Uhuru battles to fix a virtually stagnant economy

By JAMES ANYANZWA and MACHARIA KAMAU

NAIROBI, KENYA: Taking economic growth as the base, everything that could have gone wrong during Uhuru Kenyatta’s first year as President did just that.

His Jubilee Administration faces a delicate balancing act in its bid to grow a stagnating economy, control the ballooning public sector wage bill, reach out to the poor and vulnerable, and deliver on pre-election promises that could determine the likelihood of winning a second term in office.

But with several economic engines virtually knocked out, Kenya has been running on one motor the last three years — the so-called emerging sector, which envelopes mobile money transfer services, mining and Internet activity. 

However, even the motor for these high-growth sectors is slowing.

The economy grew by a modest 4.7 per cent against analysts’ projections of between 5 and 5.5 per cent, and the Government’s forecast of 6 per cent.

And as the Government eyes double-digit growth, it is emerging that the sectors expected to drive the economy to middle-income status by 2030 may not do so, calling for a major policy shift.

ECONOMIC PILLAR

The economic pillar for the Government’s long-term development plan was crafted to improve the prosperity of all Kenyans by achieving and maintaining a sustained economic growth rate of at least 10 per cent from 2012.

However, in October last year, the double-digit growth target date was revised to 2017. This is contained in the second Medium Term Plan (MTP) that covers the 2013-2017 period.

But the economy’s lacklustre performance is raising concerns over whether this dream is tenable in the near term.

The economy grew by 4.6 per cent in 2012, and 4.7 per cent in 2013. The National Treasury projects a growth rate of 5.8 per cent this year and seven per cent by 2017.

However, at the current pace of growth — 0.1 per cent per year — and if all things remain constant, the country will achieve 10 per cent growth in 2057.

“First, I don’t think we are on track with Vision 2030, but I think we have the time to get on track. We are not spending enough to develop the country. Our recurrent expenditure is still too high,” said Mr Nikhil Hira, a tax partner at Deloitte East Africa.

“I firmly believe that the economy can pick up in a big way if we put the right policies in place.”

Rising incidences of insecurity, increased costs of living, growing public debt and a fragile economy appear to be   the Government’s biggest headaches.

In the first Medium Term Plan (2008-2012), former President Mwai Kibaki’s regime identified six priority sectors that contribute more than 50 per cent of the total value of the products and services Kenya produces in a year, otherwise known as its Gross Domestic Product (GDP).

These sectors also account for nearly half of the country’s total formal employment.

They were agriculture, manufacturing, tourism, wholesale and retail trade, IT-enabled services, and financial services.

But a closer look at these critical sectors shows they have not performed to expectations, and may require key policy interventions to turn them around.

AGRICULTURE

The performance of the agricultural sector, which contributes about 23 per cent of the country’s GDP, declined last year.

Poor rainfall and unfavourable international prices for key export crops dampened the sector’s growth to 2.9 per cent in 2013, against growth of 3.8 per cent in 2012.

But according to the Government’s Economic Survey 2014, the credit extended to the sector from commercial banks expanded by 3.9 per cent in 2013 from 7.4 per cent in 2012.

The overall value of marketed production slowed to Sh344.61 billion from Sh334.73 billion, partly due to depressed production of certain major crops like maize, beans, coffee, cut flowers and fruits.

The sector was, however, boosted by increased production of tea, wheat, vegetables, potatoes and sugarcane on account of the good prices paid to farmers last year.

In the horticulture sub-sector, the value of marketed fresh produce declined by 7.9 per cent last year as a result of low export volumes and depressed unit prices in the international market. Failed rains this year could make things worse.

MANUFACTURING

The sector has high potential for employment creation, is a stimulus for growth of other sectors such as agriculture, and offers significant opportunities for export expansion.

It accounted for 8.9 per cent of GDP and provided 12.4 per cent of the jobs created in the formal sector in 2013.

The industry is among the few performers, growing 4.8 per cent in 2013 compared to 3.2 per cent the previous year.

But analysts note that manufacturing can grow by larger margins if basics, such as cheaper electricity and good infrastructure, are put in place.

According to economists at the Kenya Institute for Public Policy Analysis and Research (Kippra), the sector’s below-par performance is a result of drought, high costs of production and credit, and competition from imported goods.

Its contribution to GDP declined to 9.2 per cent in 2012 from 9.6 per cent in 2011, and its contribution to total wage employment has gradually worsened to 12.9 per cent in 2012 from 13.9 per cent in 2008.

Kippra notes that the cost of doing business is a major concern for manufacturing firms in developing countries, and has dominated policy debates due to its adverse consequences on investments and profitability.

In their Kenya Economic Report 2013, the institute pointed out that the influx of counterfeits and volatility in international oil prices also affects the sector’s performance.

Manufacturing in Kenya is predominantly agro-based, but in newly industrialised countries, food manufacturing constitutes a small share, with the manufacture of chemicals, electronics and machinery constituting over 40 per cent of the total value added.

According to analysts, revitalising the sector requires policy incentives geared towards high-value manufacturing, inter-firm linkages and enhanced foreign direct investments (FDI).

TOURISM

The story of the tourism sector reads like that of athletes at the top of their game who are set back by an injury and their chances of recovery get worse and worse the longer they are benched. 

The industry has suffered major setbacks in recent years, each leaving it weaker.

Last year was no an exception and the sector’s performance declined.

The number of international visitors decreased by 11.2 per cent from 1.71 million in 2012 to 1.51 million in 2013.

Sector earnings fell by 2.1 per cent from Sh96 billion in 2012 to Sh94 billion in 2013.

Further, the hotel bed-nights utilisation rate declined by 3.9 per cent, compared to a decline of 2.2 per cent in 2012. The drop in occupancy rate is particularly attributed to a decline in tourists arriving from traditional source countries in Europe for hotels at the Coast.

According to the Government, visitor arrivals declined in the third quarter of last year due to a fire accident that damaged the international arrivals lounge at the Jomo Kenyatta International Airport (JKIA) in August.

Other factors that contributed to the drop include the increasing number of insecurity incidences and sluggish economic growth in tourist source markets.

The sector’s performance fell below medium-term targets, underscoring the need for the Government to implement strategies to reverse its dwindling fortunes.

These include increased investment in infrastructure, improved security, implementation of Vision 2030 flagship projects like resort cities, and continued diversification of source markets.

TRADE

Wholesale and retail trade form the largest component of domestic trade and provide opportunities for employment. The sector has played an important role in the growth and development of the economy.

However, according to official data, Kenya’s total exports declined by 3 per cent from Sh517.8 billion in 2012 to Sh502 billion in 2013.

Total imports increased by 2.8 per cent from Sh1.37 trillion in 2012 to Sh1.41 trillion in 2013.

This has led to the export-import ratio deteriorating from 37.7 per cent in 2012 to 35.5 per cent in 2013, which generally means the country is paying more for imported items that it is receiving for goods it produces.

The trade balance also deteriorated by 6.3 per cent in 2013 mainly on account of a reduction in domestic exports.

ICT

The communications arm of the sector grew by 6.2 per cent in 2013, but this was lower than the 8.6 per cent increase it registered in 2012.

The general industry was, however, on the rise, with the number of mobile connections and Internet subscriptions increasing.

The number of mobile connections rose from 30.4 million in 2012 to 31.2 million in 2013, while Internet subscriptions rose from 8.5 million in 2012 to 13.3 million in 2013.

The amount of money transacted through mobile money transfer services also grew from Sh672 billion in June 2012 to Sh914 billion as at June 2013.

FINANCIAL SERVICES

The sector generally performed well last year, with activity at the Nairobi Securities Exchange (NSE) increasing.

The benchmark NSE 20-Share Index went up 19.2 per cent to 4,927 points from 4,133 points in 2012. The total number of shares traded increased by 38.7 per cent to 7.6 billion from 5.5 billion over a similar period.

Shareholders’ wealth, which is measured by market capitalisation, increased 51 per cent to Sh1.92 trillion from Sh1.27 trillion in 2012.

Further, the assets of the insurance sector grew by 18.4 per cent to Sh358 billion in 2013.

The general insurance business increased 10.6 per cent to Sh129 billion, while assets of the life insurance business grew 24.1 per cent to Sh195.9 billion.

According to the Economic Survey 2014, liabilities of the entire insurance industry amounted to Sh259.8 billion, representing a 14.2 per cent growth from 2012.

Gross premiums in the sub-sector also increased last year, going up 20.6 per cent to Sh131 billion from Sh108.6 billion the previous year.

bizbeat@standardmedia.co.ke