Kenya’s economy is growing, but middle income status way off

Thursday November 28 2013

Kenya has been growing at a moderate four per cent per year. FILE

Kenya may find it difficult to become a middle-income state if it fails to achieve higher economic growth rates necessary for the provision of quality social services and creation of jobs for its youth.

The economy, with the potential to be one of the strongest in sub-Saharan Africa,  has been underperforming in recent years raising doubt about the country’s ability to achieve double-digit economic growth, shows a new assessment by the World Bank.

As a result of the slowed growth, other sub-Saharan African countries are catching up with Kenya. “Compared with its peers, Kenya is punching below its weight,” the World Bank says in a report analysing Kenya’s overall socio-economic performance.

The report, titled Achieving Shared Prosperity in Kenya, states that over the past decade, Kenya has been growing at a moderate four per cent per year.

“This is higher than in the 1980s and 1990s, but substantially lower than the growth experienced by its East African neighbours and sub-Saharan Africa as a whole, where growth has averaged five per cent per annum, and six per cent if South Africa is excluded.”

Economists have expressed concern that many African countries whose GDP per capita was below Kenya’s in 1980, including some East African Community member states, are rapidly catching up. For example, in 1990, Ethiopia’s GDP per capita was 28 per cent of Kenya’s, in 2011 it was 48  per cent.


Relative to Kenya’s GDP per capita, a number of countries grew their economies; Ethiopia (69 per cent), Ghana (71 per cent), Mozambique (104 per cent), Tanzania (46 per cent), Uganda (98 per cent), Malaysia (94  per cent), Thailand (82 per cent) and Vietnam (213 per cent).

“The growth has mainly been driven by consumption, while investments and exports have yet to be the major factors determining growth,”  said Ganesh Rasagam, the lead private sector development specialist at the World Bank.

Over the past 10 years, services have driven growth while agriculture and industry  have lagged behind. “A breakdown of the 3.9 per cent average growth over the past decade shows that services contributed 2.1 per cent, agriculture 1.1 per cent, and industry just 0.7 per cent,” says the World Bank report.

Agriculture, which has been the country’s economic growth engine since Independence, is showing signs of fatigue for various reasons ranging from poor policies to failure to adopt modern farming and production methods.

“Kenya’s share in the global export market has declined sharply in the past three decades,” Mr Rasagam said.

The economist said the country’s traditional exports namely coffee, tea and horticulture, which still accounts for 35 per cent of goods exports, are losing share in traditional markets in Europe and failing to penetrate potential emerging markets.

Ethiopia is fast becoming a large exporter of cut flowers, posing a threat to one of Kenya’s major sources of revenue. Ethiopia’s flower sector has become a $200 million cut flowers export business in the past 10 years.

Production of some of Kenya’s staple foods has also been on the decline, with maize being one of the worst hit. This year will not be any different as the Agriculture Ministry has already sounded the alarm over declining yields in some of the major crops.

A report covering January to May reveals that the country will record low grain yields due to erratic weather and crop diseases. This means the country will have to rely on imports.

Another contradiction is that even though Kenya produces the best tea in the world, it is the most inefficient producer of sugar, with Kenyans paying triple the world prices. Diversification of exports could cushion the country from growing reliance on food imports.

A growing population, declining agricultural productivity and increased oil imports have further increased the country’s vulnerability to external price shocks in recent years.

“Implementation of laws in the public sector has not been good. We need to borrow the no-nonsense approach from Rwanda, which has succeeded in creating a conducive environment for business,” said Gituro Wainainah, the acting director general of Vision 2030, Kenya’s economic blueprint.

Despite the challenges, some economists are optimistic that the country will pull it off.

“We just got out of an election and we are putting up structures as per the Constitution. Once everything is in place, we will achieve higher growth rates than some of our neighbours,” said Prof Joseph Kieyah, the principal analyst at the Kenya Institute for Public Policy Research and Analysis (KIPPRA), the quasi-government think-tank.

Kenneth Kaniu, chief investment officer at Stanlib Kenya, links the faster economic growth of the neighbouring countries to recent discoveries of natural resources, mainly oil and gas.

“As a result of these discoveries, countries like Ethiopia, Tanzania and Uganda have attracted higher foreign direct investments because they have discovered natural resources at a faster rate than Kenya,” said Mr Kaniu.

“Our agriculture economy is still rain-fed, and until we embrace modern methods of farming, problems facing the sector will be difficult to solve,” he added.

Tanzania’s  annual GDP growth rate has averaged seven per cent over the past five years, reaching an all-time high of 11.2 per cent in 2007.

According to the Uganda Bureau of Statistics, the country’s economy grew by 5.8 per cent in the financial year 2012/2013. Rwanda’s real GDP grew by 7.7 per cent in 2012, and is expected to grow by 6.6 per cent this year.