Economy of Kenya


Economy of Kenya
Economy of Kenya
Rank 86th
Currency Kenyan shilling (KES)
Trade organizations CEN-SAD, COMESA, EAC, WTO and others
Statistics
GDP Nominal:$29.564
billion PPP:$60.361 billion
GDP per capita Nominal:$838
PPP:$1,711 (2008 est.)
GDP by sector agriculture (21.4%), industry (16.3%), services (62.3%) (2009 est.)
Inflation (CPI) 3.2% (June 2010)
Gini index 42.5% (2008 est.)
Labour force
by occupation
agriculture 75%, industry and services 25% (2007 est.)
Unemployment 40% (2008 est.)
Main industries small-scale consumer goods (plastic, furniture, batteries, textiles, clothing, soap, cigarettes, flour), agricultural products, horticulture, oil refining; aluminum, steel, lead; cement, commercial ship repair, tourism
Ease of Doing Business Rank 98th[1]
External
Exports $4.479 billion (2009 est.)
Export goods tea, horticultural products, coffee, petroleum products, fish, cement
Main export partners UK 10.2%, Netherlands 9.4%, Uganda 9.1%, Tanzania 8.9%, US 6.4%, Pakistan 5.7% (2008)
Imports $9.215 billion (2009 est.)
Import goods machinery and transportation equipment, petroleum products, motor vehicles, iron and steel, resins and plastics
Main import partners UAE 11.9%, India 11.8%, China 10.3%, Saudi Arabia 8.3%, South Africa 5.9%, Japan 5.3%, US 4% (2008)
Public finances
Public debt $7.729 billion (31 December 2009 est.)
Revenues $6.858 billion
Expenses $8.759 billion (2009 est.)
Credit rating Standard & Poor's:[2]
B+ (Domestic)
B+ (Foreign)
BB- (T&C Assessment)
Outlook: Stable[3]
Fitch:[3]
B+
Outlook: Stable
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars

Kenya's economy is market-based, with a few state-owned infrastructure enterprises, and maintains a liberalized external trade system. The country is generally perceived as Eastern and central Africa's hub for Financial, Communication and Transportation services. As at May 2010, economic prospects are positive with 4-5% GDP growth expected, largely because of expansions in tourism, telecommunications, transport, construction and a recovery in agriculture. These improvements are supported by a large pool of English speaking professional workers. There is a high level of computer literacy, especially among the youth. The government, generally perceived as investment friendly, has enacted several regulatory reforms to simplify both foreign and local investment. An increasingly significant portion of Kenya's foreign inflows is from remittances by non-resident Kenyans who work in the US, Middle East, Europe and Asia. Compared to its neighbors, Kenya has a well-developed social and physical infrastructure. It is considered the main alternative location to South Africa, for major corporations seeking entry into the African continent.

Contents

Economic History

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. Between 1974 and 1990, however, Kenya's economic performance declined. Kenya's inward-looking policy of import substitution and rising oil prices made Kenya's manufacturing sector uncompetitive. The government began a massive intrusion in the private sector. Lack of export incentives, tight import controls, and foreign exchange controls made the domestic environment for investment even less attractive.

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 to 1996, 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 July 1997, the Government of Kenya refused to meet commitments made earlier to the IMF on governance reforms.[citation needed]As a result, the IMF suspended lending for three years, and the World Bank also put a $90 million structural adjustment credit on hold.

The Government of Kenya took positive steps on reform, including the 1999 establishment of the Kenyan Anti-Corruption Authority, and measures to improve the transparency of government procurements and reduce the government payroll. In July 2000, the IMF signed a $150 million Poverty Reduction and Growth Facility, and the World Bank followed suit shortly after with a $157 million Economic and Public Sector Reform credit.

This is a chart of trend of gross domestic product of Kenya at market prices estimated by the International Monetary Fund with figures in millions of Kenyan Shillings.

Year Gross Domestic Product US Dollar Exchange
1980 74,940 7.42 Shillings
1985 143,715 16.43 Shillings
1990 278,502 22.86 Shillings
1995 614,267 50.42 Shillings
2000 967,838 78.58 Shillings
2005 1,449,408 75.55 Shillings
2008 - 78.90 Shillings
2011 - 96.85 Shillings

Small scale businesses are providing a more and more jobs in Kenya. With increased but simplified regulations, they are able to blossom into large, legitimate businesses that can eventually create more jobs and government revenue.[4]

Gross Domestic Product (GDP)

In 2006 Kenya’s GDP was about US$17.39 billion. Per capita GDP averages somewhat more than US$450 annually. Adjusted in purchasing power parity (PPP) terms, per capita GDP in 2006 was about US$1,200. The country’s real GDP growth picked up to 2.3 percent in early 2004 and to nearly 6 percent in 2005 and 2006, compared with a sluggish 1.4 percent in 2003 and throughout President Daniel arap Moi’s last term (1997–2002). Real GDP is expected to continue to improve, largely because of expansions in tourism, telecommunications, transport, and construction and a recovery in agriculture. The Kenya Central Bank forecast for 2007 is between 5 and 6 percent GDP growth. GDP composition by sector, according to 2004 estimates, was as follows: agriculture, 25.7 percent; manufacturing, 14.0 percent; trade, restaurants, and hotels, 13.8 percent; transport and communications, 6.9 percent; government services, 15.6 percent; and other, 24.0 percent.[5]

Kenya's 2010 Economic Performance and Outlook for 2011: In 2010, Kenya has seen the return of higher growth projected at 4.9 percent, and may now be at a tipping point for robust growth. Five factors are creating a positive momentum: the new constitution, EAC integration, ICT innovations, strong macroeconomic management, and recent investments in infrastructure. Services, the driver of previous years' growth, have moderated while agriculture and industry are rebounding after two weak years. ICT has been the main driver of Kenya's economic growth over the last decade, growing on average by 20 percent annually, and propelling the combined transport and communications sector into the economy's second largest (after agriculture). Since 2000, Kenya's economy grew at an average of 3.7 percent. Without ICT, growth in 2010 would have been a lackluster 2.8 percent—similar to the population growth rate—and income per capita would have stagnated. Over the last three decades Kenya has experienced only two short episodes when economic growth exceeded five percent and was sustained for at least three consecutive years: 1986-88 and 2004-2007. Economic growth in 2011-12 could range between 5.3 and 6.0 percent if no shocks occur. Public sector investments in infrastructure will help to stimulate this growth. However, the timely implementation of the constitutional reforms would also be necessary to help boost business confidence. (ref; Kenya Economic Update, December 2010, www.worldbank.org/Kenya.keu)

Industries

Agriculture

Cultivation on the slopes of Mount Kenya

The agricultural sector continues to dominate Kenya’s economy, although only 15 percent of Kenya’s total land area has sufficient fertility and rainfall to be farmed, and only 7 or 8 percent can be classified as first-class land. In 2006 almost 75 percent of working Kenyans made their living on the land, compared with 80 percent in 1980. [1] About one-half of total agricultural output is non-marketed subsistence production. Agriculture is the second largest contributor to Kenya’s gross domestic product (GDP), after the service sector. In 2005 agriculture, including forestry and fishing, accounted for about 24 percent of GDP, as well as for 18 percent of wage employment and 50 percent of revenue from exports. The principal cash crops are tea, horticultural produce, and coffee; horticultural produce and tea are the main growth sectors and the two most valuable of all of Kenya’s exports. In 2005 horticulture accounted for 23 percent and tea for 22 percent of total export earnings. Coffee has declined in importance with depressed world prices, accounting for just 5 percent of export receipts in 2005. The production of major food staples such as corn is subject to sharp weather-related fluctuations. Production downturns periodically necessitate food aid—for example, in 2004 aid for 1.8 million people⎯because of one of Kenya’s intermittent droughts. However, the expansion of credit to the agricultural sector has enabled farmers to better deal with the large risk of agriculture based on rainfall and the dramatic fluctations of the prices of agricultural products.[5]

Tea, coffee, sisal, pyrethrum, corn, and wheat are grown in the fertile highlands, one of the most successful agricultural production regions in Africa. Livestock predominates in the semi-arid savanna to the north and east. Coconuts, pineapples, cashew nuts, cotton, sugarcane, sisal, and corn are grown in the lower-lying areas.[5]

Kenya's Agriculture Performance in 2010: The agriculture sector has been rebounding in 2010 and is expected to grow by 5 percent. This is an important development after two consecutive years of decline, when the sector contracted by a combined 6.7 percent. Favourable weather conditions and specific policy interventions under the government's economic stimulus program helped turn the sector around. The performance of Kenya's main agriculture exports in 2010 was strongest for tea which recovered rapidly from 2009 weather conditions. A combination of volume and price increases will see the sector perform even better than in 2008, which had previously been the best year for the sector. Although coffee is benefitting from an increase in global prices, output contracted as coffee production was slow to recover from the prolonged drought in early 2009. Horticulture exports contracted for the third consecutive year. The sector continued to be affected by a muted recovery in Europe, especially the fruits and vegetables. In addition, the volcanic ash crisis in April 2010 disrupted access to the key source markers in Europe. (source: Kenya Economic Update, December 2010, www.worldbank.org/Kenya/keu)

Forestry and fishing

Resource degradation has reduced output from forestry. In 2004 roundwood removals came to 22,162,000 cubic meters. Fisheries are of local importance around Lake Victoria and have potential on Lake Turkana. Kenya’s total catch reported in 2004 was 128,000 metric tons. However, output from fishing has been declining because of ecological disruption. Pollution, overfishing, and the use of unauthorized fishing equipment have led to falling catches and have endangered local fish species.[5]

Mining and minerals

Kenya has no significant mineral endowment. The mining and quarrying sector makes a negligible contribution to the economy, accounting for less than 1 percent of gross domestic product, the majority contributed by the soda ash operation at Lake Magadi in south-central Kenya. Thanks largely to rising soda ash output, Kenya’s mineral production in 2005 reached more than 1 million tons. One of Kenya’s largest foreign-investment projects in recent years is the planned expansion of Magadi Soda. Apart from soda ash, the chief minerals produced are limestone, gold, salt, and fluorspar.[5]

All unextracted minerals are government property, according to the Mining Act. The Department of Mines and Geology, under the Ministry of Environment and Natural Resources, controls exploration and exploitation of such minerals.[5]

Industry and manufacturing

Although Kenya is the most industrially developed country in East Africa, manufacturing still accounts for only 14 percent of gross domestic product (GDP). This level of manufacturing GDP represents only a slight increase since independence. Expansion of the sector after independence, initially rapid, has stagnated since the 1980s, hampered by shortages in hydroelectric power, high energy costs, dilapidated transport infrastructure, and the dumping of cheap imports. However, due to urbanization, the industry and manufacturing sectors have become increasingly important to the Kenyan economy, and has been reflected by an increasing GDP per capita. Industrial activity, concentrated around the three largest urban centers, Nairobi, Mombasa, and Kisumu, is dominated by food-processing industries such as grain milling, beer production, and sugarcane crushing, and the fabrication of consumer goods, e.g., vehicles from kits. Kenya also has an oil refinery that processes imported crude petroleum into petroleum products, mainly for the domestic market. In addition, a substantial and expanding informal sector engages in small-scale manufacturing of household goods, motor-vehicle parts, and farm implements. About half of the investment in the industrial sector is foreign, with the United Kingdom providing half. The United States is the second largest investor.[5]

Kenya’s inclusion among the beneficiaries of the U.S. Government’s African Growth and Opportunity Act (AGOA) has given a boost to manufacturing in recent years. Since AGOA took effect in 2000, Kenya’s clothing sales to the United States increased from US$44 million to US$270 million (2006). Other initiatives to strengthen manufacturing have been the new government’s favorable tax measures, including the removal of duty on capital equipment and other raw materials.[5]

Energy

The largest share of Kenya’s electricity supply comes from hydroelectric stations at dams along the upper Tana River, as well as the Turkwel Gorge Dam in the west. A petroleum-fired plant on the coast, geothermal facilities at Olkaria (near Nairobi), and electricity imported from Uganda make up the rest of the supply. Kenya’s installed capacity stood at 1,142 megawatts a year between 2001 and 2003. The state-owned Kenya Electricity Generating Company (KenGen), established in 1997 under the name of Kenya Power Company, handles the generation of electricity, while the Kenya Power and Lighting Company (KPLC), which is slated for privatization, handles transmission and distribution. Shortfalls of electricity occur periodically, when drought reduces water flow. In 1997 and 2000, for example, drought prompted severe power rationing, with economically damaging 12-hour blackouts. Frequent outages, as well as high cost, remain serious obstacles to economic activity. Tax and other concessions are planned to encourage investment in hydroelectricity and in geothermal energy, in which Kenya is a pioneer. The government plans to open two new power stations in 2008, Sondu Miriu (hydroelectric) and Olkaria IV (geothermal), but power demand growth is strong, and demand is still expected to outpace supply during periods of drought.[5]

Kenya has yet to find hydrocarbon reserves on its territory, despite several decades of intermittent exploration. Although Australia continues the search off Kenya’s shore, Kenya currently imports all crude petroleum requirements. Petroleum accounts for 20 to 25 percent of the national import bill. Kenya Petroleum Refineries—a 50:50 joint venture between the government and several oil majors—operates the country’s sole oil refinery in Mombasa, which currently meets 60 percent of local demand for petroleum products. In 2004 oil consumption was estimated at 55,000 barrels (8,700 m3) a day. Most of the Mombasa refinery’s production is transported via Kenya’s Mombasa–Nairobi pipeline.[5]

Tourism

Tourists on a safari in Kenya

Kenya’s services sector, which contributes about 63 percent of GDP, is dominated by tourism. The tourism sector has exhibited steady growth in most years since independence and by the late 1980s had become the country’s principal source of foreign exchange. In the late 1990s, tourism relinquished this position to tea exports, because of a terrorism-related downturn. The downturn followed the 1998 bombing of the U.S Embassy in Nairobi and later negative travel advisories from Western governments. Tourists, the largest number from Germany and the United Kingdom, are attracted mainly to the coastal beaches and the game reserves, notably, the expansive Tsavo National Park (20,808 square kilometers) in the southeast. The government and tourist industry organizations have taken steps to address the security problem and to reverse negative publicity. Such steps include establishing a tourist police and launching marketing campaigns in key tourist origin markets. Tourism has seen a substantial revival over the past several years and is the major contributor to the pick-up in the country’s economic growth.[5]

Tourism is now Kenya's largest foreign exchange earning sector, followed by flowers, tea, and coffee. In 2006 tourism generated US$803 million, up from US$699 million the previous year.[5]

Financial Services

Kenya is East and Central Africa's hub for Financial services. The Nairobi Stock Exchange (NSE) is ranked 4th in Africa in terms of Market capitalization.

The Kenya banking system is supervised by the Central Bank of Kenya (CBK). As of late July 2004, the system consisted of 43 commercial banks (down from 48 in 2001), several non-bank financial institutions, including mortgage companies, four savings and loan associations, and several score foreign-exchange bureaus. Two of the four largest banks, the Kenya Commercial Bank (KCB) and the National Bank of Kenya (NBK), are partially government-owned, and the other two are majority foreign-owned (Barclays Bank and Standard Chartered). Most of the many smaller banks are family-owned and -operated.[5]

Labor

In 2006 Kenya’s labor force was estimated to include about 12 million workers, almost 75 percent in agriculture. The number employed outside small-scale agriculture and pastoralism was about 6 million. In 2004 about 15 percent of the labor force was officially classified as unemployed. Other estimates place Kenya’s unemployment much higher, even up to 40 percent. In recent years, Kenya's labor force has shifted from the countryside to the cities, such as Nairobi, as Kenya becomes increasingly urbanized. [5]

Currency, exchange rate, and inflation

The exchange rate of the Kenya shilling between 2003 and 2010 has averaged at about KSh74-78 to US$1.

As at April 2010 Kenya's inflation rate is 3.65%.

Government budget

In 2006 Kenya’s revenues totaled US$4.448 billion, while its estimated expenditures totaled US$5.377 billion. Government budget balance as a percentage of gross domestic product⎯a low –5.5 percent in 2004⎯had improved to –2.1 percent in 2006.[5]

Foreign economic relations

Since independence, Kenya, a nonaligned country, has seen both substantial foreign investment and significant amounts of development aid, some from Russia, some from China and others from the high developed countries. Between 60 and 70 percent of industry is still owned from abroad.[citation needed] Kenya's development assistance has come from increasingly diverse sources in recent years with China taking a increasingly higher prominent role than the west. The share of funding provided by the United Kingdom has fallen significantly, while that of multilateral agencies, particularly the World Bank and the European Development Fund, has increased. The most active investors currently are the Chinese.

Kenya is active within regional trade blocs such as the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), a partnership of Kenya, Uganda, and Tanzania. The aim of the EAC is to create a common market of the three states modeled on the European Union.[5] Among the early steps toward integration is the customs union which has eliminated duties on goods and non-tariff trade barriers among the members.

Kenyan exports in 2006

Kenya’s chief exports are horticultural products and tea. In 2005 the combined value of these commodities was US$1,150 million, about 10 times the value of Kenya’s third most valuable export, coffee. Kenya’s other significant exports are petroleum products, sold to near neighbors, fish, cement, pyrethrum, and sisal. The leading imports are crude petroleum, chemicals, manufactured goods, machinery, and transportation equipment. Africa is Kenya's largest export market, followed by the European Union. The major destinations for exports are the United Kingdom (UK), Tanzania, Uganda, and the Netherlands. Major suppliers are the UK, United Arab Emirates, Japan, and India. Kenya’s main exports to the United States are garments traded under the terms of the African Growth and Opportunity Act (AGOA). Despite AGOA, Kenya’s apparel industry is struggling to hold its ground against Asian competition and runs a trade deficit with the United States. Many of Kenya's problems relating to the export of goods are believed by most economists to be caused by Kenya's export of inexpensive goods that saurate the global market but do little to substantially raise the amount of money coming into the country.[5]

Kenya typically has a substantial trade deficit. The trade balance fluctuates widely because Kenya’s main exports are primary commodities subject to the effects of both world prices and weather. In 2005 Kenya’s income from exports was about US$3.2 billion. The payment for imports was about US$5.7 billion, yielding a trade deficit of about US$2.5 billion.[5]

In 2006 Kenya had a current account deficit of US$1.5 billion. This figure was a significant increase over 2005, when the current account had a deficit of US$495 million. In 2006 the current account balance as a percentage of gross domestic product was –4.2.[5]

In 2006 Kenya’s external debt totaled US$6.7 billion. The debt is forecast to be a manageable 30 percent of gross domestic product in 2007.[5]

Kenyan policies on foreign investment generally have been favorable since independence, with occasional tightening of restrictions to promote the Africanization of enterprises. Foreign investors have been guaranteed ownership and the right to remit dividends, royalties, and capital. In the 1970s, the government disallowed foreign investment unless there was also some government participation in the ownership of an enterprise. Notwithstanding some restrictions, between 60 and 70 percent of industry is still owned from abroad, a significant portion of which can be traced to fraudulent asset transfers by the colonial Britain during transition to independence. This denied Kenyans the opportunity to progress economically - relegating most of them to poverty and creating conditions that would lead to dependency on foreign aid. However, Kenyan has had more economic success and more success raising its own quality of life than some of its neighbors in Sub-Saharan Africa.[5]

Criticism and Challenges

The economy’s heavy dependence on rain-fed agriculture and the tourism sector leaves it vulnerable to cycles of boom and bust. The agricultural sector employs nearly 75 percent of the country’s 38 million people. Half of the sector’s output remains subsistence production.[5]

Kenya’s economic performance has been hampered by numerous interacting factors: heavy dependence on a few agricultural exports that are vulnerable to world price fluctuations, population growth that has outstripped economic growth, prolonged drought that has necessitated power rationing, deteriorating infrastructure, and extreme disparities of wealth that have limited the opportunities of most to develop their skills and knowledge. Poor governance and corruption also have had a negative impact on growth, making it expensive to do business in Kenya. According to Transparency International, Kenya ranks among the world’s half-dozen most corrupt countries. Bribery and fraud cost Kenya as much as US$1 billion a year. Kenyans, 23 percent living on less than US$1 per day, pay some 16 bribes a month—two in every three encounters with public officials. Another large drag on Kenya’s economy is the burden of human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS).[5] Prospects significantly improved under the Kibaki government, whose policy aims include budgetary reforms and debt restraint.

Kenya's economic policies have been subjected to criticism by western donors. There is debate as to the validity of, and motivations behind, such criticism.

Despite early disillusionment of western donors with the government, the economy has seen a broad-based expansion, led by strong performance in tourism and telecommunications, and acceptable post-drought results in agriculture, especially the vital tea sector.[5] Kenya's economy grew by more than 7% in 2007 and its foreign debt was greatly reduced.[5] Western donors are now adopting a less peternalistic attitude towards their relations with African nations. However there is still significant improvement to be done.

See also

References

 This article incorporates public domain material from websites or documents of the CIA World Factbook.

Further reading

  • Kitching, Gavin (1980). Class and Economic Change in Kenya. Yale University Press. ISBN 0300023855. 

External links


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