State of economy: Prioritise fundamentals for sustained growth and stable exchange rate

Corporate margins are shrinking with increased taxation and high interest rates. [iStockphoto]

Over the past two decades, Kenya has made significant political and economic reforms that have contributed to sustained economic growth, social development, and political stability. 

However, its key development challenges still include poverty, inequality, youth unemployment, climate change, weak private sector investment and the economy’s vulnerability to internal and external shocks.  

Moreover, increasing reliance on imports, elevated commodity prices, high interest rates limiting access to credit, exacerbating debt servicing costs; significant losses and damages due to frequent extreme weather events like the prolonged drought in 2022 and flooding in 2023; weakening shilling against the dollar among other shockers continue to hamper sustained growth.

The corporate margins too are shrinking with increased taxation and high interest rates which restrict borrowing, curtail spending, and increase investment and employment. 

The potential loss of foreign aid and investments has further been exacerbated by the greylisting of Kenya by the Financial Action Task Force. This potentially dents investor confidence and Kenya’s reputation as a stable, pro-business destination for investment and transparent financial hub will be compromised potentially discouraging the much-needed investment, foreign direct investment, venture capital and debt.   

The government through the Bottom-Up Economic Transformation Agenda envisages policy interventions to reduce the cost of living, create opportunities for the youth and institute measures that would enhance revenue growth and sustainability of the economy.

Whereas these measures are geared towards aligning the country’s long-term development agenda to Kenya’s Vision 2030−which aims to transform Kenya into a competitive and prosperous country with a high quality of life, there is a need to review critical factors that inhibit the absolute growth of our economy.  External capital flows play a significant role in driving investment and economic growth in financial resource-constrained countries such as Kenya.

As such, addressing the vulnerability of a country’s foreign direct investment flows to external shocks is a key area for policy intervention. 

Concerns persist regarding the future performance of the shilling, fueled by existing market pressures, dwindling foreign exchange reserves and escalating levels of national debt.

It is imperative to critically assess the fundamentals that would determine whether the shilling will continue gaining or will be on a free fall yet again. 

A weak shilling not only leads to expensive inputs like fuel and fertiliser but also results in high debt service costs for the numerous dollar-denominated loans.  

Sustained stabilising of the Kenya shilling against the dollar will require a combination of monetary and fiscal policies aimed at managing exchange rate fluctuations, incentivising production, continued shift to more concessional funding; promoting import substitution policies and increased focus on industrialisation. 

Undoubtedly, there is a need for a robust expansion of Kenya’s global footprint as an export source of both labour and product base.

Such an export-oriented economy will improve the country’s current account while reducing overreliance on imports. The manufacturing sector’s contribution to GDP remains low, coming in at only 8.3 per cent in the third quarter of last year.

There should be a deliberate effort to invest in agricultural production, value-addition, processing and improving the different associated value chains. 

A bold measure to zero-rate all agricultural inputs including animal feeds produced in Kenya will make Kenyan farmers and manufacturers produce enough crops and animal products enough for local consumption and export.

Increased focus on agriculture will not only spur production and manufacturing but also create more jobs, reduce expenditure on health due to a healthy population, reduce inflation, boost the exchange rate as well as reduce carbon emission. 

Deliberate actions to spur the growth of the Micro, Small and Medium Enterprises (MSME) sector by improving the ease and reducing the cost of doing business should be prioritised.

The top priority should be to reduce the multiplicity of levies, fees and taxes imposed on businesses.

This can be done by streamlining the different government regulatory and licencing agencies, in a way that makes it easier for entrepreneurs to form business ventures, operate and transact. As businesses grow, they create employment and contribute to tax revenues.  

Kenya must also address the narrow tax base challenge, administrative constraints, low tax morale, and complexity in taxing emerging digital economy by adopting a single identifier of all persons, restructuring our address system, digitising government processes, collaborating with both levels of government, enhancing transparency and accountability of public expenditure to boost revenue mobilization and enhance economic efficiency.