Kenya Country Report

KENYA COUNTRY REPORT
Prince Muraguri, Simón Ortiz and David Soler
MARCH 2018 KENYA COUNTRY REPORT 2018
The Kenya Country Report is a publication by the Navarra Center for International
Development. The report is a collection of the major economic, social and political indicators describing the Kenyan economy, obtained from reliable sources such as the World Bank, The International Monetary Fund, the Central Bank of Kenya and others.
In-depth analysis is conducted by the researchers at the Center to provide a holistic understanding of the opportunities and emerging trends in the highlighted indicators. TABLE OF CONTENTS
1. KENYA COUNTRY OVERVIEW .......................................................................................... 5
2. ECONOMY OVERVIEW OF KENYA ................................................................................... 7
3. KENYA GROSS DOMESTIC PRODUCT.............................................................................. 9
3.1 Kenya GDP Analysis .......................................................................................................... 9
3.2 Outlook of Kenya´s Economic Performance in 2018 ....................................................... 14
4. POPULATION IN KENYA.................................................................................................... 15
4.1 Background of Kenya´s Population .................................................................................. 15
4.2 Analysis of Population trends in Kenya............................................................................ 15
4.3 Age Structure .................................................................................................................... 17
4.4 Gender Structure in Kenya................................................................................................ 18
4.5 Work and Employment ..................................................................................................... 20
5. KENYAN TRADE AND BALANCE OF PAYMENTS........................................................ 21
5.1 Background of Kenya´s Trade .......................................................................................... 21
5.2 Kenyan Exports................................................................................................................. 22
5.3 Kenya Imports................................................................................................................... 25
5.4 Balance of Trade ............................................................................................................... 26
5.5 International Liquidity....................................................................................................... 29
5.6 Kenya Trade Outlook........................................................................................................ 30
6. GOVERNMENT FINANCE IN KENYA .............................................................................. 32
6.1 Background of Government Finance................................................................................. 32
6.2 Government Revenue........................................................................................................ 33
6.3 Government Expenditure.................................................................................................. 34
6.4 Public Debt ........................................................................................................................ 36
7. FINANCIAL MARKETS ....................................................................................................... 37
7.1 Background of Kenyan Markets ....................................................................................... 37
7.2 Capital Markets................................................................................................................. 38
7.3 Money Markets ................................................................................................................. 39
7.4 Currency Market ............................................................................................................... 41
8. MOBILE FINANCIAL SERVICES IN KENYA................................................................... 43
8.1 Background of Mobile Financial Services in Kenya......................................................... 43
8.2 Brief History on Commercial Banks in Kenya .................................................................... 44
8.2 Mobile Financial Services .................................................................................................. 47
8.3 Mobile Money................................................................................................................... 47 8.6 Agency Banking................................................................................................................ 49
8.7 Mobile Banking................................................................................................................. 51
9. EDUCATION IN KENYA............................................................................................................. 53
9.1 General Statements............................................................................................................ 53
9.2 Attendance and literacy..................................................................................................... 54
9.3 Role of the government in Education................................................................................ 57
10. CORRUPTION ..................................................................................................................... 59
10.1 Analysis of Corruption in Kenya .................................................................................... 59
11. STATE OF DEMOCRACY IN KENYA.............................................................................. 61
11.1 Analysis of Democracy Indicators .................................................................................. 61
11.2 Impact of Ethnicity on Elections in Kenya ..................................................................... 62
11.3 FREEDOM OF EXPRESSION AND CIVIL LIBERTIES ............................................ 63
11.4 Extra-Judicial Killings..................................................................................................... 63
11.5 Security Cost................................................................................................................... 64
11.6 Terrorism......................................................................................................................... 65
BIBLIOGRAPHY....................................................................................................................... 66 1. KENYA COUNTRY OVERVIEW
Kenya, officially the Republic of Kenya, is a country in Africa and a founding member of the East African Community (EAC). Kenya´s capital and largest city is Nairobi.
Kenya´s territory lies on the equator and overlies the East African Rift covering a diverse and expansive terrain that extends roughly from Lake Victoria and further south-east to the Indian Ocean. It is bordered by Tanzania to the south and southwest,
Uganda to the west, South-Sudan to the north-west, Ethiopia to the north and Somalia to the north-east. Kenya covers 581,309km2 (224,445 sq mi), and had a population of approximately 48 million people in January 2017.
The economy of Kenya is the largest by GDP in East and Central Africa. According to the 2017 World Bank GDP rankings, Kenya is the ninth largest economy in Africa and the fourth in Sub-Saharan Africa (World Bank Group, 2017). The capital, Nairobi, is a regional commercial hub. Agriculture is a major employer in Kenya; the country traditionally exports tea and coffee and has more recently begun to export fresh flowers to Europe. The service industry is also a major economic driver. Additionally, Kenya is a member of the East African Community trade bloc.
After attaining its independence in 1963, Kenya promoted rapid economic growth through public investment, encouragement of smallholder agricultural production, and incentives for private often foreign industrial investment. Gross domestic product (GDP) grew at an annual average of 6.6% from 1963 to 1973 and 7.2% during the 1970s.
Agricultural production grew by 4.7% annually during the same period, stimulated by redistributing estates, diffusing new crop strains, and opening new areas to cultivation.
Between 1974 and 1990, however, Kenya's economic performance declined. GSP growth averaged 4.2% per year in the 1980s and 2.2% a year in the 1990s (Kimenyi,
Njuguna, Mwega, 2016).
Kenya is a world leader in mobile money1 and has made significant progress in financial inclusion since 2007. Increasingly, Kenya has become a center of innovation especially in mobile phone-based financial services, whose growth and employment opportunities have ignited economic growth in the economy. Kenya has also been an important player in the horticulture export market. The country has a youthful population and is well positioned to reap the population dividend. In addition, the 1 Kenya is home to the world´s leading mobile money platform – M-Pesa.
country discovered oil in 2012 in the Northern Turkana region and it is likely to be an oil exporter in the near future and will join Uganda and South Sudan. The Kenyan economy serves five landlocked countries that are relatively resource-rich (Ethiopia,
South Sudan, Uganda, Rwanda, and Burundi). Therefore, Kenya´s comparative advantage lies in improving its port facilities, road and railway networks, and transit airports as trade routes for these five countries. Even more significant has been the strengthening of the institutions of governance through the 2010 enactment of a progressive constitution that radically altered the previous dominance of the executive.
At the core of the new constitutional dispensation is devolution of decision-making powers to 47 county governments. All these factors augur well for continued strong economic performance.
However, the country’s future growth faces several pitfalls even with the above set of opportunities. Some of the risk factors include: first, the emerging terrorist attacks by the Al-Shaabab group based in Somalia which has adversely impacted the country’s economy; second and increasingly, although the country has recorded high rates of economic growth, joblessness especially among the youth remains very high and a likely source of instability; and third, poverty and inequality both at individual and regional levels remain high and pose threats not only to sustained growth but also to stability. In addition, internal institutional weaknesses and governance challenges threaten the gains of the new constitution. These and other risk factors are of concern to the country’s ability to sustain growth and retain its position as a dominant economy.
More recently, there have been growing concerns over the ballooning public debt and an interest rate cap that has slowed down private sector credit growth.
This report seeks to analyze the main economic indicators of the Kenyan economy, to provide a holistic understanding of the opportunities and emerging trends in various economic sectors. 2. ECONOMY OVERVIEW OF KENYA
Kenya´s economy is market-based with a few state-owned infrastructure enterprises and maintains a liberalized external trade system. The country is generally perceived as
Eastern and central Africa's hub for Financial, Communication and Transportation services. Major industries include: agriculture, forestry and fishing, mining and minerals, industrial manufacturing, energy, tourism and financial services. As of 2016 estimates,
Kenya had a GDP of $70.53 billion. The GDP value of Kenya represents 0.11 percent of the world economy, making it the 68th largest economy in the world (World Bank
Group, 2017). Per capita GDP was estimated at $1,455.36 in the 2016.
The government of Kenya is generally investment friendly and has enacted several regulatory reforms to simplify both foreign and local investment, including the creation of an export processing zone. The export processing zone has grown rapidly through input of foreign direct investment. An increasingly significant portion of Kenya's foreign inflows are remittances by non-resident Kenyans who work in the US, Middle
East, Europe and Asia. Compared to its neighbours, Kenya has well-developed social and physical infrastructure..
Kenya´s real GDP growth has averaged over 5% for the last eight years. Since 2014,
Kenya has been ranked as a lower middle income country because its per capita GDP crossed a World Bank threshold. Kenya has a growing entrepreneurial middle class and steady growth.
Agriculture remains the backbone of the Kenyan economy, contributing one third of GDP. About 75% of Kenya´s population of roughly 44.2 million work at least part time in the agricultural sector, including livestock and pastoral activities. Over 75% of agricultural output is from small-scale, rain-fed farming or livestock production.
Inadequate infrastructure and weak governance continue to hamper Kenya´s efforts to improve its annual growth to the 8%-10% range so that it can meaningfully address poverty and unemployment. The Kenyatta administration has been successful in courting external investment for infrastructure development. International financial institutions and donors remain important to Kenya´s economic growth and development, but Kenya has also successfully raised capital in the global bond market. Kenya issued its first sovereign bond offering in mid-2014, and recently raised an additional $2 billion in February 2018 Eurobond issue. Nairobi contracted a Chinese company to
construct a new Standard Gauge Railway (SGR) connecting Mombasa and Nairobi, which was completed in May 2017.
The Central Bank of Kenya follows an inflation targeting monetary policy regime, targeting an inflation range of 5% +/- 2.5%.Inflation pressures and sharp currency depreciation peaked in early 2012 but have since abated following low global food and fuel prices and monetary innovations by the Central Bank. Drought-like conditions in parts of the country pushed inflation in 2017 above 8%. Chronic budget deficits, including a shortage of funds in mid-2015, hampered the government’s ability to implement proposed development programs, but the economy is back in balance with many indicators, including foreign exchange reserves, interest rates and FDI moving in the right direction. Underlying weaknesses were imposed in the banking sector in 2016 when the government was forced to take over three small and undercapitalized banks. In
2016, the government enacted legislation that limits interest rates that banks can charge on loans and set a rate that banks must pay their depositors. This measure led to a sharp shrinkage of credit in the economy.
Tourism holds a significant place in Kenya´s economy. A spate of terrorist attacks by the Somalia-based group al-Shabaab reduced international tourism earnings after their deadly 2013 attack on Nairobi´s Westgate mall, which killed 67 people, but the sector is now recovering. In 2016, tourist arrivals grew by 17% while revenues from tourism increased by 37%.

3. KENYA GROSS DOMESTIC PRODUCT
3.1 Kenya GDP Analysis
Since attaining its independence in 1963, Kenya´s economic growth and expansion of the Gross Domestic Product have experienced phases of growth and contraction based on a number of factors. Kenya accomplished good economic performance in the 1960s and early 1970s but contracted in the 1980s and 1990s due to limited economic transformation. The economy expanded from 2000 to 2016 following a new political regime, adoption of a new constitution and strengthening of institutions. Even so, a number of factors have occasionally disrupted economic growth such as drought, postelection violence of 2007 and low commodity prices. The Gross Domestic Product
(GDP) in Kenya was worth 70.53 billion US dollars in 2016. This GDP value of Kenya represents 0.11 percent of the world economy (World Bank Group, 2017). GDP in
Kenya averaged 14.33 USD Billion from 1960 until 2016, reaching an all-time high of 70.53 USD Billion in 2016 and a record low of 0.79 USD Billion in 1961. In the longterm, the Kenya GDP is projected to trend around 82.00 USD Billion in 2020.
Figure 1: GDP of Kenya: 1960 - 2016
Source: World Development Indicators 2017
Analyzing Kenya´s GDP growth rate over the years: In the 1960s, growth averaged 5.7 per cent, accelerating in the 1970s to 7.2 per cent. It declined in the 1980s to 4.2 per
cent and in the 1990s to 2.2 percent. In the new millennium, the economy has experienced relatively strong economic performance compared to the Sub-Saharan region and the global economy at large. In the period 2000-2010, GDP growth averaged
4.1 per cent and accelerated to 5.45% from 2011 to 2017 (World Bank Group, 2017).
Figure 2: Kenya GDP growth rate (1961 – 2017)
Kenya GDP Growth Rate (1961-2017; projections to 2022)
25
20
15
10
GDP Growth Rate (%)
5
0
-5
-10
65 70 75 80 85 90 95 00 05 10 15 20
Year
Source: World Bank Development Indicators 2017
The subdued economic growth of the 1980s was mainly due to the global recession, commodity price decline, delayed structural adjustment policies, a political succession in the country, as well as slow moving candidates such as institutional quality and distributional policies (Ndulu, Bates, Chukwuma, O'Connell, Collier, 2008).
Kenya ´s economy experienced sustained recovery and sound economic growth since
2000. This growth was consistent with the Africa Rising narrative of a resurgence of economic growth in the region in the new millennium supported by the emergence of strong institutions and increasing demand for political accountability. The rapid growth in Africa has been attributed to a range of factors as discussed by Robertson (2013):
 better government finances and fiscal policies reflected in reduced debt and general government expenditures ratios;  booming commodity exports, especially to China, although the region runs a trade deficit with the country
 increased FDI
 new discoveries of oil and other minerals
 increased role of telecoms
 ease of doing business reforms
 increased investments in education
 democratization of the continent
Figure 3: Kenya GDP Growth Rate in the recent age: 2000-2017
Kenya GDP Growth Rate (2000 - 2017)
9
8
7
6
5
Growth Rate (%)
4
3
2
1
0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Year
Source: World Bank Development Indicators 2017
In 2000, the economy recorded an all-time low growth rate of 0.6 per cent, increasing to
3.8 per cent in 2001, but declining to 0.5 per cent in 2002. Following a peaceful change of government in December 2002 from the Kenya African National Union (KANU), which had ruled the country since independence, to the National Rainbow Coalition
(NARC) under Mwai Kibaki, the growth rate accelerated. The economy expanded steadily from 2.9 per cent in 2003 to 5.1 per cent in 2004, 5.9 per cent in 2005, and 6.3 per cent in 2006, to reach a peak of 7.1 per cent in 2007, the highest in over two decades and the only episode of five-year growth acceleration in Kenya´s independence history
(World Bank Group, 2014). The sound economic performance was bolstered by the implementation of bold economic and structural reforms under the Economic Recovery
Strategy (ERS) and a favourable external environment. The ERS was a five-year blueprint prepared to address Kenya´s macroeconomic vulnerabilities and structural weaknesses.
The Kibaki government put in place economic policy and governance reforms that enhanced economic performance. Kenya´s rankings in the World Bank Country Policy and Institutional Assessment (CPIA), which rates 20 aspect of governance and policies, generally improved in 2005-06 (from 3.52 to 3.58); declined in 2007-08 /to 3.55 and 3.52 respectively) as a result of the post-election violence, drought, and the global financial crisis; and improved in 2009-13 (from 3.67 to 3.80). It has maintained at 3.8 till 2016.
Figure 4: Kenya CPIA scores: 2008 - 2016
World Bank CPIA Scores (2008 - 2016)
4.0
3.9
3.8
3.7
IDA Borrow ers Average
Kenya
SSA IDA average
3.6
3.5
3.4
3.3
3.2
3.1
CPIA score
2008 2009 2010 2011 2012 2013 2014 2015 2016
Year
Source: World Bank Country and Policy Institutional Assessment 2016
Kenya´s economic growth declined in 2008 as a result of post-election violence, drought and the global finance crisis eroding the achievements of the previous halfdecade. Following counter cyclical demand management policies and favourable weather conditions that improved agricultural performance, growth subsequently picked up to 3.31 per cent in 2009 and to 8.41 percent in 2010.As a result of a surge in global food and oil prices as well as a drought in the country, growth declined to 6.12 per cent in 2011, to 4.45 per cent in 2012, 5.74 per cent in 2013, and was 5.3 percent in 2014. The economy experienced slight recovery in 2015 (5.71 per cent) and also in 2016 (5.84 per cent) on the backdrop of heavy government spending on infrastructural projects including the Standard Gauge Railway connecting the port city of Mombasa to the capital city of Nairobi. In 2017, growth declined to 4.8 per cent. This was mainly due to a prolonged election period during which Kenya had a repeat presidential election. Also hampering economic growth in 2017 was weak private sector economic activity following the adoption of legislation by the government in September 2016 where the Government of Kenya set the lending and deposit rates to be charged by banks to customers2. Private sector credit growth in Kenya slowed down to very low levels in
2017.
Figure 5: Slowdown in private sector credit growth
Growth in Private Sector Credit (2014 - 2017)
30
25
20
15
10
5
0
14 14 14 14 15 15 15 15 16 16 16 16 17 17 17 17
0000000000000000
2222222222222222
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Period
Source: Brookings Institution, obtained from Central Bank of Kenya
2 The Government of Kenya capped the commercial bank lending rates to 400 basis points above the central bank interest rate. Deposit rates were set to 70 per cent of the central bank rate. 3.2 Outlook of Kenya´s Economic Performance in 2018
In 2017, Kenya´s economic growth was derailed by elevated uncertainty during the prolonged election cycle, a crippling drought that damaged agricultural output, and the government’s ongoing cap on lending rates charged by commercial banks. Economic activity expanded again in January 2018 against a backdrop of political stability, evidenced by a PMI reading above the 50-point threshold; the private sector returned to growth in December 2017 following seven months of contraction. At the same time, the economy’s public and external debt stocks have been piling up while revenue flows have declined, eroding debt affordability. Data released by the Central Bank of Kenya shows that both domestic debt and external debt jumped by double-digit figures over the previous year in 2017. A deteriorating fiscal position led Moody’s to downgrade
Kenya’s credit rating from B1 to B2 on 13 February 2018. The agency views fiscal trends worsening in the near-term, with greater reliance on commercial external debt.
However, it assigned a stable outlook, given the economy’s relatively diversified structure, strong growth potential and mature financial sector.
In 2018, the economy is expected to expand more due to increased agricultural output, supported by more favorable weather conditions; an expansion in construction activity for planned infrastructure projects; and an upturn in investment should bump up growth in 2018. That said, the government’s interest rate cap policy will continue to dent growth. The economy’s rising debt levels may subdue growth in the medium term.
4. POPULATION IN KENYA
4.1 Background of Kenya´s Population
Kenya is a multi-ethnic state, inhabited primarily by Bantu and Nilotic populations, with some Cushitic-speaking ethnic minorities in the northern regions of the country.
Kenya has a very diverse population that includes most major ethnic, racial and linguistic groups found in Africa. Bantu and Nilotic populations together constitute around 97% of the nation's inhabitants.
Swahili and English are official languages. Swahili is compulsory in primary education, and, along with English, serves as the main lingua franca between the various ethnic groups.
According to the C.I.A World Factbook profile on Kenya, the main ethnic groups are as follows: Kikuyu 22%, Luhya 14%, Luo 13%, Kalenjin 12%, Kamba 11%, Kisii 6%,
Meru 6%, other African 15%, non-African (Asian, European, and Arab) 1%. Since
Kenyan independence in 1963, Kenyan politics have been characterized by ethnic tensions and rivalry between the larger groups. This devolved into ethnic violence in the 2007–2008 post-election violence.
The main religion in Kenya is Christianity, which is practised by 83% of the population.
Of the Christians, Protestant are 47.7%, Roman Catholics are 23.4% and Other
Christians are 11.9%. Islam religion in Kenya is practiced by 11.2% of the population.
4.2 Analysis of Population trends in Kenya
Kenya has experienced dramatic population growth since the mid-20th century as a result of its high birth rate and its declining mortality rate. The last census to be undertaken in Kenya was done in 2009, where the population was recorded at 38.6 million. The I.M.F World Economic Outlook 2017 database indicates that Kenya´s population as of 2018 is estimated to be 48.03 million persons, and is expected to grow to 53.52 persons by 2022.
Kenya has experienced dramatic population growth since the mid-20th century as a result of its high birth rate and its declining mortality rate. More than 40% of Kenyans are under the age of 15 because of sustained high fertility, early marriage and childbearing. Kenya’s persistent rapid population growth strains the labor market, social services, arable land, and natural resources. Although Kenya in 1967 was the first sub-
Saharan country to launch a nationwide family planning program, progress in reducing the birth rate has largely stalled since the late 1990s, when the government decreased its support for family planning to focus on the HIV epidemic. Government commitment and international technical support spurred Kenyan contraceptive use, decreasing the fertility rate (children per woman) from about 8 in the late 1970s to less than 5 children twenty years later, but it has plateaued at just over 3 children today (Central Intelligence