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Kenya in middle-income league, but are we really better off?

NEWS
By MARK KAPCHANGA | April 20th 2014
Nearly half of Kenyans are poor. Economists say the change in GDP/income per capita will only happen on paper. Personal conditions will remain unchanged even after rebasing.

By MARK KAPCHANGA

Imagine this: Adam Tumbo migrates from his rural home to Nairobi having secured a job in a construction project in the city. Mr Tumbo secures the job as a mason, not that he is a skilled mason but he had connections from a relative and he can “learn on the job.”

His new, masonry job, will pay him twice as better compared with the earnings he gets from his one eighth of an acre farm back home. And so Mr Tumbo migrates to the “city in the sun”, leaving his wife and one year old baby girl behind.

Now, assuming Mr Tumbo’s wife continues farming, the total value of the services and goods produced by the Tumbo household (their gross domestic product or GDP) will have increased.  The statisticians will now have to calculate, what the Tumbos earn from farming and what Mr Tumbo brings in from his mason job, this will be the new GDP.

Bearing in mind the new mason job, Tumbo Household GDP will be significantly higher compared to a few years back when they were into farming only.  But with the new GDP figures, are the Tumbos better off than they were? One thing is certain, the relatives who used to support Tumbo with remittances once a month will cut out giving him this financial aid. Second, Mr Tumbo will realise that life in the city is expensive compared with the rural area.

Thirdly, is that even though the Tumbos are producing more services and goods, their competitive advantage, as a household has not generally increased, especially in terms of their skills. Now, replace the Tumbo household with Kenya. Later on this year statisticians are expected to capture new growth sectors – such as the telecoms sector, like Tumbo and his earnings from masonry – in Kenya’s economy. This will mean the value of Kenya’s goods and services produced, will swell significantly. But the Treasury may later this year come under pressure later in the year to explain to millions of Kenyans why they are poor despite the expansion of the economy.

This follows the bid to puff up the gross domestic product (GDP), the most widely used measure of the economy, by about 20 per cent.

This means the size of the economy will swell to Sh4.65 trillion from about Sh3.87 trillion, making Kenya the fourth-largest economy in sub-Saharan Africa after Nigeria, South Africa and Angola.

The Kenya National Bureau of Statistics says the recalculation, which started four years ago, will boost coverage in key growing sectors of the economy such as mobile money and Internet activities. It will see the country attain a middle-income status in September amid the painful reality that 46 per cent of Kenyans, about 20 million people, are poor.

Revision of the GDP

The rebasing of the GDP, as is referred to, brings the national accounts in tandem with the new economic environment. It also changes the base year from 2001 to 2009. To ordinary Kenyans, this translates to increased school enrolment, better housing and healthcare and access to clean water.

But this will not be the case.

It would only give Kenya a greater positive outlook in terms of economic size, the debt to GDP ratio and the country’s per capita income. In most cases, governments aim for a low debt-to-GDP ratio, usually below 50 per cent, as an indication it produces and sells goods and services sufficient to pay back debts. For Kenya, this will be a huge opportunity to float the international bonds since the revision of the GDP enhances its credit worthiness for new borrowing worth about $2 billion (Sh172 billion) to fund infrastructure projects.

Moreover, it will underpin Kenya’s spot as one of Africa’s emerging economies, joining the league of Nigeria, Ghana and South Africa, and help improve on the country’s economic profile at the international scene.

X.N Iraki, Lecturer, University of Nairobi says rebasing will make it easier for investors and donors to better make decisions based on reality. “We now know the economic potential of the country. To most Kenyans, not much difference will be noted, only change in statistics and some feel good effect. If your plot bought 20 years ago is revalued, you only know its real value but you do not become richer,” said Dr Iraki.

According to the Kenya Institute for Public Policy Research and Analysis (Kippra) Policy Analyst Dickson Khainga, while Kenyans may not see an improvement in their incomes, the release of the new numbers in last quarter of this year will give Kenya a unique international standing in the eyes of investors and development partners.

Dr Khainga says the elevation means that some of the indicators of economic sustainability that Kenya has been using, such as wage bill to GDP, will have different meaning. For instance, the on-going debate on the public wage bill, which is hinged on the GDP ratio, will be much lower than the current 13 per cent. “The policy discourse will have to be based on more indicators.  The new numbers will thus be useful for proper planning and design of macroeconomic policies,” he said.

On the contrary, the much sought-after middle-income tag would translate to an improved-capacity indicator for Kenya. As such, it might not qualify for interest-free loans and grants from the World Bank. Yet, these have been key financial services from the Bretton Wood institution to the country to boost education, health, infrastructure and agriculture.

Last year, the World Bank gave Kenya Sh21.7 billion interest-free loan to support its fight against poverty. While economists concerned with the world development would be fascinated with the signals that the number of poor countries is reducing globally, critics argue the expected GDP makeover is a fallacy. They say there are slim indications that poverty numbers will fall. Food insecurity has further dimmed the country’s hope for economic prosperity as farmers battle the high costs of farm inputs. Furthermore, the distribution of better healthcare and education is uneven, and is usually pegged on income levels. The World Bank says secondary school enrolment is at a low 32 per cent. Moreover, maternal mortality in Kenya remains among the highest in Africa, with 488 deaths per 100,000 live births.

Economics lecturer at the University of Nairobi Joy Kiiru says the move will create an illusion that could see Kenya underestimate its liabilities. “The rebasing will make debt levels look small. This will entice the government to borrow more thus exerting massive inflationary pressure to the economy if the tax base is not expanded,” said Dr Kiiru. She says the revision would not take away the country’s infrastructural, insecurity and high cost of production challenges. “What is a number for if it cannot transform people’s lives?”

Another academic, Emmanuel Manyasa of Kenyatta University says the illusion of success could make the government slow its projects aimed at improving people’s livelihoods. “I do not know the benefits of rebasing the economy. It is not timely especially now when the economy is shaky,” said Dr Manyasa.

The development, analysts are warning, will just be like a public show, citing the case where Kenya has traditionally been referred to as East Africa’s largest economy, yet its people’s living standards are below that of its peers. A World Bank report released last week shows nearly half of Kenyans live in abject poverty. This is second to Burundi, which has 67 per cent of its population poor, followed by Rwanda at 44.9 per cent.

Purchasing power

The World Development Indicator report noted that Uganda has the lowest poverty levels at 24 per cent with Tanzania’s at 28 per cent.  Kenya also performed below par compared to its neighbours, with only 55 per cent of the rural population able to access clean and safe water. Burundi leads the pack at 73 per cent.

Opponents claim without knowing the basis of rebasing, the exercise would be useless. They cite the case in 2009 where Kenya revised its consumer price index calculation methodology to match international best practice.

The Government then stopped measuring inflation through the arithmetic method, and instead went geometric. Using the geometric method compresses the increase in the rate of inflation, and many analysts argue that it hides the symptoms of mismanagement of the economy, showing that all vital signs of the economy are well. In spite of inflation going down, prices of goods were still high, to-date.

To arrest disappointments from the expectant wananchi, economists say the government needs to boost their purchasing power by ruthlessly taming prices of basic commodities. Be as it may, Nairobi-based analyst Gitau Githongo says all is not lost in redeeming the country’s grip as an economic powerhouse.  “Even though some main contributors of the economy such as tourism and agriculture are not growing, devolution is unlocking huge potential in a range of sectors that could propel growth,” he said.

Early this month, Nigeria said it was rebasing its GDP, making it Africa’s biggest economy. World Bank’s Chief Economist in-charge of Africa, Francisco Ferreira, says the development has exposed its investment potential globally. According to Dr Ferreira, the rebasing, coupled with aggressive regional integration would drastically reduce the cost of doing business in Africa.

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