Kenya entered 2013 from an improving economic position with low inflation and stable interest rates. By end-February, inflation was down to 4.5%, from a high of 18% in early 2012, and the shilling remained stable (at Sh85=US$1) against major trading currencies. This enabled the Central Bank to lower interest rates to 9.5%, compared to a peak of 20% in mid-2012.
Peaceful national elections in March 2013 and a smooth transition of power renewed business confidence, strengthening prospects for the economy to achieve a growth rate of five percent in 2013, compared to 4.3% in 2012.
But Kenya is still underperforming its peers and the economy remains out of balance with sharp differences in sectoral performance, says the latest World Bank economic analysis. Macroeconomic management, the financial sector and the Information and Communications Technology (ICT) sectors remain very strong, but the port of Mombasa and agriculture are weak, says the Bank analysis in February 2013, which builds on the key findings of the Bank’s December 2012 Kenya Economic Update.
The economy remains vulnerable to external shocks, as the current account deficit is above 10% of gross domestic product (GDP), despite global fuel prices moderating in recent months. Service exports have increased but goods exports remain weak. Short-term capital inflows have helped stabilize the exchange rate, but heightened vulnerability to external shocks. Moreover, the real exchange rate is 34% stronger than a decade ago, constraining economic competitiveness.
Growth in 2013 will mainly be driven by recovery in agriculture and more stable energy supplies due to good rains, compensating a slowdown in tourism. Energizing Kenya’s export engine will be key to creating jobs for the 800,000 Kenyans who enter the labor force every year. Bank analysis shows that Kenya is undergoing a long-term shift out of family farming, with less than half of working Kenyans being engaged on family farms today compared to two-thirds two decades ago.
With the formal sector creating only 50,000 jobs, most jobs will need to be generated by the informal sector. Stronger job growth, the Bank says, will result only if Kenya improves infrastructure and business climate environment for export industries and boosts household productivity by accepting informal businesses as legitimate parts of the economy.
The Bank urges the new administration to focus its policy on several key areas, including social equity, quality education and better management of water resources to reduce vulnerability. Enhancing competitiveness through macroeconomic and political stability, infrastructure expansion (energy, roads, port and rail services) and overhaul of the state monopoly on maize and cereals sector is also critical. Moreover, the new administration should strengthen institutional reforms in devolution, judicial transformation and public financial management.
Kenya should also maintain prudent macroeconomic performance and improve its growth rate closer to the average of its peers in Africa and East African Community (EAC), whose growth averages of 5.3% and six percent respectively. It should reduce non-tariff barriers to trade to benefit from emerging trade and investment opportunities in the EAC to improve its food and energy security.
courtesy: World Bank