Kenya - Economy

Kenya is the largest economy in east Africa and is a regional financial and transportation hub. After independence, 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. 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.

Kenya has a generally positive investment climate that has made it attractive to international firms seeking a location for their regional or African operations. The investment climate is characterized by stable monetary and fiscal conditions and a legal environment that makes few distinctions between foreign and domestic investment. Kenya has a strong telecommunications infrastructure, a robust financial sector, and solid aviation connections both within Africa and to Europe and Asia. Its port at Mombasa is the major trade gateway for much of East Africa.

Kenya has a well-educated population and a growing urban middle class. Increasing integration among the members of the East African Community as well as Kenya�s membership in other regional trade blocks provide growing access to a large regional market outside of Kenya. Key challenges for investors are Kenya�s consistently low rankings on international measures of the ease of doing business and corruption. Kenya also faces a rising threat of insecurity from terrorism and crime.

Kenya's Rift Valley hides a treasure buried several kilometres beneath the earth's surface: geothermal energy. Kenya is one of two countries (including Ethiopia) that produce geothermal energy in Africa. In 2011, geothermal accounted for 19% of Kenya's total electricity net generation, and geothermal installed capacity was 200 megawatts.

Today only 13 percent of Kenya's electricity is provided by this source of power, but its potential is more than five times the population's entire demand. The country has the potential to produce 10,000 megawatts of geothermal-powered electricity, according to Kenya's state-owned Geothermal Development Company. The country plans to multiply its electricity production tenfold by the year 2030, using geothermal as its driver. Eventually it could even export its energy, by tapping into this abundant resource that will never run out.

Kenya�s colonial economy, like that of Nigeria, displayed characteristics typical of an underdeveloped economy at the periphery, namely, the preponderance of foreign capital, the dominance of agriculture, the limited development of industry and heavy reliance on export of primary products and import of capital and manufactured consumer goods. This underdeveloped state of the economy meant that independent Kenya would have to formulate policy that would not only arrest Kenya�s mounting urban and rural poverty and decay, but would also put the economy into the hands of the indigenous people.

British colonialists dreamed of making this part of Africa a white man's country. The colonialists established the Kenya protectorate and later on the Kenya colony with the finance that was to be generated from the white settler plantations which covered the highly potential areas of the country.

History has it that large tracts of agriculturally potential land (i.e. white highlands) were alienated by the British colonial administration. As a result of the massive land alienation activities in the early period of colonialism, many of the hitherto cultivating populations were pushed into the `infertile' native reserves that were not conducive for arable farming.

The displaced populations lived as farm laborers, casual workers, tenants as well as squatters. The process of land alienation was also extended to the pastoral ethnic groups like the Maasai, Samburu, Nandi, Pokot and other Kalenjin speaking communities. Like their agricultural counterparts, the pastrolists were pushed to the less conducive reserves.

During the period of nationalism and decolonization, land grievances were central to all ethnic groups that actively participated in the struggle for independence. In fact the land question is one of the main factors for the MAU MAU rebellion of 1952 to 1956 in Kenya and the subsequent declaration of the state of emergence by the British.

By 1978 when President Kenyatta died, the Kikuyu had, far more than all other ethnic groups put together, bought the bulk of the so-called "white highlands". Besides, they were the main beneficiaries of the governments settlement plan for the landless at no cost or at minimal rates. They thus expanded their land ownership and settlement beyond their traditional home-Central Province-into the Rift Valley province, and a bit into the Coast province, apart from their widespread networks in urban centres within Kenya.

Particularly in the 1960s and 1970s, Kenya had one of the most impressive economic growth rates in Africa and has maintained a relatively stable political system and impressive human rights record. By the 1990s Kenya faced serious unemployment, a fast growing population, shrinking per capita income, and a government intolerant of democratic dissent which relies increasingly on threats of violence to quell growing demands for reform.

Key macroeconomic fundamentals are strong. Inflation is stable in the range of 5-7 percent. The exchange rate is also stable at 86 Kenyan shillings to the U.S. dollar. The Central Bank of Kenya (CBK) has held interest rates steady at 8.5 percent, although many banks do not pass lower rates promoted by CBK monetary policy on to consumers, which creates a drag on investment. Kenya has also maintained relatively stable fiscal policies with manageable debt levels and deficits.

Kenya�s debt to GDP ratio is rising; it recently crossed the 50 percent threshold. The ratio may lower as Kenya�s GDP is statistically �rebased,� which should revise estimates upwards by about 20 percent. However, Kenya�s interest payments on debt are starting to cut into its budget, which the revision will not help. Kenya�s spending on public debt repayment was 70 percent higher than its spending on development in 2013. An ongoing concern is the large public sector wage bill, which the government is attempting to control.

After experiencing moderately high growth rates during the 1960s and 1970s, Kenya's economic performance during the 1980s and 1990s was far below its potential. From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3.9%. Inflation reached a record 100% in August 1993, and the government's budget deficit was over 10% of GDP. As a result of these combined problems, bilateral and multilateral donors suspended program aid to Kenya in 1991.

In 1993, the Government of Kenya began a major program of economic reform and liberalization. A new minister of finance and a new governor of the central bank undertook a series of economic measures with the assistance of the World Bank and the International Monetary Fund (IMF). As part of this program, the government eliminated price controls and import licensing, removed foreign exchange controls, privatized a range of publicly owned companies, reduced the number of civil servants, and introduced conservative fiscal and monetary policies. From 1994-96, Kenya's real GDP growth rate averaged just over 4% a year.

In 1997, however, the economy entered a period of slowing or stagnant growth, due in part to adverse weather conditions and reduced economic activity prior to general elections in December 1997. In 2000, GDP growth was negative.

In July 1997, the Government of Kenya refused to meet commitments made earlier to the IMF on governance reforms. As a result, the IMF suspended lending for 3 years, and the World Bank also put a $90 million structural adjustment credit on hold. Although many economic reforms put in place in 1993-94 remained, Kenya needed further reforms, particularly in governance, in order to increase GDP growth and combat poverty among the majority of its population.

In the mid-1990s, the government implemented economic reform measures to stabilize the economy and restore sustainable growth, including lifting nearly all administrative controls on producer and retail prices, imports, foreign exchange, and grain marketing.

Nevertheless, the economy grew by an annual average of only 1.5% between 1997 and 2002, which was below the population growth estimated at 2.5% per annum, leading to a decline in per capita incomes. The poor economic performance was largely due to inappropriate agricultural, land, and industrial policies compounded by poor international terms of trade and governance weaknesses. Increased government intrusion into the private sector and import substitution policies made the manufacturing sector uncompetitive. The policy environment, along with tight import controls and foreign exchange controls, made the domestic environment for investment unattractive for both foreign and domestic investors.

During President Kibaki's first term in office (2003-2007), the Government of Kenya began an ambitious economic reform program and resumed its cooperation with the World Bank and the IMF. There was some movement to reduce corruption in 2003, but the government did not sustain that momentum. Economic growth began to recover in this period, with real GDP growth registering 2.8% in 2003, 4.3% in 2004, 5.8% in 2005, 6.1% in 2006, and 7.0% in 2007. However, the economic effects of the violence that broke out after the December 27, 2007 general election, compounded by drought and the global financial crisis, brought growth down to less than 2% in 2008.

The post-election violence in the first quarter of 2008 hit the Kenyan economy hard. The Kenya Private Sector Alliance (representing most major businesses) estimated that 400,000 jobs were lost and economic growth was expected to slow to 4%. The tourism industry, which is a major source of foreign exchange, was severely damaged. The agriculture sector was also been heavily affected, which would have long term effects on Kenya's economy.

In 2009, there was modest improvement with 2.6% growth, while the final 2010 growth figure was expected to be about 5%. In May 2009, the IMF Board approved a disbursement of approximately $200 million under its Exogenous Shock Facility (ESF), which is designed to provide policy support and financial assistance to low-income countries facing exogenous but temporary shocks. The ESF resources were meant to help Kenya recover from the negative impact of higher food and international fuel and fertilizer costs, and the slowdown in external demand associated with the global financial crisis. In January 2011, the IMF approved a 3-year, $508.7-million arrangement for Kenya under the Fund's Extended Credit Facility.

To a considerable extent, the government's ability to stimulate economic demand through fiscal and monetary policy is linked to the pace at which the government is pursuing reforms in other key areas. The Privatization Law was enacted in 2005, but only became operational as of January 1, 2008. Parastatals Kenya Electricity Generating Company (KenGen), Telkom Kenya, and Kenya Re-Insurance have been privatized. The government sold 25% of Safaricom (10 billion shares) in 2008, reducing its share to 35%.

Accelerating growth to achieve Kenya's potential and reduce the poverty that afflicts about 46% of its population will require continued deregulation of business, improved delivery of government services, addressing structural reforms, massive investment in new infrastructure (especially roads), reduction of chronic insecurity caused by crime, and improved economic governance generally. The government's Vision 2030 plan calls for these reforms, but realization of the goals could be delayed by coalition politics and line ministries' limited capacity.

Economic expansion is fairly broad-based and is built on a stable macro-environment fostered by government, and the resilience, resourcefulness, and improved confidence of the private sector. Despite the post-election crisis, Nairobi continues to be the primary communication and financial hub of East Africa. It enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years.

In FY 2010, tea was Kenya's top export, accounting for $1.15 billion. Kenya Tea Development Agency Limited (KTDA Ltd) was incorporated in June 2000 as a private company. Having taken over the assets and liabilities of Kenya Tea Development Authority, the Kenya Tea Development Agency (KTDA) is today, the largest single producer and exporter of made tea in the country accounting for 28% of Kenya�s exporting earnings and also the second largest exporter of black tea in the world. Its predecessor the Kenya Tea Development Authority had at its inception, inherited 19,000 growers from SCDA who were cultivating 4,700 hectares of tea and producing 2.8 million Kgs of green leaf annually. Three and a half decades later, the agency currently had about 400,000 growers cultivating over 86,000 hectares with an annual green leaf production in excess of 700 million Kgs, about 6,000/ha by year 2003.

Compared to other sectors, the tea industry is a success story in this country where tea farmers are able to count on the commodity as an income earner. Despite some changes undertaken by the Government towards the liberalisation of the smallholder tea sub-sector since 1997, there are still issues within the subsector that may have a negative impact on the continued development of the industry. The KTDA still dominates provision of services to the smallholder farmers but parallel systems continue to emerge where farmers sell green tea leaf directly to private factories or to middlemen for immediate payments without any contractual arrangements. If this practice is encouraged it is likely to lead to low tea production as a result of lack of inputs and services to smallholder farmers. Most farmers will certainly not use the money so earned to buy inputs for the tea.

Fresh horticulture exports were $718 million, well short of the record high of $1.12 billion in 2007, in part due to unfavorable global weather conditions that affected air transportation. Tourism rebounded from the drop experienced in 2008 after the post-election violence, bringing in $807 million in 2009, an increase of 19% from 2008. In 2010, the Kenyan Ministry of Tourism recorded nearly 1.1 million tourists--an all-time high--and an 18% revenue growth, in local currency terms. Africa is Kenya's largest export market, followed by the European Union (EU).

Kenya benefits significantly from the African Growth and Opportunity Act (AGOA), but the apparel industry is struggling to hold its ground against Asian competition. Currently there are 19 apparel factories, 1 yarn/fabric company, and 6 accessory companies (labels, sewing supplies, hangers) operating in the Export Processing Zones. Approximately 90% of Kenya's AGOA exports in 2010 were garments, and Kenya�s garment exports under AGOA totaled $202 million in 2010 (a slight increase over 2009 but still well below the 2006 level of $265 million).

Kenya does not systematically collect foreign direct investment (FDI) statistics, and its historical performance in attracting FDI has been relatively weak. The stock of FDI in 2005 was estimated to be about $1.04 billion, less than half of that in neighboring Tanzania. Net foreign direct investment was negative from 2000-2003, but started trickling back in 2004. The stock of U.S. FDI (at historical prices) was estimated to be about U.S. $180 million as of 2010.

Remittances are Kenya�s single largest source of foreign exchange and a key social safety net. According to the Central Bank of Kenya, recorded remittances totaled about $640 million in 2010; however, the actual number may be as high as $1 billion.

Kenya faces profound environmental challenges brought on by high population growth, deforestation, shifting climate patterns, and the overgrazing of cattle in marginal areas in the north and west of the country. Significant portions of the population will continue to require emergency food assistance in the coming years.

Kenya is pursuing regional economic integration, which could enhance long-term growth prospects. The government is pursuing a strategy to reduce unemployment by expanding its manufacturing base to export more value-added goods to the region while enabling Kenya to develop its services hub. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East African Community (EAC). The EAC's objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement paving the way for a common market.

The Customs Union and a Common External Tariff were established on January 1, 2005, but by 2012 the EAC countries were still working out exceptions to the tariff. Rwanda and Burundi joined the community in July 2007. In May 2007, during a Common Market for Eastern and Southern Africa (COMESA) summit, 13 heads of state endorsed a move to adopt a COMESA customs union and set December 8, 2008 as the target date for its adoption. On July 1, 2010, the EAC Common Market Protocol, which allows for the free movement of goods and services across the five member states, took effect. In October 2008, the heads of state of EAC, COMESA, and the Southern African Development Community (SADC) agreed to work toward a free trade area among all three economic groups with the eventual goal of establishing a customs union. If realized, the Tripartite Free Trade area would cover 26 countries.

The key independent print media in Kenya are the Nation Media Group, the Standard Group, People Limited, and the Times Media Group. The Nation Media Group publications, which include the Daily Nation, the Sunday Nation, the Business Daily, the weekly East African, and the only Swahili publications, Taifa Leo and Taifa Jumapili, have the largest circulations. The Standard and the Sunday Standard, published by the Standard Group, are also popular newspapers, although with smaller circulations. Approximately 120 foreign correspondents representing 100 media organizations report from Nairobi. There is no government-owned or controlled newspaper.

Major independent radio and television media are the Kenya Television Network (KTN), the broadcast media arm of the Standard Group; Nation Radio/TV, owned by the Nation Media Group; and Citizen Radio/Television, owned by Royal Media Services. The government owns and controls the Kenya Broadcasting Corporation (KBC) and its subsidiaries. KBC is the only national radio and television network.

Kenya also has hundreds of FM radio stations, some broadcasting in Swahili or in local languages. Radio has a wide reach in Kenya, especially in rural areas. Some major international broadcasters, including British Broadcasting Corporation (BBC), Voice of America (VOA), and Radio France Internationale (RFI), rebroadcast their programming in Kenya.