As far as economic takeoffs go, Kenya is taxiing on the runway.

Exports are arriving, foreign investors are bidding for local equities and bonds, and a surging middle-class is driving up consumption.

Kenya’s leading business people, technocrats and several top-notch global economists attending a high level conference last week, seemed to agree that the country was ready for takeoff, albeit against domestic and external turbulence.

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Investments are expected to rise sharply in coming years, riding on surging consumer demand and growing investor appetite fuelled by recent oil and gas finds, economists argued during the conference.

President Uhuru Kenyatta, in his opening speech, said Kenya’s economy had hit the takeoff stage, laying the ground for his government’s bid to bring about an “industrial revolution” that would turn Kenya into a middle-income country by 2030.

In June, Kenya rolled out a Ksh1.6 trillion ($18.8 billion) public expenditure programme, its biggest budget ever, with a bias towards huge infrastructure projects and social spending.

So, is Kenya ready for takeoff?

This is a question that will interest both households and businesses as well as investors trying to make sense of Kenya’s economic prospects in the face of a series of negative indicators — high inflation, exchange rate fluctuations, widening current account deficit, political risk, poverty and unemployment.

“... Kenya should aim at maintaining a track record of prudent macroeconomic policy… as that can be more important for investors than episodic international turmoil, because of its impact on the country risk premium,” said Domenico Fanizza, assistant director of the International Monetary Fund.

When retired president Mwai Kibaki assumed power in 2003, available data shows that Kenya was beginning to recover from a decade of economic decline arising from foreign aid cuts and corruption during the last years of the Moi administration.

President Kibaki pursued trickle-down economics during the decade he was in power — rolling out free primary and partial free secondary school education, opening the doors for children from poor backgrounds to attain basic education and giving them a chance to scale the career ladder.

Economy expanded

At that time, banks were barely lending to businesses and households and when they did, the loans were costly — at least 30 per cent interest per year. Currently, lending rates average 17 per cent.

In 2002, lending to the private sector shrank by two-and-a-half per cent, while the economy expanded by only 1.3 per cent.

Economists argue that there is usually a close correlation between cheap loans and economic growth as this leaves businesses with funds to expand and supports private consumption.

In the early years of the Kibaki era, unemployment among the youth was high — as it is today. The Economic Survey 2013 shows total private sector wages grew from Ksh483 billion ($5.8 billion) in 2008 to Ksh628 billion ($7.3 billion) in 2012, a 32 per cent jump.

Ten years later, while most of the economic indicators like poverty, unemployment, exports growth have improved substantially, the economy continues to face pressures.

Dependency is rising fast, mainly due to 43 per cent of Kenyans being under the age of 15. Data shows that for the decade ending in 2012, Kenya’s rate of growth was 4.6 per cent, against sub-Saharan Africa’s average of six per cent.

A May 2012 report by the World Bank showed that Kenya’s poverty levels have oscillated between 44 and 46 per cent for the past six years. However, this represents an improvement from 12 years ago when the poverty level stood at 56 per cent before falling to 46 per cent in 2005.

“Domestically, we are confronted with a swelling public sector wage bill that increasingly challenges fiscal policy. Our exports are not growing at the rate required to cover our current account deficit,” said President Kenyatta during the conference organised by the National Treasury, Central Bank of Kenya and IMF.

In the current financial year, for example, the total estimated wage bill is Ksh458 billion ($5.4 billion), which is equivalent to 12 per cent of the country’s GDP, and well above the global average of eight per cent.

Kenya sees global markets as a key determinant of its growth pattern.

“Negative effect of geopolitical uncertainty on the international oil market will slow down the manufacturing sector and continued weak growth in advanced economies will impact negatively on exports and tourism activities,” said Treasury Cabinet Secretary Henry Rotich.

Rising costs of production — seen in high energy and transport costs and new taxes like VAT and the Railway Levy — promise to unsettle Kenya’s plan to grow an economy that is less dependent on the services sector, which has been the main driver of growth over the past seven years, and instead grow its manufacturing and exports.

READ: Tough times ahead for Kenya as VAT on basics, oil prices bite
Buoyed by an expanding middle class, improved infrastructure and an enduring property boom, supermarkets are on an upward growth trajectory.

The Kenya Economic Survey 2013 shows the retail and wholesale sector grew by 19 per cent in the past five years, becoming the second largest driver of economic growth after the transport and communication sectors.

Over the next three years, the country plans to spend $17.5 billion to build new power plants as well as the requisite transmission lines to deliver an additional 5,000MW of electricity, or about three times the country’s current installed capacity. This should drastically cut energy costs for businesses.

However, economists said structural weaknesses, especially in the way Kenya thinks of the export and manufacturing business, are exposing the country to external forces, which remain the biggest threat to growth.

Most local exports have a high import content, meaning a high cost of production at home will only make the country’s products more expensive when sent out, especially in an era when global prices for inputs like fertilisers and chemicals are on the rise.

Over the years, imports have been rising faster than exports, worsening Kenya’s current account deficit. The country’s balance of payments — the difference between the value of imports and exports — has risen nearly tenfold since 2003, from a deficit of Ksh98 billion ($1.1 billion) to a deficit of Ksh856 billion ($10 billion) last year, a situation that worries policy-makers as it makes Kenya vulnerable to external shocks.

In 2003, Kenya’s exports stood at Ksh183 billion ($2.1 billion). By last year, exports had grown nearly threefold to Ksh517 billion ($6.1 billion). Imports recorded a similarly dramatic increase from Ksh281 billion ($3.3 billion) in 2003 to Ksh1.3 trillion ($15.2 billion) in 2012.

“Kenya needs to identify its competitive advantages — perhaps IT, tourism, horticulture — and make these the focus of integrated long-term policy thinking,” said Charles Robertson, the global chief economist at Renaissance Capital. “Try to do all this while avoiding excessive twin deficits — current account and fiscal — that could destabilise the economy,” he said.

The risky situation is compounded by the fact that foreign exchange reserves only rose from Ksh106 billion ($1.2 billion) in 2003 to Ksh385 billion ($4.5 billion) in July 2013.

Foreign investors are increasingly attracted to Kenya because of its low-inflation environment, a flexible but stable exchange rate, and the smooth functioning of its financial system.

Inflation rose

Kenya plans to issue a $1.4 billion international bond in the next two months. But inflation has been rising over the past few months, testing the government’s resolve to keep it within the five per cent margin. Last month, inflation rose from 6.02 per cent to 6.67 per cent.

READ: Inflation, weak shilling dampen Kenya economy

“The creation of buffers to support the supply side of the economy — reserves of food, oil and foreign exchange — would provide an intervention mechanism for moderating overall inflation,” said CBK Governor Njuguna Ndung’u.

The country has lined up several infrastructure projects to improve its competitiveness. It plans to build a network of first-rate international trunk roads to link up her neighbours Tanzania, Uganda, Ethiopia and South Sudan. Among the other projects are the standard gauge railway from Mombasa to Kigali through Uganda, expected to slash transport costs by at least 80 per cent.

But it must put its money where its mouth is. As Apurva Sanghi, the lead economist at the World Bank, noted: “The country is only spending three per cent of its GDP on infrastructure every year, and whereas this is higher than the African average of two per cent, it is still lower than the six per cent spent by emerging economies.”

Additional reporting by Peterson Thiong’o