Young Kenyans also voice concerns about how economic growth, and also some jobs. However, the lack of job opportunities confines them to low these jobs have not been sufficiently productive. earning, sometimes dangerous or illegal activities. High consumer demand has spilled over into demand They feel vulnerable to nepotism and sense a lack of for services, but has not resulted in a take-off in the fairness in accessing well-paying and secure jobs.18 more dynamic, high productivity services sectors. 18 World Bank (2012), Kenya Economic Update: Kenya at Work, World Bank: Washington, DC. 43 March 2016 | Edition No. 13 Recent growth in value added per capita mostly The contribution of labor productivity to growth driven by increase in the share of the employed was minimal. At the same time, labor productivity labor force. The contribution to growth (per capita) within sectors remained stagnant, limiting the poten- can be separated out into several phenomena. tial for improved job quality. Given the stagnation in Growth can be the result of more people coming labor productivity growth, its contribution to value of age and thus in principle able to work. Growth added growth was limited, accounting for 5 percent can increase because a higher proportion of those of total value added per capita growth. Thus, while adults choose to work, or because more of those Kenyans were offered more jobs, those jobs were looking for a job find one. And finally, growth can not significantly better as they were not associated come about because the employed become better with higher value added. The very small contribution at what they are doing. For example, because of of labor productivity to overall value added growth learning on the job or because of access to more was almost entirely driven by inter-sectoral shifts: sophisticated technology. Estimates for Kenya show a net relative increase in the services sector and a that between 2006 and 2013, the most significant net relative loss in agriculture. However, the shift contribution to per capita value added growth was from agriculture into the informal trade sector did an increase in employment in the active labor force, not signify a significant improvement in productiv- accounting for 83 percent of total per capita value ity and further, productivity growth within sectors added growth. Employment growth was in turn was negligible (Figure 4.6, b). Given the perception driven by a strong growth in employment in ser- of significant pockets of underemployment in the vices, mostly in the (largely informal) trade sector farm sector, it is remarkable that a reduction in the (Figure 4.6, a). Higher participation and demographic agricultural work force was not accompanied by an changes contributed 7 and 5 percent. increase in agricultural productivity. Figure 4.6 | The contributions of growth fail to show significant change into more productive jobs. Source: Estimates based on KNBS Economic Surveys complemented by 2009 census. March 2016 | Edition No. 13 44 Figure 4.7 | Employment in urban and rural Kenya Source: Estimates based on KNBS Economic Surveys complemented by 2009 census. Economic growth therefore did not bring with it a differed significantly between urban and rural areas. significant increase in the quality of jobs. The slow In rural areas, family farming dominated employ- structural transformation of output was mirrored in a ment, while wage work was the predominant form slow structural transformation of employment. Jobs of work in urban areas (Figure 4.7, b). in the non-agricultural sector have been growing faster than agricultural jobs, but not at a rate suf- Urban labor markets also show evidence of lack ficient to transform the structure of employment. of enough productive jobs. The message from the Information from the 1999 and 2009 censuses census data is corroborated by data from Kenya’s presented in the Kenya Economic Update: Kenya urban areas. Kenya’s labor markets are characterized at Work (World Bank, 2012) showed that in abso- by a much smaller formal wage sector and much lute terms, wage jobs in the non-agricultural sector more work in the form of self-employment or infor- increased by 1.5 million, while self-employment in mal wage work than is typical of more advanced the non-farm sector increased by 1 million over the economies. Indeed, “labor markets” is something same period (Figure 4.7, a). The shift out of farming of a misnomer for the landscape of work in Kenya, happened for both young and old. However, the very since much of the work is not sold or bought for a young (age 15-19) were most likely to be working wage, but takes place in self-employment. As seen in on family farms, possibly representing the limited Figure 4.3 above, non-wage work, – self-employment options for rural youth leaving school early. While or unpaid work for businesses run by another family this represented a relative shift out of agriculture, member – account for 44 percent of total urban some 300,000 jobs were nonetheless created in employment, with the remainder in wage work. the agricultural sector (on a net basis). Importantly, However, half of wage employees are working in farming still made up the largest single sector of the informal sector and less than one million urban employment. Unsurprisingly, opportunities still workers hold formal wage jobs. In all, three out of 45 March 2016 | Edition No. 13 four jobs in urban areas are outside the formal wage productivity, including in agriculture. However, the sector, mostly in jobs that generally offer low pay and Kenyan economy has not experienced such a transi- irregular incomes. The lack of productive employ- tion in economic structure, whether in employment ment explains why relatively high deprivation can or output, in the past decade. co-exist with a high share of employed adults: work is a necessity, but work does not pay well, so most Faster growing non-agricultural sector jobs did not household members are expected to contribute. transform the structure of employment. In relative terms, workers shifted out of agriculture and into the Productivity growth is held back by limited growth services sector. The share of employment in agricul- in wage jobs in more productive sectors. In Kenya ture fell from 43 to 36 percent, and that of services as elsewhere, different forms of jobs offer differ- increased from 44 to 50 percent. However, while ent opportunities: wage jobs in the formal sector in the services sector accounted for most employment particular pays much better than self-employment growth between 2006 and 2013, labor productiv- or informal wage work, and labor productivity is ity actually fell in the services sectors. And most of much higher in industry (in particular) and services those jobs were created in the informal trade sector, than in agriculture. For Kenyan jobs to become where earnings and job security is low. The manu- transformational there is need to transition from facturing sector has also shown poor performance lower productivity to higher productivity activities over the last decade. Labor productivity had strongly and jobs, both within sectors (jobs created in more fallen during the 1980s and 1990s and remained productive firms) and between sectors (the bulk of stable since then. Kenyan firms are having difficul- jobs shift into more productive sectors). In particular, ties increasing productivity and allocative efficiency a shift of workers out of agriculture into more pro- is low, reflecting distortions in the use of factors of ductive activities has the potential to increase overall production. Figure 4.8 | Wage jobs in higher productivity services and industry are needed a. Distribution of earnings b. Value added per worker, by in urban areas, by form of economic sector. employment Source: Estimates based on STEP survey and on data from KNBS March 2016 | Edition No. 13 46 Figure 4.9 | Jobs are dominated by services, and by informal occupations Share of jobs, urban areas. b. Occupations by economic sector, urban areas Source: Estimates based on STEP survey and on data from KNBS Jobs Needed to Raise Living Standards Four out of five jobs in urban areas are in the ser- and Fight Exclusion vices sector. Wholesale and retail trade (29 percent) Given slow transformation of production and labor and other services related jobs (54 percent) make up markets, majority of workers are confined to low the vast majority of urban jobs. The manufacturing earning jobs. Kenya’s labor markets are character- sector is small, employing less than ten percent of ized by a much smaller formal wage sector and much urban workers (Figure 4.9, a). The trade sector is more work in the form of self-employment or infor- dominated by self-employment, while wage employ- mal wage work than is typical of more advanced ment is more common in other forms of services. economies. Indeed, “labor markets” is something Informal wage work is most prevalent in the con- of a misnomer for the landscape of work in Kenya, struction sector (Figure 4.9, b). since almost half of all work is not sold or bought for a wage, but takes place in self-employment. Even in Majority of jobs are low skill, indicating lack of urban areas where a vast majority are engaged in modernization of employment and production. non-agricultural activities, the quality of jobs is low. In fact, many jobs do not involve the use of some The urban formal wage sector employs less than basic cognitive skills. Formal wage workers, espe- 900,000 people, which is less than one quarter of cially in high value added services, are more likely the work force, while 2.5 million workers are either to use their cognitive skills intensively than others in informal wage employment or engaged in self-em- but these sectors account for a small share of total ployment or unpaid work for other family members, employment (Figure 4.10). A majority of unpaid mostly in the wholesale and retail trade sector. Those family workers, self-employed and informal wage jobs tend to offer significantly lower earnings and workers do not use foundational skills like reading, less job security than formal sector jobs. writing, or computer at work at all. 47 March 2016 | Edition No. 13 Figure 4.10 | Low intensity of skills used on the job ,Use of skills at work, by occupation status Source: Estimates based on STEP survey Women, youth and those with little education are Many young women are not active in labor market excluded from jobs. First, youth and women are because of household work. Although both men and especially vulnerable in terms of unemployment. women are among the inactive, their reasons for not More than one quarter of all urban active women, looking for a job are widely different. Focusing on the are unemployed. The unemployment rate reaches jobless that are not in education, inactive young men 40 percent for young women, and women with little are closer to the labor market than women. Young or no education are more likely to be unemployed men are either discouraged, that is, they would like for much longer than others. Although young men to work but have no hope of finding a job and there- fare better, 20 percent of 15-24 year old active men fore don’t look for employment, or are looking for a are also unemployed. The risk of long-term unem- job, which they had been unable to find within the ployment is also highest for men and women with two weeks following the survey. They are therefore little or no education. Women, youth, and those with not counted as unemployed. Women, however, are less education are also more likely to be inactive. predominantly absorbed by household work, espe- As a result, employment-to-population ratios are cially between ages 20 to 34, when they are more lowest for youth, women, and those with intermedi- likely to have young children. Women are more likely ary levels of education. Those who have completed than men to be inactive and also make up a majority tertiary education are significantly more likely than of the discouraged workers (Figure 4.11). others to be employed. March 2016 | Edition No. 13 48 Figure 4.11 | Reasons for inactivity, by gender and age. Figure 4.12 | Age, gender and education levels matter for the kind of job one gets. Source: Central Bank of Kenya Source: Estimates based on STEP survey (Urban areas only). Women, youth, and those with less education are Slow Creation of Productive Jobs in also excluded from good jobs. Even more impor- the Formal Sector tantly, working women, youth and low educated To create better jobs, Kenya needs a thriving private workers are predominantly confined to low pro- sector that can engage workers in more productive ductivity activities. Urban women are more likely employment. Labor productivity in Kenya is signifi- to be self-employed than men (39 percent versus cantly higher in formal than in the informal sector. 28 percent of total female/male employment), and Within the private formal sector, more productive female workers make up only one third of formal and more established forms offer better job condi- wage jobs. Whereas a majority of young workers tions and higher wages. However, analysis of firm are in the wage sector, only 28 percent of them have data from enterprise census of the formal manufac- access to formal sector jobs, compared to 47 percent turing sector, and surveys of formal services sector, for older workers. as well as the informal sector, indicate that the con- ditions for firms do not favour entrepreneurship and The youngest urban workers are more likely to be expansion, especially of the more productive and in the trade sector than in other services. Unsur- competitive firms in the formal sector. This suggests prisingly, since many of them have left school early, resource allocation is not functioning as it should in they are less likely to be in the public administration, a well-established market economy. and in professional activities, where education levels are higher. But patterns change significantly for the More productive and more established firms offer workers between 25 and 34, who are more likely to better job conditions and higher wages. In the be working in manufacturing, in the public sector, formal manufacturing sector, job security is relatively or in professional activities. high, with more than half of employees holding a 49 March 2016 | Edition No. 13 permanent job. Some 56 percent of workers have a formal and informal firms, a synthetic data-set was permanent contract, 26 percent are casual workers, constructed, incorporating formal firms with less and 17 percent have a temporary contract. Multi- than six workers. The purpose is to allow compar- variate analysis shows that older, more productive isons between firms of similar size, thus ensuring and capital intensive firms, firms investing in ICT, and that what are truly “informal” characteristics are exporting firms, offer a better contractual situation not simply proxies for small firms. On these bases, than others.19 Larger firms tend to pay higher wages labor productivity, as measured by sales per worker, than medium or small firms, excluding micro-firms is higher in formal firms, even when size is accounted that surprisingly account for higher wages than the for. The differences are quite significant in both the sector average. Again, multivariate analysis allows services and manufacturing sector (Figure 4.13). us to separate out the firm characteristics that are More productive firms are more likely to start-up in more strongly correlated with higher wages. More the formal sector, perhaps as a result of having larger productive firms pay higher wages, as do larger firms. revenues to cover the costs of formality. These labor In addition, firms with exposure to foreign markets productivity differences are reflected in a concom- tend to pay more. Wages in Nairobi are higher than itant wage gap in the services sector; less so in the in the more remote regions.20 manufacturing sector. Employment is more stable in the services sector The formal private sector offers better jobs. How- than in the manufacturing sector. Over 70 percent ever, this sector is still small and accounts for less of workers have a permanent contract; only in the than one in four jobs in the non-agricultural sector. predominantly public sub-sector including admin- Formal wage jobs, in both public and private sectors, istration, health, and education, are term contracts make up 22 percent of all jobs in industry and 24 more common. Again, older and more productive percent of all jobs in the services sector, including firms tend to hire more permanent workers, and as both wage and self-employment jobs. Although the such offer more job security. As for the manufactur- small size of the formal sector suggests that efforts ing sector, relative wages are also strongly linked to also must concentrate on raising productivity in productivity levels. More productive firms are likely the informal sector (where, in fact, most jobs will to be better able to sustain higher wages, as they can continue to be created in the short term), finding reallocate resources to cover fixed costs.21 ways to remove obstacles to firm and labor demand growth is essential to improving the jobs landscape Small, formal, firms are significantly more produc- in Kenya. tive than small informal firms. In order to compare 19 Refers to estimates of a model of the determinants of the share of permanent employment in total employment, based on the following variables: a set of dummy variables for the age of the firm (the excluded category is the young ones, i.e. from 1 to 3), a set of dummies accounting the foreign exposure of the firm (exporter, importer), ICT equipment level (relative to the sector average), a dummy for invest- ments in R&D, the ratio of capital to labor, value added per worker and we control for location and subsectors. A full table with regression results is available in Annex 5. 20 Wage regressions are based on a set of variables including dummies for the size and age of the firm, its foreign exposure, some innovation indicators as well as the value added per worker. Results are available in Annex 5. 21 See Annex 5 March 2016 | Edition No. 13 50 Figure 4.13 | Labor productivity is significantly higher in the formal sector. a. Relative distribution of sales per worker by b. Relative distribution of sales per worker firms in the manufacturing sector in the service sector Informal sector as a Informal sector as a reference reference Source: Estimates based on the 2010 Census of Industrial Production for Kenya, the 2011 Integrated Survey of Services and the Kenya Enterprise Informal Survey 2013 In both the manufacturing and services sectors, firm old firms in OECD countries account for a majority creation is low. High levels of firm creation can be a of employment, their share is much lower than in mechanism for productivity growth, if more produc- Kenya.22 tive firms enter and force less productive firms out of business. However, in the manufacturing sector, Lack of young firms indicates a problem. This less than 19 percent of firms are young, here defined problem is a lack of potential for job creation in the as firms created less than 5 years ago, set against formal sector. In more developed economies such 35 percent in the United States and Ethiopia. The as the OECD members, most firms are old, and most low entry rate of formal firms points to a lack of employment is in older firms, but the share of older dynamism. Whether this reflects barriers to start-up, firms is lower than in Kenya. For example, young or barriers to formalization, is beyond the scope of firms (0-5) in the US account for some 35 percent this study. However, it remains a fact that entry into of all firms, and nearly 30 percent in the OECD as a formal sector is limited. The potential for dynamic whole, compared to 21 percent of Kenyan firms. And changes to employment through firm entry and exit in the OECD, some 15 percent of firms are new-born is therefore by necessity limited (Figure 4.14). In the or start-ups (0-2 years), compared to ten percent in services sector, new entrants, start-ups, and younger Kenya. This is an important characteristic, because firms account for an even lower share of total firms young firms in OECD countries contribute dispropor- than in the manufacturing sector. A majority of firms tionately more to job creation, and much less to job are “old,” having been in business for more than destruction.23 The lack of young firms in Kenya may ten years. Again, this compares unfavourably with therefore be evidence of a lack of potential for job the structure of firms in OECD countries. Although creation in the formal sector. 22 Criscuolo, Gal and Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers no. 14, OECD Publishing. 23 Ibid 51 March 2016 | Edition No. 13 Figure 4.14 | Firm creation is limited in the formal sector a. Distribution of firms and employment by age of b. Distribution of firms and employment by age of firm, manufacturing firm, services Source: estimates based on the 2010 Census of Industrial Production for Kenya and the 2011 Integrated Survey of Services More productive firms do not create more jobs. In a And larger firms are not more productive. Simi- well-functioning market economy, more productive larly, firms with lower productivity levels are larger in firms should be more competitive. As such, they are terms of employment than higher productivity firms. able to gain market shares over time. However, more With time, Kenyan manufacturing firms only grow to productive manufacturing sector firms do not create two or three times the size of young (less than five more employment in Kenya. years) firms. The services sector is also suffering from distortions. The main employing sector (the trade Manufacturing firms experiencing productivity sector), shows evidence of misallocation, with the growth do not see more job creation. The lack of larger firms being less productive. For comparison, relationship between productivity levels and employ- older US firms grow up to six times the size of small ment growth does indeed suggest that productive firms. In middle-income countries like Lebanon and firms are held back in the Kenyan economy. In a Tunisia, younger and more productive firms have well-functioning market economy, they should be been creating proportionally more jobs than other more competitive than other firms, and as a result firms.24 be expanding business and creating more employ- ment. However, the correlation between firm size Low Skills Levels Could Constrain and productivity growth is in fact negative in Kenya, All Sectors of Employment suggesting the opposite. This is particularly true for Skills development is also fundamental to the the food and textile sectors – the major employers transition to better jobs. Currently, the demand for in the manufacturing sector. higher level cognitive skills is low in Kenya’s jobs 24 World Bank (2014) “Jobs or Privileges: Unleashing the Employment Potential of the Middle East and North Africa”. Macro and Fiscal Man- agement Global Practice, Middle East and North Africa Region March 2016 | Edition No. 13 52 market, and the World Bank’s enterprise surveys are very imperfect measures of actual labor market do not suggest skills are the most important con- relevant skills. In a labor market that rewards pro- straint to doing business. However, there are signs ductivity, skills should be what matters for job that skills are at least becoming a more important opportunities. The STEP household survey has been problem for firms. At least 30 percent of firms cite designed to systematically measure different labor it as a major constraint. A transformation into more market related skills, and how these relate to both formal, higher productivity jobs will require a better education and labor market outcomes (Box I). trained labor force. A flexible skills development system that fosters basic generic skills and provides Skills matter for labor market outcomes. Socio-emo- opportunities for acquiring labor market relevant tional skills, especially openness to new experiences technical skills is needed, as are labor markets that and being thorough and careful in work, correspond reward skills above degrees, personal connections, to higher hourly earnings in Kenya. Technical skills and other distortions. and job related skills are also related to higher hourly earnings. However, these returns tend to vary across What matters between Skills and Education? Impor- age groups. For example, rewards from using a com- tantly, “years of schooling” or “level of education” puter at work increases with age. Box 1 | The STEP Household Survey: Measuring Skills in Kenya In the economic literature, “level of skills” has often been approximated by “years in school” or “high- est degree obtained.” However, attending school is not a guarantee for developing skills. Designed as a lighter version of the OECD’s Survey of Adults Skills (PIAAC), the STEP household survey thus looks beyond education levels and focuses on individuals and their supply and use of actual skills. More particularly, the STEP is an attempt at a systematic assessment of: (i) Cognitive skills, that is, analytical, logical, intuitive and creative thinking and problem solving skills are assessed directly, through a reading literacy assessment, and indirectly, through self-re- ported information of use of skills in daily life and work. (ii) Socio-emotional skills and personality traits (behavioural skills, soft skills, life skills, personality traits), include behavioural aspects, including openness to new experiences, conscientious- ness, extraversion, agreeableness, hostile bias (the tendency to interpret others’ behaviours as hostile), perseverance and focus on long term goals (grit), and attitudes and preferences with respect to decision making, time and risk. (iii) Job-relevant skills are task related and include technical skills directly related to the specific occupation (e.g., accounting for an accountant) and computer use, repair/maintenance of machinery, operation of machinery, but also soft skills like client contact, problem solving, learn- ing, supervision, and so on. 53 March 2016 | Edition No. 13 Both skills and education matter for earnings. Once divide,” with low educated never using computers. different skills are accounted for, the returns on edu- Those with a higher level of education also tend to cation are only significant for those with secondary have higher scores in non-cognitive skills, in partic- or tertiary education. Therefore, the impact of ter- ular some people-related skills like openness and tiary education is much more significant for these agreeableness. They also fare better when other groups of people. There is thus a separate effect of characteristics such as age group, socio-economic years of schooling, over and above of the skills that status and parental education levels are considered. attending school can produce (and that are mea- In addition, youth are more likely than older cohorts sured in the STEP survey). Potential explanations to use skills, excepting the 15-19 year olds, who most for this include a signalling effect of education. For likely are early drop-outs from the education system, example, that having passed through tertiary edu- and as such in unemployed or working in low skill cation is a sign of some innate ability that is not well jobs. measured in the skills defined by the STEP survey. A majority of urban Kenyan adults have at least Education helps accessing jobs with more intensive secondary education and in particular women have use of cognitive skills. The intensity of use of skills been given higher access. Kenya’s general educa- like writing documents, reading, computing, is higher tion system is based on an 8-4-4 curriculum: 8 years for people with higher levels of education, except in primary school, 4 years in secondary school and for numeracy, which is used more intensely than 4 years of college or university. Access to primary other types of skills, as it is used in most adult life and secondary education has increased consider- to perform some market related calculations such ably over time. In particular, women have attained as buying produce or charging for one’s products greater access to primary and secondary education. or services. There is, in particular, a clear “digital Three out of five women aged between 25 and 34 Figure 4.15 | Distribution of population by age, gender and highest level of education. Source: Estimates based on STEP survey March 2016 | Edition No. 13 54 have completed at least secondary education, but household with low socio-economic status have no only two out of five women among the 55-64 year- more than primary education, and one in four had no olds have done so. education at all. By contrast, more than three in five individuals with middle socio-economic status, and But there are still gender, regional, and socio-eco- three in four with high socio-economic status, and nomic gaps in educational attainment. Almost half at least finished secondary education (Figure 4.16). of all women, specifically 45 percent, have com- Access to tertiary education in particular seems to pleted primary education at the most, against 35 be confined to individuals from well off households. percent for men. The largest drop in the gap seems to happen for secondary education. At the other Delayed entry and early drop-outs remain a signif- end, the share of tertiary educated is higher among icant problem in Kenya. Many children are delayed men than women. There are significant regional dif- in entering school. This in turn delays and reduces ferences as well, although those have reduced with the development of important cognitive skills and time. Even when comparing for the 15-19 year olds penalizes future academic development. The official (reflecting the most recent state of the school system age of entry for primary school is six years. However, among adults), the primary completion rates for many children enrol at a higher age. This is in fact a urban areas in the coastal areas reaches above 90 problem, because delayed entry is in turn related to percent while those of the Western inland zones, early drop-out.25 Among those that started school Rift Valley and the Western Zone, reach just over at age 9, more than fifty percent did not get further 60 percent. Finally, a majority of individuals from than primary school. Among children who started Figure 4.16 | Primary completion rates by provinces Figure 4.17 | Highest education achieved, by socio- economic status Source: Estimates based on STEP survey. Note: Excludes those currently at Source: Estimates based on STEP survey. school 25 Lewin (2009) notes that high variance in age of entry in Sub-Saharan Africa is an important factor for explaining early drop-outs of those with delayed entry. Lewin (2009),”Access to education in sub-Saharan Africa: patterns, problems and possibilities.” Comparative Education, 45 (2). pp. 151-174. 55 March 2016 | Edition No. 13 Figure 4.18 | Highest education completed by age of entry. too expensive to attend school, perhaps because of the opportunity cost of not working, and by early family formation (especially for women). Higher access to school has not translated into suf- ficient learning. There are also significant indications that the quality of education has not kept up with expansion in access. A vast majority of adults who have passed through secondary levels of education remain functionally illiterate in English. Even among adults with tertiary levels of education, less than one quarter reaches the minimum level of func- tional literacy. Second chances and other training opportunities are limited in Kenya: only 27 percent Source: Estimates based on STEP survey. of the urban population benefited from some kind of training after school. A 2011 survey showed that at age 5 or 6, however, two thirds were likely to 7 out of 10 children in Grade 3 could not do work finish at least secondary school. Though not shown at the level of Grade 2.26 Teacher absenteeism and here, those who started school much later than usual high (and widely varying) teacher/student ratios (around 10 or 11 years of age) are more likely to are among the more critical problems plaguing the not finish even primary education than those who education system. entered earlier (Figure 4.18) Figure 4.19 | Mismatch by gender, educational level and age categories The cost associated with schooling is a constraint for increasing education levels. Early drop-outs are in fact a significant problem in Kenya, as one third of dropouts happen before completion of primary education, preventing the development of basic functional competencies like literacy and numeracy. And importantly, drop-outs is more common among those belonging to households with low socio-eco- nomic status (specifically, those who were living in such a household at the age of 15). Almost 40 per- cent of those with low socio-economic background drop out of school – twice as high as those from a high socio-economic background. Drop-outs are also generally driven by financial considerations, as it is Source: Estimates based on STEP survey 26 World Bank (2013), Achieving Shared Prosperity in Kenya. March 2016 | Edition No. 13 56 While Kenya has invested in broadening access to widely different access to more productive jobs. This education, the pay-off to educational investment means that the pillars of a jobs strategy must not has been low. Many educational assets sit idle only include more and better jobs, but specific and because of mismatches, reinforcing the impression targeted policies to connect people to jobs, and jobs that Kenya is not making productive use of its avail- to people. able labor force. A high share of workers reports their education level to be mismatched with the Improve business environment to encourage pri- requirements of their jobs: 40 percent consider vate sector growth and create labor demand. The themselves undereducated, but 30 percent consider World Bank’s Enterprise Surveys from 2007 and 2013 they are overeducated for their job (Figure 4.19). suggest that the business climate is deteriorating in Kenya. Compared with 2007, firms in 2013 experi- Limited after school training opportunities, espe- enced higher financing costs, higher insecurity, and cially outside the formal sector, are holding back more unreliable access to infrastructure. Kenyan productivity growth. About one in four in Kenya’s firms make 30 contributions a year, taking 201 staff urban population benefited from some kind of hours to calculate, file, and pay their taxes. For trad- training at the certificate, traineeship or on-the-job- ers, logistics are a major hindrance. On average, the training levels. Access to different forms of training procedures and documentation needed to import or programs is a strong correlate of formal sector work. export take 26 days; connecting to the power grid in Almost 30 percent of formal wage workers had par- Nairobi requires 6 steps, takes more than 5 months, ticipated in a training course during the year prior to and costs 10 times average Gross National Income the survey, compared to only 7 percent of informal (GNI) per capita.27 wage workers. Self-employed and unpaid workers are even less likely to participate in any kind of train- Kenyan firms perceived competition from the infor- ing. Participation in training programs is linked to mal sector, electricity, and lack of access to finance jobs with high skills use intensity. For example, those as the top obstacles in 2013. When asked to identify who attended on-the-job training programs are more the biggest obstacle to business, 18.5 percent of likely to use their cognitive skills such as learning and firms cited “practices of competitors in the informal thinking, on the job. sector,” 16.5 percent cited “electricity,” and 12.7 percent cited “access to finance.” Focusing instead Policy Priorities to Foster More, Better and More on major constraints, any area that is considered a Inclusive Jobs major constraint to business, over twenty percent Kenya is a country of great variations in opportuni- of firms in Kenya considered infrastructure, insecu- ties and challenges. It combines a vibrant economic rity, customs and trade regulations, informal sector activity in some of the largest cities together with a practices, and, importantly, the lack of skills, as major continued dependence on agriculture in rural areas, constraints to expanding their businesses. These high mobile and internet use and low functional areas are also relatively highly ranked by Kenya, literacy, widely different access to education, and compared to peer countries. 27 World Bank (2014), Kenya Economic Update 2014: Anchoring High Growth: Can Manufacturing Contribute More?, World Bank: Washington, DC. 57 March 2016 | Edition No. 13 Figure 4.20 | Major constraints to doing business, Kenya and schemes that are increasing the cost of doing busi- Comparators ness unduly in Kenya.28 Increase informal enterprise and worker productiv- ity to improve overall productivity and job quality in Kenya. Even in a scenario with rapid growth in the formal wage sector, formal firms will not create jobs for all young Kenyans. Many youth will continue to find jobs in the small household enterprises, work- ing for themselves or their family in the Jua Kali, the informal sector. A vast majority of these firms will remain very small. The household enterprise sector tends to expand by creating new firms (many of them own-account jobs), rather than by increasing Source: Estimates based on World Bank Enterprise Surveys. employment.29 The government should support interventions that Several measures are needed to promote produc- increase productivity of these firms. This could be tivity and employment growth in the formal sector. done by improving the conditions under which they Policy directions for the manufacturing sector, but operate, particularly by increasing access to skills, with a bearing also on services, include: (i) help- technology, credit and markets, and helping such ing firm access skills, technology and information firms to manage income risk. Raising the skills levels through, for example, technology extension or of Jua Kali workers involves addressing broad skills technology transfer programs; (ii) ensuring level needs (technical as well as general business skills playing field between informal and formal sector, by like marketing and accounting), and offering flexible streamlining and reducing regulation and ensuring modes of training that permit combining work with fair enforcement: (iii) decreasing the cost of doing skills upgrading. Given the granular nature of the business by addressing critical infrastructure gaps, informal sector, there is a need address information especially in electricity, developing key financial asymmetries and hook up these micro-firms with infrastructure and special programs to help enter- the modern economy. This can be achieved by cre- prises access financing, and accelerate and facilitate ating linkages between informal and formal firms, international trade; (iv) supporting firm entry and connecting suppliers with customers, coordinating exit, which is low in Kenya, by facilitating the start- producers, connecting firms with technological solu- ing up of a business, and simplifying the insolvency tions, and helping small-scale enterprises enter into framework; (v) and streamlining revenue raising local, regional and global value chains. 28 Ibid 29 Filmer and Fox (2014), Youth Employment in Sub-Saharan Africa. Washington, DC: World Bank and Agence Française de Développement. March 2016 | Edition No. 13 58 More effective safety nets needed beyond formal resources to pay for school in determining early sector social security coverage to prevent people drop-outs suggests that demand side issues – how to facing income losses from falling into poverty. stimulate demand for education, by alleviating both Potential avenues include voluntary social insurance credit and information constraints, can be important. programs and specific targeted schemes for informal sector firms, subsidies for low-income workers, rais- To connect people to jobs, targeted policy solutions ing awareness about labor standards, and delinking are called for on the supply side. An analysis of “risk social security coverage from formal contracts. profiles” among the vulnerable youth population31 arrives at four groups facing similar labor market Skills are becoming a more important constraint, challenges within each group. These groups could pointing to the need for rapid action. Informality, benefit from similar policy approaches. (Figure 4.21). trade regulations, and lack of access to finance These clusters are defined by type of barriers, along became more important constraints in the past six two axes: employability (education, experience, years, while transportation, crime, theft, and dis- skills) and social barriers (gender, poverty, family order became less important. Firms perceived the responsibilities, etc.). The groups need different and severity to have fallen most for telecommunications, targeted policy assistance, ranging from intermedi- a development that is likely related to rapid techno- ation in the labor market (helping qualified workers logical improvements over this period, particularly connect to available jobs) to the other extreme, with the penetration of mobile networks and devices. The an emphasis on building very basic functional skills: severity of crime, tax rates and tax administration, transport, and workings of the courts also declined. Market ready. Males, both rural, low-skilled, married The only obstacle firms perceived to have risen in ones working in the informal sector, and urban, semi- severity was the availability of educated workers. skilled unemployed single ones, fit into this category. They require mostly intermediation in the labor Improve quality of education and make education market. This can be in form of job search assistance more inclusive. Skills development takes many years, and information provision. Given the comparatively from early childhood education to post-secondary high mobile and Internet penetration and use in training. To respond to upcoming skills shortages, Kenya (43 percent of the population uses Internet efforts to increase the quality and impact of educa- according to the most recent data); this group may tion, and improve equity in access, are sorely and be favourably served through different ICT tools.32 urgently needed. While a broad education reform implies action in a wide range of areas, cross cut- Intensified action. This group consists of single ting systemic problems include lack of accountability males, currently working in less productive employ- and oversight.30 The importance of lack of sufficient ment, including both rural low skilled unpaid, 30 World Bank (2013), Achieving Shared Prosperity in Kenya. World Bank: Washington, DC. 31 The vulnerable youth population refers to individuals aged 15 to 24 that are economically inactive out-of-school, unemployed, or employed in the informal sector (i.e., unpaid family workers, self-employed or informal wage-workers). 32 World Bank (2015), World Development Report 2016: Digital Dividends. World Bank: Washington, DC., and data from the World Development Indicators. 59 March 2016 | Edition No. 13 self-employed, and informal wage workers. They consuming group to activate – they require skills face, in particular, education/skills barriers and as development, functional literacy and numeracy, as such are likely to benefit from long term measures well as socio-emotional skills. for building skills, such as increased access to edu- Figure 4.21 | Policy targeting: identifying groups cation, as well as shorter term job-relevant training, to increase their employability. Special support. This group is made up of female clusters: rural, unskilled, married, self-employed or unpaid workers and urban, low-skilled, inactive mar- ried female. These two groups face social barriers as well. They are likely to need childcare services to enter the labor market, as they carry large household responsibilities. They may benefit from intensified action as for the above group, but with attention to childcare and other social barriers. Hard to serve. This includes rural, unskilled, inac- Source: Estimates based on KIHBS 2005. The Clusters are defined as: 1. low skilled unpaid worker single male (40 percent of total sample); 2. Rural un- tive, single females who face high employability skilled “unpaid-self-employed worker” married female (15 percent); 3. Ru- ral, unskilled, single male worker (14%); 4. Urban semiskilled, unemployed and family barriers. They lack work experience, or informal wage workers, single male (10%); Urban low skilled inactive have little education, and are engaged in household married female (8%); 6. Rural, unskilled, inactive single female; 7. Rural low skilled informal married male work. This may be the most difficult group and time March 2016 | Edition No. 13 60 ANNEXES Annex 1 | Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 GDP growth Rates (percent)/1 3.3 8.4 6.1 4.5 5.7 5.3 5.5 Agriculture -2.3 10.0 2.4 2.9 5.2 3.5 5.5 Industry 3.7 8.7 7.2 4.2 5.0 6.5 3.6 Manufacturing -1.1 4.5 7.2 -0.6 5.6 3.4 6.6 Services 6.2 7.3 6.1 4.7 5.4 5.7 5.3 Fiscal Framework (percent of GDP)/2 Total revenue 19.4 19.4 18.8 18.8 19.3 19.4 20.3 Total expenditure 24.0 23.5 23.7 25.2 25.8 28.7 29.6 Grants 1.0 0.5 0.4 0.5 0.5 0.5 1.1 Budget deficit (including grants) -5.8 -3.4 -4.5 -5.4 -5.9 -8.6 -8.1 Total debt (net) 36.6 39.1 37.0 38.5 44.0 45.6 46.5 External Account (percent of GDP)/3 Exports (fob) 12.2 13.1 13.8 12.3 10.6 10.1 9.7 Imports (cif) 27.8 31.0 35.3 33.2 31.0 31.0 27.2 Balance of trade -10.5 -11.6 -15.3 -13.7 -13.8 -15.3 -11.6 Current account balance -4.5 -6.3 -7.9 -8.4 -8.7 -10.0 -7.2 Financial and capital account 6.6 6.7 7.8 10.9 10.0 12.3 7.1 Overall balance 2.1 0.4 -0.1 2.5 1.2 2.3 -0.1 Prices Inflation (average) 10.5 4.1 14.0 9.6 5.7 6.9 6.6 Exchange rate (average K Sh/$) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 Source:Kenya National Bureau of Statistics, National Treasury and Central Bank of Kenya End of FY in June (e.g 2009 = 2009/2010) 1/ Figure s for 2015 are average for Q1, Q2 and Q3 2/Figures for 2015 are from the resived budget for 2015/16 3/ Figures for 2015 are for the 12 months ending November 2015 Annex 2 | GDP growth rates for Kenya SSA and EAC (2010-2014) 2010 2011 2012 2013 2014 2010-2014 Kenya 8.4 6.1 4.5 5.7 5.3 5.4 SSA (excluding South Africa) 5.7 5.0 4.2 4.6 4.4 4.6 Uganda 7.7 6.8 2.6 3.9 4.9 4.6 Tanzania 6.4 7.9 5.1 7.3 7.2 6.9 Rwanda 6.3 7.5 8.8 4.7 7.0 7.0 Source: World Economic Outlook(IMF) and Kenya National Bureau of Statistics. March 2016 | Edition No. 13 62 Annex 3 | Kenya annual GDP GDP, GDP, 2001 GDP/ GDP current constant capita, growth prices prices current Years prices KSh KSh KSh Percent Billions Billions Billions 2007 2151 2766 847 6.9 2008 2483 2772 926 0.2 2009 2864 2864 930 3.3 2010 3169 3104 978 8.4 2011 3726 3294 998 6.1 2012 4261 3444 1167 4.5 2013 4731 3640 1238 5.7 2014 5358 3834 1338 5.3 Source: Kenya National Bureau of Statistics and World Bank Development Indicators. Annex 4.a | Broad sectors growth (half year, percent) Year Half Agriculture Industry Services GDP 2012 H1 2.9 3.9 4.8 4.4 H2 3.1 4.5 4.6 4.6 2013 H1 6.4 7.3 5.3 6.6 H2 3.7 2.8 5.5 4.8 2014 H1 2.1 8.5 5.8 5.3 H2 5.3 4.5 5.7 5.3 2015 H1 5.0 6.3 5.1 5.3 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 gas + Water supply and sewerage + Construction Services = Wholesale and retail trade + Accomodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Professional, administrative and support services + Real estate + Education + Helath + Other services + FISIM 63 March 2016 | Edition No. 13 Annex 4.b | Quartely growth rates (percent) AGRICULTURE INDUSTRY SERVICES GDP (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ Years Quarters Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) 2012 1 48.9 3.5 2.6 -4.6 5.8 6.7 -1.0 4.4 5.2 7.5 4.7 5.4 2 -10.6 2.1 2.3 -1.2 2.0 4.6 -1.3 5.3 5.2 -3.6 4.3 4.8 3 -22.7 2.0 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.4 4.5 4.4 4 1.3 4.1 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.5 2013 1 51.9 6.3 3.8 -0.5 8.9 5.0 -1.6 4.1 4.7 8.8 6.0 4.9 2 -10.4 6.6 5.0 -4.1 5.7 5.9 1.0 6.5 5.0 -2.6 7.0 5.6 3 -22.9 6.4 5.9 4.6 6.5 6.4 4.0 5.4 5.2 -1.7 6.8 6.2 4 -3.9 0.9 5.2 -0.4 -0.6 5.0 2.2 5.6 5.4 -1.2 2.9 5.7 2014 1 53.8 2.2 4.0 6.7 6.6 4.5 -2.0 5.2 5.7 10.7 4.7 5.4 2 -10.4 2.1 2.8 -0.6 10.5 5.7 2.2 6.5 5.6 -1.4 6.0 5.1 3 -19.3 6.8 2.9 -1.6 4.0 5.1 3.0 5.4 5.7 -2.4 5.2 4.7 4 -6.6 3.8 3.5 0.6 5.1 6.5 2.8 6.1 5.8 -0.9 5.5 5.3 2015 1 54.8 4.4 4.2 7.6 5.9 6.3 -3.0 5.0 5.7 10.2 5.0 5.4 2 -9.5 5.6 5.1 0.2 6.7 5.5 2.3 5.2 5.4 -0.9 5.6 5.3 3 -18.2 7.1 5.2 -1.2 7.2 6.2 3.3 5.5 5.5 -2.2 5.8 5.5 Source: World Bank, based on data from Kenya National Bureau of Statistics. March 2016 | Edition No. 13 64 Annex 5 | Inflation Year Month Overall Food Energy Core inflation inflation inflation inflation 2014 January 7.2 10.1 5.5 5.4 February 6.9 9.1 5.6 5.5 March 6.3 8.3 4.7 5.4 April 6.4 8.1 5.9 5.3 May 7.3 8.9 8.1 5.6 June 7.4 8.4 9.0 5.6 July 7.7 9.1 9.1 5.5 August 8.4 10.9 8.6 5.6 September 6.6 8.4 7.2 4.4 October 6.4 8.2 7.0 4.4 November 6.1 7.5 6.4 4.6 December 6.0 7.7 6.0 4.5 2015 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 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 Source: World Bank, based on data from Kenya National Bureau of Statistics. 65 March 2016 | Edition No. 13 Annex 6 | Tea production and exports Year Month Production Price Exports Exports value MT K Sh/Kg MT K Sh million 2014 January 44,970 236 38,652 8,784 February 33,774 203 33,514 7,317 March 33,336 187 37,642 7,938 April 39,975 188 37,439 7,782 May 41,186 179 36,216 7,380 June 31,945 178 39,011 7,692 July 30,790 200 42,393 8,468 August 26,756 191 38,121 7,974 September 33,321 178 35,961 7,244 October 45,368 180 37,637 7,444 November 38,614 182 38,275 7,595 December 45,071 182 41,631 8,379 2015 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 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 Source: Kenya National Bureau of Statistics. March 2016 | Edition No. 13 66 Annex 7 | Coffee production and exports Year Month Production Price Exports Exports value MT K Sh/Kg MT K Sh million 2014 January 2,850 293 3,169 1,055 February 5,382 399 3,078 1,118 March 6,212 459 4,584 1,533 April 6,611 393 4,858 2,013 May 3,747 349 4,594 2,024 June 2,860 358 4,587 2,007 July 1,292 315 5,425 2,383 August 3,214 381 3,313 1,474 September 3,424 404 3,944 1,722 October 2,801 423 3,618 1,645 November 1,703 410 3,718 1,747 December 2,354 414 2,551 1,192 2015 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 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 Source: Kenya National Bureau of Statistics. 67 March 2016 | Edition No. 13 Annex 8 | Horticulture exports Exports Exports value Year Month MT K Sh million 2014 January 18,494 8,376 February 19,640 7,729 March 18,834 9,741 April 20,569 6,636 May 19,858 7,533 June 18,237 6,536 July 17,114 6,138 August 16,459 5,203 September 18,488 5,479 October 19,638 7,380 November 17,089 7,815 December 15,825 5,517 2015 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 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 Source: Kenya National Bureau of Statistics. March 2016 | Edition No. 13 68 Annex 9 | Local electricity generation by source. Year Month Hydro Geo-thermal Thermal Total KWh million KWh million KWh million KWh million KWh million 2014 January 339 179 226 747 February 270 145 257 674 March 287 171 279 737 April 308 170 240 717 May 250 191 296 737 June 263 221 246 730 July 254 258 252 763 August 294 247 224 765 September 278 293 164 735 October 279 339 157 775 November 307 322 122 751 December 282 382 94 758 2015 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 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 Source: Kenya National Bureau of Statistics. 69 March 2016 | Edition No. 13 Annex 10 | Soft drinks, sugar, galvanized sheets and cement production Soft drinks Sugar Galvanized sheets Cement Year Month litres (thousands) MT MT MT 2014 January 39,007 64,298 22,090 454,960 February 39,146 60,044 18,573 442,636 March 40,320 63,365 21,267 478,416 April 37,885 47,279 25,989 468,022 May 40,430 44,094 27,433 464,695 June 28,706 42,866 24,465 464,929 July 33,790 55,912 21,779 503,428 August 33,404 50,140 25,733 492,801 September 35,899 47,915 26,126 499,479 October 41,601 42,197 26,732 553,186 November 40,134 34,455 25,763 545,041 December 49,142 64,298 18,539 492,944 2015 January 45,282 63,227 21,304 511,298 February 40,021 57,917 20,078 465,471 March 50,388 63,389 22,797 550,556 April 39,120 46,280 20,674 537,452 May 40,112 44,081 23,132 516,513 June 36,387 46,098 20,358 516,185 July 39,401 47,957 18,415 570,904 August 35,748 54,089 20,871 553,929 September 42,528 61,069 20,564 556,873 October 43,215 56,360 26,008 547,509 November 41,323 43,401 25,726 522,446 December 48,089 481,857 Source: Kenya National Bureau of Statistics. March 2016 | Edition No. 13 70 Annex 11 | Tourism arrivals Year Month JKIA MIA TOTAL 2014 January 75,906 19,853 95,759 February 50,270 18,334 68,604 March 76,561 15,041 91,602 April 59,357 7,293 66,650 May 54,334 3,967 58,301 June 42,549 4,758 47,307 July 78,902 7,764 86,666 August 82,465 10,962 93,427 September 53,743 6,778 60,521 October 52,606 6,323 58,929 November 51,480 7,153 58,633 December 65,427 9,570 74,997 2015 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 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 20,015 9,070 59,085 Source: Kenya National Bureau of Statistics. 71 March 2016 | Edition No. 13 Annex 12 | New vehicles registration Year Month All body types (number) 2015 January 15,411 February 17,779 March 15,629 April 12,789 May 14,109 June 14,011 July 16,490 August 32,401 September 24,390 October 17,214 November 17,226 December 20,608 2015 January 15,366 February 17,409 March 25,067 April 20,730 May 22,837 June 25,070 July 21,132 August 17,381 September 18,595 October 18,740 November 23,209 December 22,308 Source: Kenya National Bureau of Statistics. March 2016 | Edition No. 13 72 Annex 13 | Exchange rate Year Month USD UK pound Euro 2014 January 86.2 142.0 117.5 February 86.3 142.8 117.8 March 86.5 143.8 119.6 April 86.7 145.1 119.8 May 87.4 147.3 120.1 June 87.6 148.1 119.2 July 87.8 150.0 118.9 August 88.1 147.2 117.4 September 88.8 145.0 114.7 October 89.2 143.7 113.2 November 90.0 142.0 112.3 December 90.4 141.5 111.5 2015 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 July 101.2 157.5 111.4 August 102.4 159.8 114.1 September 105.3 161.5 118.2 October 102.8 157.4 115.3 November 102.2 155.4 109.8 December 102.2 153.3 111.1 Source: Central Bank of Kenya. 73 March 2016 | Edition No. 13 Annex 14 | Interest Rates Short-term Longterm Interbank 91-Treasury Central Average Savings Overall Interest bill bank rate deposit weighted rate spread rate lending rate 2014 January 10.4 9.3 8.5 6.6 1.6 17.0 10.5 February 8.8 9.2 8.5 6.6 1.5 17.1 10.5 March 6.5 9.0 8.5 6.6 1.6 16.9 10.3 April 7.4 8.8 8.5 6.5 1.5 16.7 10.2 May 7.8 8.8 8.5 6.4 1.5 17.0 10.6 June 6.6 9.8 8.5 6.6 1.5 16.4 9.8 July 8.1 9.8 8.5 6.6 1.3 16.9 10.3 August 11.8 8.3 8.5 6.5 1.5 16.3 9.8 September 7.4 8.4 8.5 6.6 1.5 16.0 9.4 October 6.8 8.7 8.5 6.6 1.6 16.0 9.4 November 6.9 8.6 8.5 6.7 1.5 15.9 9.2 December 6.9 8.6 8.5 6.8 1.8 16.0 9.2 2015 January 7.1 8.6 8.5 6.7 1.6 15.9 9.3 February 6.8 8.6 8.5 6.7 1.5 15.5 8.8 March 6.9 8.5 8.5 6.6 1.5 15.5 8.8 April 8.8 8.4 8.5 6.6 1.9 15.4 8.8 May 11.2 8.3 8.5 6.6 1.5 15.3 8.7 June 11.8 8.3 10.0 6.6 1.9 15.5 8.8 July 13.5 10.6 11.5 6.3 1.4 15.8 9.4 August 18.5 11.5 11.5 6.9 1.5 15.7 8.8 September 19.9 14.6 11.5 7.3 1.7 16.6 9.3 October 14.8 21.7 11.5 7.5 1.7 16.6 9.0 November 8.8 12.3 11.5 7.6 1.4 17.2 9.6 December 7.3 9.8 11.5 7.9 1.6 17.4 9.5 Source: Central Bank of Kenya. March 2016 | Edition No. 13 74 75 Annex 15 | Credit to private sector Other activities Agriculture Business services growth rates Total private Manufacturing Trade construction insurance Real estate rying Mining and quar- Private communication durables Consumer Finance and sector annual Building and Transport and households January 20.5 -1.1 12.8 18.6 0.1 23.1 -13.6 23.3 -16.3 35.6 20.2 50.1 24.6 February 21.5 3.4 16.8 20.2 5.4 31.2 12.1 24.0 -14.0 30.9 20.4 48.1 15.1 March 2016 | Edition No. 13 March 22.7 7.7 17.3 25.2 2.0 44.8 39.0 28.4 -8.6 44.0 22.5 45.5 -14.6 April 23.9 16.1 22.8 24.5 4.4 45.4 31.2 33.2 5.9 35.2 21.8 51.0 -15.5 May 25.0 16.7 28.5 25.4 10.7 50.1 26.5 31.6 9.2 24.7 22.0 44.0 -3.4 June 25.8 17.9 31.7 24.4 15.1 44.3 31.2 27.5 30.7 28.3 20.6 38.2 3.0 2014 July 25.5 18.8 27.5 25.9 9.4 42.3 37.8 30.8 24.3 30.2 20.3 36.5 1.8 August 24.5 20.9 27.0 25.1 10.8 46.1 42.6 29.4 19.6 27.8 18.4 31.7 -0.2 September 24.5 30.8 35.2 20.7 11.8 43.8 40.4 36.5 -0.5 23.8 16.4 44.1 -12.3 October 23.6 36.8 32.7 18.7 10.3 45.4 75.1 35.7 3.5 38.0 11.4 27.5 -24.8 November 22.2 32.1 29.8 19.7 11.3 45.2 66.9 31.6 1.9 38.9 12.4 28.9 -29.9 December 22.2 27.9 30.7 21.2 13.6 45.6 68.4 32.4 -15.8 39.1 18.7 25.0 -32.3 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 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 Source: Central Bank of Kenya. Annex 16 | Money aggregate Growth rates Broad money Money ( M1 ) Money ( M0 ) Reserve (yoy) supply ( M2 ) money 2014 January 16.7 19.9 10.6 10.3 February 17.8 20.3 5.0 9.9 March 19.0 20.4 4.5 7.7 April 16.1 16.9 8.4 17.7 May 18.4 19.9 9.2 11.9 June 18.8 21.3 6.9 12.6 July 18.8 18.9 8.6 7.3 August 20.0 21.0 7.9 15.2 September 17.1 12.6 7.9 11.2 October 18.4 12.9 6.3 13.5 November 17.8 13.5 4.2 9.3 December 18.6 13.2 6.2 18.5 2015 January 17.8 12.7 6.2 14.5 February 17.6 11.5 8.1 19.1 March 16.8 11.1 9.1 16.8 April 16.9 11.8 10.1 15.6 May 16.2 11.8 10.0 12.9 June 16.2 11.0 10.5 14.0 July 15.8 10.9 11.0 18.6 August 15.6 11.1 10.9 14.5 September 14.3 10.7 10.9 15.2 October 13.5 10.0 10.5 14.7 November 12.6 December 12.5 Source: Central Bank of Kenya. March 2016 | Edition No. 13 76 Annex 17 | Mobile payments Month Number of Number of Number of Value of agents customers transactions transac- (Millions) (Millions) tions (Billions) 2014 January 114107 25.8 67.1 178.5 February 115015 26.1 65.6 172.8 March 116196 26.2 74.0 192.7 April 116581 26.1 72.1 186.7 May 117807 25.8 74.5 198.1 June 120781 25.9 74.0 189.9 July 122462 26.2 77.5 201.0 August 124708 26.3 78.9 206.7 September 124179 26.3 78.2 206.3 October 128706 26.0 82.9 210.3 November 121419 24.9 81.0 203.2 December 123703 25.2 85.6 225.5 2015 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 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 28.5 102.8 255.8 November 142386 30.1 101.3 236.4 December 143946 31.6 107.4 267.1 Source: Central Bank of Kenya. 77 March 2016 | Edition No. 13 Annex 18 | Nairobi stock exchange (20 share index) and the Dow Jones (New York) Year Month NSE (1966 = 100) Dow Jones 2014 January 4856 15,699 February 4933 16,322 March 4946 16,458 April 4949 16,581 May 4882 16,717 June 4885 16,827 July 4906 16,563 August 5139 17,098 September 5256 17,043 October 5195 17,391 November 5156 17,828 December 5113 17,823 2015 January 5212 17,165 February 5491 18,133 March 5248 17,776 April 5091 17,841 May 4787 18,011 June 4906 17,620 July 4405 17,690 August 4176 16,528 September 4173 16,285 October 3869 17,664 November 4016 17,720 December 4041 17,425 Source: Nairobi Securities Exchange and New York Stock Exchange. March 2016 | Edition No. 13 78 Annex 19 | Nominal and real exchange rate Year Month NEER REER 2003 = 100 2003 = 100 2014 January 116 62 February 116 62 March 117 62 April 117 62 May 118 62 June 118 62 July 118 62 August 118 61 September 118 61 October 118 61 November 118 61 December 117 60 2015 January 117 59 February 117 59 March 116 58 April 118 58 May 122 60 June 124 61 July 127 63 August 129 63 September 132 64 October 129 63 November 127 62 December Source: Central Bank of Kenya 79 March 2016 | Edition No. 13 Annex 20 | 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** Revenue and grants 19.8 18.9 20.5 19.9 19.2 19.7 19.9 19.9 21.5 Total revenue 18.7 18.2 19.4 19.4 18.8 19.3 19.3 19.4 20.3 Tax revenue 17.1 17.0 17.9 17.7 17.1 17.3 18.2 18.1 18.7 Income tax 6.8 6.9 7.2 7.5 7.8 8.3 8.9 8.9 9.1 VAT 4.8 4.7 4.9 5.0 4.4 4.1 4.6 4.6 4.6 Import duty 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 1.3 Excise duty 2.7 2.6 2.5 2.3 2.0 1.9 2.0 2.0 2.3 Other revenues 1.4 1.4 2.0 1.5 1.6 1.7 1.3 1.3 1.4 Railway levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Appropriation-in-aid 1.5 1.2 1.6 1.7 1.7 2.0 1.1 1.3 1.7 Grants 1.1 0.7 1.0 0.5 0.4 0.5 0.5 0.5 1.1 Expenditure and net lending 23.1 22.3 24.0 23.5 23.7 25.2 25.8 28.7 29.6 Recurrent 17.4 16.3 16.9 17.2 16.3 18.2 15.6 15.7 15.4 *Provosional ** Revised budget Wages and salaries 6.3 5.8 5.7 5.8 5.5 6.1 5.6 5.1 5.2 Interest payments 2.1 1.9 2.1 2.2 2.1 2.7 2.7 3.0 3.0 Development and net lending 5.7 6.0 7.1 6.4 7.4 6.8 6.3 8.9 10.1 Transfer to counties 0.0 0.0 0.0 0.0 0.0 0.2 3.8 4.0 4.1 Parliamentary service 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.4 0.4 Judicial service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 Fiscal balance Deficit excluding grants (commitment basis) -4.4 -4.0 -4.6 -4.2 -4.9 -5.8 -6.4 -9.4 0.0 Deficit including grants (commitment basis) -3.3 -3.4 -3.6 -3.6 -4.5 -5.4 -5.9 -8.8 -8.1 Deficit including grants (cash basis) 0.3 -4.4 -5.8 -3.4 -4.5 -5.4 -5.9 -8.6 -8.1 Source:Quarterly Budget and Economic Review, August2015 (National Treasury) and Kenya National Bureau of Statistics. Financing Foreign 0.3 1.5 0.8 0.8 2.8 1.9 2.1 3.8 5.4 Domestic borrowing -0.6 2.8 5.0 2.6 1.6 3.8 4.0 4.4 2.6 Public debt to GDP (net) 33.4 35.4 36.6 39.1 37.0 38.5 44.0 45.6 46.5 External debt 19.1 20.2 18.9 21.0 19.4 18.7 22.6 25.0 26.3 March 2016 | Edition No. 13 Domestic debt 18.6 19.5 21.9 22.2 21.5 23.3 25.5 24.9 24.0 Memo: 80 GDP (Calendar year current market prices, KSh billions) 2483.1 2863.7 3169.3 3725.9 4261.2 4730.8 5357.7 GDP (Fiscal year current market prices, KSh billions) 2317.2 2673.4 3016.5 3447.6 3993.5 4496.0 5044.2 5703.3 6443.0 Annex 21 | County Fiscal position 2013-14 2014-15 2015-16 Budget Actual Budget Actual Budget Expenditure 228.6 169.4 326.2 258.9 361.1 Development 123.4 36.6 144.9 90.4 160.7 Recurrent 165.2 132.8 181.3 167.5 200.4 Revenue 280.8 224 338.1 304.2 373.7 Equitable Share 213.4 193.4 242.4 226.7 259.7 Equalization Fund 190 226.7 Local revenue 67.4 26.3 50.4 33.9 56.6 Grants 16.5 2.57 27.2 Conditional Grants 15.8 1.87  25.9 DANIDA Grant[1] 0.7 0.7 0.8 World Bank[2] 0.5 Balance brought forward 4.3 38.1 41.7 30.2 Balance -7.8 54.6 17.9 46.2 12.6 Pending Bills (as of end-June) 37.6 Source: The Office of the Controller of Budget [1] DANIDA Grant to supplement financing for county health facilities [2] World Bank Grant to supplement financing of county health facilities 81 March 2016 | Edition No. 13 Annex 22 | 12-months cumulative balance of payments 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 1. CURRENT ACCOUNT -511 -1034 -1973 -1671 -2512 -3330 -4253 -4786 -6097 -4366 Balance of trade -2226 -2996 -4260 -3892 -4642 -6440 -6893 -7584 -8049 -6998 2. MERCHANDISE ACCOUNT -3817 -4936 -6444 -5768 -7169 -9007 -10539 -11229 -12719 -12340 2.1 Exports (fob) 3516 4132 5048 4528 5225 5807 6183 5822 6174 5875 Coffee 138 166 155 201 209 222 269 192 232 214 Tea 656 693 924 892 1159 1153 1199 1215 1069 1205 Horticulture 509 607 763 692 725 678 695 741 808 767 Manufactured goods 422 513 625 526 608 729 700 705 592 517 Other 1792 2153 2580 2216 2525 3026 3320 2969 3473 3172 2.2 Imports (cif) 7333 9069 11492 10296 12395 14814 16722 17051 18893 16443 Oil 1745 1919 3051 2192 2673 4081 4081 3838 4026 2587 Chemicals 1004 1156 1446 1324 1603 1947 2076 2279 2388 2455 Manufactured goods 1065 1435 1589 1411 1774 2250 2302 2624 2677 2754 Machinery and transport equipment 2252 2800 3063 3065 3808 3686 4748 4600 6128 5508 Other 1267 1759 2343 2304 2537 2848 3251 3593 3673 3139 3. SERVICES 3306 3902 4470 4097 4657 5676 6286 6443 6622 6202 3.1 Non-factor services 1591 1940 2184 1876 2527 2566 3645 3646 3373 3569 3.2 Income account -70 -143 -45 -38 -158 7 -164 -339 -528 -491 3.3 Current transfers account 1785 2106 2331 2259 2288 3103 2804 3137 3777 3123 of which remittances 408 574 611 609 642 891 1171 1291 1428 1544 March 2016 | Edition No. 13 82 83 Annex 22 | 12-months cumulative balance of payments (continued) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 4. CAPITAL & FINANCIAL ACCOUNT 1186 1888 1505 2451 2675 3288 5514 5471 7475 4305 4.1 Capital account 211 267 294 290 154 235 235 98 24 110 4.2 Financial account 975 1621 1210 2161 2522 3053 5278 5373 7451 4195 4.2.1.1 Official, medium and long-term -202 -16 106 466 308 340 1147 592 2289 3355 Source: Central Bank of Kenya. March 2016 | Edition No. 13 4.2.1.2 Private, medium and long-term 38 592 72 44 176 35 -87 -258 981 444 4.2.1.2.3 Direct investment (FDI) -11 438 153 127 106 107 107 218 1023 439 * Cumulative 12 months to November 2015 4.2.1.3 Commercial banks (net) -156 -5 15 494 61 -213 854 49 666 97 4.2.2 Short term and net errorsand 1296 1050 1017 1158 1977 2891 3364 4989 3515 299 omissions (NEO) Short term (including portfolio flows) 714 1032 995 577 1130 1678 2429 2579 2763 2992 Net errors and omissions (NEO) 582 18 22 581 847 1213 935 2410 752 -2694 5. OVERALL BALANCE 675 854 -469 781 163 -43 1261 685 1378 -60 Memo: Gross reserves 3331 4557 4641 5064 5123 6045 7160 8483 9738 9411 Official 2415 3355 2875 3847 4002 4248 5702 6560 7895 7161 Commercial banks 916 1202 1765 1217 1121 1797 1458 1923 1843 2250 Imports cover (calender year) 3.5 4.0 2.7 4.1 3.5 3.1 3.8 4.3 4.6 4.8 Import cover (36 mths imports) 3.9 4.8 3.4 4.1 3.9 3.7 4.3 4.5 5.0 4.6 GDP market price (Kshs billion) 1862 2151 2483 2864 3169 3726 4261 4731 5358 5632 GDP market price (US$ billiom) 25.8 32.0 35.9 37.0 40.0 42.0 50.4 54.9 60.9 60.5 Annex 23 | Growth Outlook Annual growth (percent) 2014 2015e 2016f 2017f 2018f BASELINE GDP Revised projections 5.3 5.6 5.9 6.1 6.2 Previous projections (KEU 12) 5.3 5.4 5.7 6.1 Private consumption 5.5 5.2 6.0 6.0 6 Government consumption 2.7 14.7 10.4 7.6 7.6 Gross fixed capital investment 11.1 8.4 9 9.3 9.3 Exports, goods and services 2.3 2.0 3.0 4.8 4.8 Imports, goods and services 9.7 8.7 8.7 8.2 8.2 Agriculture 3.5 3.9 3.5 3.6 3.6 Industry 6.5 5 5 5.2 5.2 Services 5.8 5.5 5.7 5.2 5.2 Current account balance, % of GDP -10.4 -7.1 -6.0 -5.4 -5.3 Fiscal balance, % of GDP -7.2 -8.3 -7.5 -6.4 -5.1 Source: World Bank. Note: e(estimate); f(forecast) March 2016 | Edition No. 13 84 Annex 24 | Average growth and share of Kenya’s exports: 2010-15 85 March 2016 | Edition No. 13 March 2016 | Edition No. 13 86 Annex 25 | Kenya Exports to COMESA, 2010-2015. Figures in KSh Millions 2010 2011 2012 2013 2014 2015 Congo DR 12,792 17,537 18,427 18,437 21,052 20,673 Egypt 18,116 23,422 21,464 17,001 17,509 20,166 Ethiopia 4,385 4,826 4,578 4,885 6,919 7,154 Malawi 4,262 5,818 4,694 3,497 3,326 3,047 Sudan 18,814 22,153 24,597 23,105 26,064 26,979 Zambia 4,688 6,138 6,667 6,288 6,668 5,909 Top COMESA 63,057 79,894 80,427 73,213 81,538 85,945 Other 4,652 6,216 6,395 5,997 5,366 3,957 Total COMESA 67,709 86,110 86,822 79,210 86,904 89,901 Source: KNBS Economic Survey 2015 (data for the period 2010-2014) and KNBS 2015 data (unpublished) Annex 26 | Kenya exports to the EU and EU imports from extra-EU countries of product categories that Kenya has an export interest in the EU market Kenya Exports EU 28Countries Imports from Products Kenya's share (%) (2010-2014) the World (2011-2014) Fish (HS03) 15,992,622 81,854,806,666 0.02% Cut Flowers & Plants (HS06) 1,643,652,240 8,531,398,651 19.27% Vegetables (HS07) 573,399,826 20,508,853,799 2.80% Fruits and Nuts (HS08) 99,413,432 78,142,606,690 0.13% Coffee & Tea (HS09) 1,305,037,361 52,730,974,211 2.47% Oil seeds, medicinal plants (HS12) 17,272,016 50,518,230,969 0.03% Vegetable plaiting materials and vegetable 79,420,238 1,087,305,658 7.30% products (HS14) Kenya Exports EU 28Countries Imports Kenya's share Products (2010-2014) from the World (2011-2014) (%) Animal and Vegetable fats and oils (HS15) 7,265,965 46,681,242,234 0.02% Processed fish and meat products (HS16) 55,245,979 29,111,006,251 0.19% Preparations of cereals, flour, starch or milk (cereals, 8,584,412 6,458,898,448 0.13% pasta, etc.) - HS 19 Preparations of vegetables, fruits, nuts or other parts 473,738,040 26,270,183,006 1.80% of plants (frozen vegetables, etc.) - HS 20 Tobacco and manufactured tobacco substitutes (HS 24) 89,401,652 13,954,355,994 0.64% Salt, sulphur; earths and stone; plastering materials 76,775,408 22,759,554,275 0.34% lime and cement (HS25) Textile and Apparel (HS61-63) 16,061,958 415,163,253,570 0.004% Source: EAC Trade Help Desk - http://tradehelpdesk.eac.int/ (Kenya exports to the EU) and EU Export Help Desk - http://exporthelp.europa.eu/ (for EU Extra-EU Imports) 87 March 2016 | Edition No. 13