Kenya raked in Ksh68 billion ($800 million) in new investments in the three months to June, signalling renewed optimism over growth.

Data from the Kenya Investment Authority (KenInvest) — the agency that tracks investments on behalf of the government — shows the value of investments in the second quarter was a huge leap from the Ksh5 billion ($58.8 million) the country received in the first quarter, a sign that the economy was recovering from the uncertainties associated with the March 4 General Election.

Heightened political risk ahead of the polls had dampened investor interest, leaving Kenyan businesses holding cash while others suspended expansion plans.

READ: Kenya’s political risk dampens investment climate

Company data showed firms that had reported their 2012 full year results by the end of March held a combined Ksh130 billion ($1.52 billion) compared with Ksh110 billion ($1.29 billion) in the same period in 2011.

READ: Kenyan firms hold $1.5bn amid election

The growth in new investments is translating into new jobs, which should help the country address one of its most pressing problems — unemployment.

The KenInvest data shows at least 4,360 new jobs were created through these new investments since January. At least 875 jobs were created in the first quarter and 3,485 in the second quarter, the agency’s report states.

Manufacturing, services, ICT and tourism remained the top recipients of new investments and make up the new crop of top employers.

But the new jobs are a drop in the ocean as thousands of Kenyans remain unemployed. The country’s rate of creating formal sector jobs has continued to trail the number of young people entering the labour market and analysts say the trend will continue even if economy grows at more than 10 per cent annually.

The Economic Survey 2013 shows the economy created close to 660,000 new jobs last year in both the formal and informal sectors.

Out of these, only 68,000 new jobs were created in the formal sector of the economy, an indication that the informal sector remains the employer of majority of Kenyans. The informal sector is estimated to have created 594,000 new jobs in 2012, compared with 587,000 jobs in 2011. The informal sector constituted 89.7 per cent of all the new jobs created.

News of the increase in investments could also be dampened by a projection that an ongoing salary strike by teachers, who are demanding Ksh46 billion ($541 million), and a likely stalemate over a tax Bill could cause a setback to economic growth.

Increased budgetary demands — if the government gives in to the teachers’ demands — and a shortfall in revenues if the VAT Bill is rejected or watered down could push the government into more borrowing.

Any rise in domestic borrowing would trigger higher interest rates and reduced demand for borrowing from the private sector, stunting growth. Currently, interest rates average 17 per cent.

KenIvest said foreign capital accounted for at least three-quarters of the new investments in the three months to June, totalling Ksh45.2 billion ($531.7 million), compared with domestic projects, which accounted for Ksh22.5 billion ($258.8 million).

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Business executives and analysts said they expect improved economic prospects in the remaining part of the year, but warned that the government’s spending plans could be jeopardised by fresh expenditure demands.

Teachers are on strike, for a third week running, wanting the government to increase their salary by 70 per cent to factor in housing, medical and commuter allowances agreed on in 1997. The government insists that it does not have the Ksh46 billion ($541 million) needed to effect an agreement apparently substituted in 2003 with another through which teachers have been paid Ksh32 billion ($376.4 million).

A plan by the government to raise at least Ksh10 billion ($117.6 million) in taxes through a controversial law — the Value Added Tax Bill 2013 — hangs in the balance following opposition from activists, a section of MPs and the general public, worried that it could raise the cost of essential commodities.

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The government had sought to introduce a 16 per cent consumption tax on goods including milk and medicine. But it has since backed down, saying maize flour and bread will be removed from the list of commodities to be brought under the Bill.

Should the government give in to the teachers’ demands too, a new pay package could substantially raise the public wage bill, punching holes in the government’s budgetary plans.

A bigger wage bill, economists warned, was likely to hurt spending on infrastructure and social services like health and education at a time when the country is facing a thinning resource envelope as harsh economic conditions diminish tax revenues.

The Treasury, in its Budget Policy Statement (BPS) published on Friday, said the level of recurrent expenditure was reaching unsustainable levels, squeezing out resources meant for development and threatening to scuttle economic growth.

At over 12 per cent of GDP, the wage bill is well above the internationally accepted standard of 7-8 per cent, Treasury said, and accounts for almost half of the revenue collected by Government.

“This is unsustainable and poses a serious threat to the funding of important development projects, and has the potential to severely affect the country’s economic prospects. In addition, salary pressures will also impact on pensions, hence increasing the government’s contingent liability,” said the Treasury in a statement.

The government has been keen to have the Salaries and Remuneration Commission (SRC) set new salary levels for public servants but faces stiff opposition from trade unions.

The economy expanded by 5.2 per cent in the first quarter of the year to March, higher than the 4.6 per cent annual growth in 2012, with analysts saying the economy was set for a strong showing in the year overall. But the growth prospects could be tested by a combination of factors.

“Generally, consumption in the economy is growing with the relatively low inflation. Firms are concentrating on setting up, rolling out new investments and dealing with operational efficiency in what looks like a good year,” said Ayisi Makatiani, the managing partner and CEO of Fanisi Capital Ltd.

“What will kill the enthusiasm are the strikes and how the government manages them and the politics. What will matter is how the government manages politics, especially in parliament and the Senate. They could distract the government and decisions important to business will not be made, so that we find ourselves back to where we were two years ago,” he said.

New data by the Kenya National Bureau of Statistics shows that Kenya’s trade deficit — the gap between imports and exports — widened to Ksh300 billion ($3.5 billion) in the first four months of this year, potentially testing the stability of the shilling.

The shilling has been weakening for the past one month, oscillating around Ksh86.20 to the dollar last week. For the first four months, the unit exchanged at around Ksh83, on average.

Kenneth Kaniu, the chief investments officer at Stanlib Kenya Ltd, said the country’s economic prospects are bright. “There is a lot of pent-up demand from consumers, and with the declining interest rates, this is positive for growth,” said Mr Kaniu.

“But there are certain risks. More demand for more consumer goods could drive up the import bill. If basic commodities are taxed as proposed in the Bill then this could trigger inflation, which if not well managed can affect economic growth,” said Mr Kaniu.

The statistics bureau said Kenya imported goods worth Ksh472 billion ($5.5 billion) in the first four months of the year, more than three times the Ksh173 billion ($2 billion) exported during that period.

“The risk to the outlook for 2013/14 and medium-term include further weakening in global economic growth and unfavourable weather conditions should there be a dry spell in 2013 and beyond. A reversal in the current easing of international oil prices may fuel inflation and weaken growth,” said Treasury in the statement.

“Poor transition to a decentralised system of government could weaken investor confidence and slow down growth.”

Economists are projecting a slight jump in inflation in the coming months, triggered by the implementation of new duty measures aimed at raising revenue and providing a boost to Kenyan manufacturers, which could add to overall price increases.

“The bigger impact however will come from credit growth, which is expected to show a robust trend in the coming months, reflecting increased business confidence. Nonetheless, we expect that this will be offset by ongoing efforts to maintain relatively tight market liquidity in support of the shilling’s stability,” said Razia Khan, the head of research, Africa, at Standard Chartered Bank.

“While headline inflation should continue to rise over the coming months, driven by a less-favourable base, it should nonetheless remain within a 5-7 per cent range through to the end of 2013, supporting the current level of interest rates” said Ms Khan. The Central Bank’s Monetary Policy Committee is expected to meet on Tuesday to assess the economic conditions in the country and set the benchmark key lending rate.

Economic uncertainties

Some business leaders said Kenya will not achieve much in the second part of the year due to the socio-economic uncertainties hanging over the country.

“We lost almost a whole year to politics. Holding elections in March affected business performance and we also spent too much time to putting the government together. I feel we will not achieve much in the remaining part of the year,” said Jacqueline Mugo, the executive director of the Kenya Federation of Employers.

“Some investors have adopted a wait-and-see attitude to observe how the government handles the devolution question. If it is dealt with well, some benefits will be realised,” she added.

Parliament has also raised concerns over the budgetary pressures the government will face in the coming months.

“There is a need to look critically at the overall allocation of 42.91 per cent that goes to compensation to employees. Key issues of productivity as well as value for money needs to looked into,” said the Parliamentary Budget Office in a review of the 2013/2014 budget presented on June 14.

Out of the Ksh225 billion ($2.6 billion) allocated to state corporations in the 2012/13 budget, for example, 60 per cent or Ksh135 billion ($$1.5 billion) was spent on compensating employees.

While the economy in April and May could still have experienced some slowdown, economists said, a rebound in the hotel and restaurants and financial sectors can be anticipated over the rest of the year.

“The challenge for Kenya will be to steer a steady course, maintaining this positive momentum, while avoiding any new credit or asset market bubbles. Given the changing external environment, there is a need for faster fiscal consolidation, in order to create more of a buffer when times — or even the weather — are less favourable” said Ms Khan.

Reported by Mwaura Kimani, Steve Mbogo and Jeff Otieno