Kenya should support inclusive growth agenda for securing future growth

The moderation in growth is attributed to a slowdown in agricultural output and weak private sector investment.

Kenya continues to experience steady economic growth, with real GDP expanding on average by 5.6 percent over the last five years (2014-2018). In 2019, however, economic activity has softened to 5.8 percent from 6.3 percent in 2018 according to the latest World Bank Kenya Economic Update. The moderation in growth is attributed to a slowdown in agricultural output and weak private sector investment. The medium-term growth outlook remains positive with a projected growth of 5.9 percent.

The report notes that Kenya’s overall macroeconomic environment is expected to remain stable with low inflation and a manageable current account deficit, which should be supportive of the inclusive growth agenda of the government. Headline inflation is within the government target range of 52.5 percent, while the current account deficit has narrowed significantly due to lower imports, diaspora remittance inflows and improved tourism revenues. Nonetheless, interest rate caps have constrained the operating environment for the banking sector and reduced flexibility for monetary policy to support growth, if needed. The repeal of interest rate caps (if approved) is a welcome development that should eliminate what has been a powerful disincentive for banks to lend to SMEs and restore the potency of monetary policy.

While there is a great commitment by the authorities to fiscal consolidation, weak domestic revenue mobilization and expenditure pressures pose a significant challenge to attaining planned fiscal adjustment, with actual deficit consistently exceeding target deficit. This calls for stronger adjustment measures by the government to place fiscal accounts back on a prudent trajectory. These should include actions to increase revenue, make revenue projections more realistic, and strengthen expenditure controls and cash management. In addition, measures to adjust the government’s borrowing plans are essential to rebalance the public debt portfolio towards lower cost and longer-maturity debt, hence reducing its vulnerability to market instability as well as creating fiscal space.

“The expansionary fiscal stance has resulted in the crowding out of private sector investment, an unanticipated rise in public debt, and a continuation of slower private sector credit growth,” said Felipe Jaramillo, World Bank Country Director for Kenya.

The report recommends further structural reforms to lift productivity durably.

“Structural reforms could include continued effort to ease barriers for SMEs growth, improving quality of education and skills development at all levels, empowering women, supporting R&D, technology adoption and digitalization,” said Peter W. Chacha, World Bank Senior Economist.

The Special Focus topic advances policies to support Kenya’s Digital Transformation. The report concludes that to secure Kenya’s digital future, there is a need to “digitally enable” every individual, business and prepare the entrepreneurship ecosystem to capitalize on recent churning of innovative startup stage digital ventures. Legislations and regulations governing the digital economy need to keep pace with technology evolution to enable growth and competition while protecting consumers. Furthermore, initiatives aimed at building a digitally-savvy workforce should be strengthened.

“It will be important for Kenya to ensure its laws and regulations keep up with the fast-paced digital evolution to grant every Kenyan an opportunity to participate in the digital economy,” said Casey Torgusson, World Bank Senior Digital Development Specialist and author of the special section on Kenya’s Digital Transformation. “Prioritizing and adequately financing partnerships with the private sector to enable investment in increased internet access, technology skills development and regional integration to maximize on the effects of a large single digital market will no doubt enhance Kenya’s position as a silicon savannah.”