Research Report. An Overview of the Kenyan Economy. Jeremy Wakeford

Transcription

1 Research Report An Overview of the Kenyan Economy Jeremy Wakeford November 2016

2 An Overview of the Kenyan Economy Jeremy Wakeford Quantum Global Research Lab November 2016 Contents List of Figures... 2 List of Tables... 2 Highlights... 3 SWOT Analysis... 3 Key macroeconomic indicators... 4 Vision Macroeconomic outlook... 5 Macroeconomic Performance... 6 Economic growth and inflation... 6 Composition of GDP... 6 Employment... 8 Fiscal sector... 9 Monetary and financial sector External sector Consumption, investment and savings Business Environment Socioeconomic Welfare Urbanisation Sectoral Issues Infrastructure Electricity Oil resources Tourism & hospitality References

3 List of Figures Figure 1: Macroeconomic performance indicators... 6 Figure 2: Broad sectoral composition of value added, Figure 3: Sectoral composition of GDP, Figure 4: Employment creation in formal and informal sectors... 9 Figure 5: Government revenue, expenditure and debt Figure 6: Money supply and credit extension Figure 7: Consumer inflation and interest rate Figure 8: NSE20 stock market index Figure 9: Imports and exports Figure 10: Value of main export products Figure 11: Prices of main export products Figure 12: Composition of exports, Figure 13: Composition of imports, Figure 14: Foreign direct investment, current account balance and exchange rate Figure 15: External debt and foreign reserves Figure 16: Household consumption expenditure Figure 17: Consumption, investment and savings Figure 18: Electricity generation by source, Figure 19: Tourism sector statistics, List of Tables Table 1: Key macroeconomic indicators for Table 2: Forecasts of economic growth in Kenya... 5 Table 3: Sectoral growth rates, Table 4: Average expenditure on selected items for the period Table 5: Ease of Doing Business rankings for selected countries in sub-saharan Africa Table 6: Key socioeconomic indicators for Kenya and sub-saharan Africa

4 Highlights SWOT Analysis Strengths consistent and rapid economic growth, averaging over 5% in the past decade relatively low and stable inflation rate stable exchange rate solid public investment in infrastructure relatively diversified structure of the economy robust domestic consumption strong inflow of remittances rising incomes and a growing middle-income class inclusive financial innovation Opportunities further investment in infrastructure to boost growth and competitiveness development of indigenous oil resources further development of geothermal energy potential demographic dividend urbanisation and industrialisation potential regional trade opportunities Weaknesses large and widening fiscal deficit growing public debt large current account deficit low savings rate high poverty rate (25%) limited formal sector employment youth unemployment (especially urban) large skills gap External: Threats global demand and commodity price weakness global financial market volatility capital flight from emerging & frontier economies oil price shocks possible La Niña-induced drought Internal: security and terrorist threats political uncertainty in the lead-up to the 2017 elections slow fiscal consolidation may crowd out private investment and cause overheating capping of interest rates could curtail credit growth 3

5 Kenya s rate of economic growth is on track to exceed the average for sub-saharan Africa (SSA) for the eighth year in a row. This growth performance has been by driven by strong domestic demand and public infrastructure investment in a context of low oil prices and domestic macroeconomic stability. Domestic consumption has been growing rapidly on the back of a growing middle class, rising incomes and rapid expansion of credit. Public investment and fiscal transfers to counties has ensured that the growth has been geographically broad-based. Low oil prices and a surge in remittances have allowed a contraction in the current account deficit recently, although the gap between imports and exports is still wide and presents a risk, especially if oil prices rise. Economic growth has been reasonably well diversified, especially in services sectors, although manufacturing has underperformed. Low inflation and currency stability over the past two years have been conducive for investment. Key macroeconomic indicators 1 Table 1: Key macroeconomic indicators for 2015 Indicator 2015 Population (million) 46.1 Population growth rate 2.6% Real GDP growth rate 5.6% Real GDP per capita growth rate 2.9% GDP per capita (purchasing power parity) $3,083 Inflation rate (annual %) 6.6% Fiscal deficit (% of GDP) 8.3% Government net debt (% of GDP) 48.3% Current account balance (% of GDP) -6.8% Unemployment rate 9.2%* Source: World Bank (2016a) and IMF (2016a); *2014 Vision 2030 The Kenyan government s overarching development strategy is articulated in its Vision 2030 national development programme, which aims to accelerate sustainable growth, reduce inequality, and manage resource scarcity. Specifically, the Vision 2030 sets the goal for Kenya to become a newly industrialising country and to reach upper-middle-income status by 2030, thereby providing a high quality of life for all its citizens (Government of Kenya [GoK] 2007). This implies raising the Gross National Income (GNI) per capita to between $4,036 and $12,475 (in 2015 dollars), 2 from $1,340 in The Vision 2030 rests on three pillars, namely economic, social and political. The economic pillar seeks to achieve an average rate of GDP growth of 10% per annum (from 2012). The social pillar aims to build a just and cohesive society with social equity in a clean and secure environment. The political pillar seeks to realise a democratic 1 There is some discrepancy between the macroeconomic data provided by the World Bank (2016a) and IMF (2016a). To ensure consistency, and because it is a more complete dataset, the World Bank data are used whenever possible

6 political system founded on issue-based politics that respects the rule of law, and protects the rights and freedoms of every individual in Kenyan society. The Vision 2030 is to be implemented in a series of five-year Medium-Term Plans. The first such plan (MTP I) covered the period , and included several flagship projects in six key sectors, namely tourism, agriculture, wholesale and retail trade, manufacturing for the regional market, business process offshoring, and financial services (GoK 2007). A second five-year Medium Term Plan (MTP II ) was adopted in 2013, which prioritises the development of commercial agriculture in order to boost agricultural productivity and food security, and also highlights the need for job creation (GoK 2013). The related agenda of scaling up value addition in the agriculture value chain is to be supported by investments in skill development. The development of oil and other mineral resources is another key priority. The political pillar of the MTP II emphasizes devolution of governance, as required by the 2010 Constitution. Macroeconomic outlook Overall, the outlook for Kenya s economy over the coming years looks bright. Both the World Bank and International Monetary Fund (IMF) are forecasting growth rates of around 6% for the next 3-4 years. Growth will continue to be supported by robust domestic consumption, public infrastructure investments in transport, energy and information and communications technology (ICT), and remittances from abroad. On the other hand, the emergence of the La Niña weather phenomenon could bring adverse rainfall conditions and harm agricultural output, 3 which accounts for a third of GDP and the bulk of export revenues. The other main external risks are continued weak global demand, global financial volatility (especially following the election of Donald Trump in the United States), and a risk of capital flight from frontier economies. Oil prices are expected to lift modestly next year, but the impact on the balance of payments could be offset by recovery in tourism and FDI. The major internal risks relate to possible political instability in the run-up to the 2017 elections, associated delays in fiscal consolidation, and the recent capping of interest rates, which could restrict access to credit and impair bank performance. Table 2: Forecasts of economic growth in Kenya Agency World Bank 5.9% 6.0% 6.1% N/A IMF 6.0% 6.1% 6.5% 6.5% Source: World Bank (2016b), IMF (2016a) 3 5

7 Annual % change Macroeconomic Performance Economic growth and inflation Kenya s population was estimated to be 46.1 million in 2015 (World Bank, 2016a). The population grew at an average annual rate of 2.6% between 2006 and If it continued to grow at this rate, the population would roughly double in size over the next 25 years. Real GDP has grown by an average rate of 5.3% between 2006 and In constant local currency units, the Kenyan economy double in size between 1998 and However, given the relatively rapid rate of population growth, real GDP per capita growth has averaged just 2.5% between 2006 and In 2015, the level of GDP per capita stood at US$1,377, or $3,083 when measured in purchasing power parity (PPP) terms (current international dollars). The consumer price inflation rate averaged 10.6% between 2006 and Inflation has been quite volatile over the last 15 years, with major spikes in 2008 (driven mainly by rapid increases in the global prices of oil and food products) and 2011 (largely a result of a sharp depreciation of the Kenyan shilling). Since 2013, however, the inflation rate has been within the Central Bank of Kenya s target of 5.00% +/-2.50%. Figure 1: Macroeconomic performance indicators Real GDP Real GDP per capita Consumer price inflation Source: World Bank (2016a) Composition of GDP In 2015, agriculture accounted for 33% of gross value added, industry for 20% and services for the remaining 47%. Somewhat surprisingly, agriculture s share has risen in the past few years, from 23% in The shares of both industry (22% in 2007) and services (55% in 2007) have declined in recent years. This shift can be attributed partly to growth in agricultural output and partly to the depreciation in the exchange rate, which has led to increased export earnings (in local currency units) from commodity exports such as coffee, tea and horticultural products. 6

8 Value added (% of GDP) Figure 2: Broad sectoral composition of value added, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Agriculture Industry Services Source: World Bank (2016a) Figure 3 shows the percentage contribution to GDP of the main economic sectors in Agriculture (32%) was the single largest sector, followed by financial services and real estate (17%), public services (13%), manufacturing (11%) and transport and communication (10%). Mining and quarrying was the smallest sector (1%), while electricity and water accounted for 2% of GDP and construction for 5%. Figure 3: Sectoral composition of GDP, 2015 Public services 13% Financial, insurance, real estate & admin 17% Agriculture 32% Transport, storage & communication 10% Trade & hospitality 9% Construction 5% Source: Kenya National Bureau of Statistics (2016a) Electricity & water 2% Mining & quarrying 1% Manufacturing 11% 7

9 As Table 3 shows, the sectors that recorded the highest average rate of growth in the period 2012 to 2015 were construction (11%), which was bolstered partly by state infrastructure projects, mining and quarrying (10.1%), financial services (7.8%) and education (7.1%). Agriculture sector growth (5.6%) was given a boost by above-average rainfall associated with the El Nino weather phenomenon. The only sector to record negative growth over this period was accommodation and restaurants (-4.9%), which suffered from the impact of terrorist activities on tourist arrivals, especially in The number of international visitor arrivals fell by 12.6% from 1.35 million in 2014 to 1.18 million in 2015 (KNBS 2016b). Other sectors that performed relatively weakly were manufacturing (2.9%), wholesale and retail trade (3.2%), and professional, administrative and support services (3.3%). Kenya s growth has been reasonably broad based, with the exception of manufacturing, which is inhibited by the high cost of credit, infrastructural constraints and a challenging business regulatory environment (World Bank 2016b: 4). In the first half of 2016, growth has been particularly strong in agriculture, construction, transport and tourism (World Bank 2016b). Table 3: Sectoral growth rates, Sector Average Agriculture Mining & quarrying Manufacturing Electricity & water Construction Wholesale & retail trade Accommodation & restaurants Transport & storage Information & communication Financial & insurance Public administration Professional, admin & support services Real estate Education Health Other services GDP Source: Kenya National Bureau of Statistics (2016a) Employment Total employment excluding small-scale agriculture and pastoralist activities grew by 5.9% to 15.2 million persons in 2015 (KNBS 2016b). Informal sector employment stood at 12.6 million persons in 2015, accounting for 83% of total employment. Non-agricultural formal sector employment amounted to just 2.6 million persons (17% of the total). Figure 4 shows that informal sector employment has been growing by 600,000 to 700,000 person per annum over the past five years, compared to about 100,000 new formal sector jobs. 8

10 Figure 4: Employment creation in formal and informal sectors Source: KNBS (2016b) Fiscal sector Tax revenue as a proportion of GDP has remained fairly constant over the past 15 years, being range bound between 18.4% and 20.1% of GDP (see Figure 5). However, government expenditure has grown steadily from 20.2% of GDP in 2004 to 27.8% in 2015, when revenue was just 19.5% of GDP. The Kenyan government has run a budget deficit every year except Moreover, the gap between expenditure and revenue has been widening steadily, culminating in a fiscal deficit of 8.4% of GDP in Between 2002 and 2007, the government was able to reduce its net debt levels from 58% to 34% of GDP. Since then, however, the widening fiscal deficit has resulted in an accumulation of government net debt, which reached 48.3% of GDP in The persistent and growing fiscal deficit and the rapid accumulation of debt in recent years are causes for concern in terms of fiscal sustainability. Prudent fiscal management requires that any further increases in real expenditures are directed towards productive investments that lay the foundation for future economic growth. 9

11 % of GDP Figure 5: Government revenue, expenditure and debt Source: IMF (2016a) Government net debt Revenue Expenditure Military spending accounted for 1.3% of GDP in 2014, down slightly from an average of 1.5% over the past decade, while public health expenditure amounted to 3.5%. Research and development spending was 0.8% of GDP in 2010, which is high compared to most sub-saharan African countries. Health expenditure accounted for 2.3% of GDP on average between 2006 and 2015, while expenditure on education averaged 6.3%. Compared to the averages for SSA, Kenya spent more of GDP on education, less on health, and slightly more on R&D and the military (see Table 4). Table 4: Average expenditure on selected items for the period Expenditure as a % of GDP Kenya Sub-Saharan Africa Research and development expenditure Military expenditure Health expenditure Government expenditure on education Source: World Bank (2016a) Monetary and financial sector Domestic credit extension to the private sector has grown rapidly over the past decade (18.3% per annum on average), consequently rising from 22.9% of GDP in 2006 to 34.9% in The broad money supply has grown at a similar pace, averaging 17% per annum over the past 10 years. While such rapid growth in credit and money supply has facilitated the robust rate of economic growth, it does present a potential risk in terms of inflationary pressure. The percentage of firms using banks to finance investment rose to 10

12 % of GDP 43% in 2013, up from 23% in 2007 (World Bank 2016b). This represents a significant amount of financial deepening, which has been supported by proactive financial inclusion policies of the Central Bank of Kenya (IMF, 2014). Credit extended to the private sector accounted for 81% of total credit extension in 2015 (KNBS 2016). Figure 6: Money supply and credit extension Broad money Credit to private sector Source: World Bank (2016a) The consumer price inflation rate averaged 10.6% over the past 10 years, but has declined in recent years to around 6%. 4 Lending interest rates have remained at moderately high levels between 15% and 20% since The real interest rate reached double figures in 2010 and 2013, but moderated to 6.4% in The Central Bank of Kenya s (CBK) Monetary Policy Committee (MPC) raised the Central Bank Rate (CBR) from 8.5 per cent to 10.0 per cent in June 2015, and further to 11.5 per cent in July 2015, in order to restrain growing inflationary pressures and to manage exchange rate volatility (KNBS 2016). In May 2016 the CBK reduced the CBR by one percentage point to 10.5% as the inflation rate fell to 5%. In September it trimmed the bank rate by a further 50 basis points to 10%. 4 The consumer price inflation data from the World Bank (2016a) and IMF (2016a) World Economic Outlook are inconsistent in some years. The World Bank data are presented here, as they are consistent with the data in the IMF s International Financial Statistics database. 11

13 Figure 7: Consumer inflation and interest rate % Consumer price inflation Lending interest rate Source: World Bank (2016a) The Nairobi Securities Exchange (NSE) 20 share index declined from a record high of 5,491 points during the first quarter of 2015 to 4,040 points in December By mid-november 2016 it was trading at 3,272 points. This reflects a broader sell-off of emerging and frontier market equities in the wake of slowing global trade, weakening commodity prices and heightened global financial uncertainty and volatility. Figure 8: NSE20 stock market index Source: Bloomberg 2016 The total amount of money transacted through the mobile money platform grew by 18.7% to KSh 2.8 trillion between 2014 and 2015 (KNBS 2016b). This represented 39% of GDP in

14 US$ Billions External sector The dollar value of Kenya s exports and imports have both been on a rising trend since the early 2000s, although imports have grown more rapidly than exports. The only annual decline was in 2009, in the wake of the Global Financial Crisis and ensuing Great Recession. Figure 9: Imports and exports Exports Imports Source: World Bank (2016a) Figure 10 shows the value of Kenya s three main export products, namely tea, coffee and horticulture products (such as cut flowers and salads). While the value of coffee exports has been stagnant over the past five or so years, there has been strong growth in the realised value (in Kenyan shillings) of tea and horticulture exports. In the case of tea and horticultures, this increase has not been due to increases in the international prices of these commodities, but has rather been driven mainly by increasing export volumes. On the other hand, while coffee export volumes have stagnated, international price increases since 2009 have driven a substantial rise in the price of coffee exports in local currency units. 13

15 Jan 01 Okt 01 Jul 02 Apr 03 Jan 04 Okt 04 Jul 05 Apr 06 Jan 07 Okt 07 Jul 08 Apr 09 Jan 10 Okt 10 Jul 11 Apr 12 Jan 13 Okt 13 Jul 14 Apr 15 Jan 16 KES/tonne KES billions Figure 10: Value of main export products Jan Okt Jul Apr 03 Jan Okt Jul Apr 06 Jan Okt Jul Apr 09 Jan Okt Jul Coffee Tea Horticulture Apr 12 Jan Okt Jul Apr Jan Figure 11: Prices of main export products Source: Central Bank of Kenya (2016) Coffee Tea Horticulture Figure 12 displays the composition of Kenya s export earnings in Tea (25%) and horticulture products (16%) were the largest individual items, followed by chemicals (9%) and coffee (4%). 14

16 Figure 12: Composition of exports, 2015 Coffee 4% Other 43% Tea 25% Petroleum 1% Cement 1% Source: Central Bank of Kenya (2016) Horticulture 16% Fish 1% Chemicals 9% The composition of imports is shown in Figure 13. The weakness of domestic industrial capacity is clearly shown in the dependence on imports of machinery (34% of imports), manufactured goods (17%), chemicals (15%) and minerals (15%). Food (7%) and beverages (1%) account for small shares of imports, confirming that Kenya is largely self-sufficient in food products. Petroleum products imports in 2015 amounted to KES215 billion (KNBS 2016b). Figure 13: Composition of imports, 2015 Other 6% Food 7% Beverages 1% Crude 2% Machinery 34% Mineral 15% Animals 3% Manufactured 17% Chemicals 15% Source: Central Bank of Kenya (2016) 15

17 % of GDP KES/USD The current account balance has been in negative territory since 2004, with the deficit steadily worsening since then and reaching -10.3% of GDP in 2014, subsequently abating to -6.8% last year (Figure 14). This presents significant risks to the exchange rate and therefore also to domestic prices because of the dependence on imports, especially for oil and machinery. Net foreign direct investment has been minimal in most years since the turn of the millennium, although it picked up significantly in the last two years, reaching 2.3% of GDP in Remittances have been a steady and significant source of foreign exchange in recent years, rising to 2.5% of GDP in The nominal exchange rate has depreciated considerably over the past decade, falling from KES67 per USD in 2007 to KES 98/USD in Currently, the rate is KES102/USD. Figure 14: Foreign direct investment, current account balance and exchange rate Remittances FDI net inflows Current account balance Exchange rate Source: World Bank (2016a) Kenya s stock of external debt declined significantly in the early 2000s, from 47% of Gross National Income (GNI) in 2003 to 21% of GNI in 2008, thereafter rising slightly to 26.7% in 2014 (Figure 15). This improved debt position was mirrored by an improvement in the ratio of total reserves to external debt, from 17.2% in 2002 to 48.9% in Thus while Kenya is still somewhat exposed in terms of its external debt commitments, the situation has improved substantially since the early 2000s. Interest payments on external debt amounted to just 0.4% of gross national income in 2014, thanks to low prevailing international interest rates. Kenya raised $2.82 billion in its first Eurobond issuance in 2014, at yields of percent for 10-year paper. 5 The government is reportedly considering another Eurobond issue to help finance the current fiscal deficit, which is expected to reach 9.3% of GDP in This recourse to

18 international debt raises some concerns about currency risk in the event of global financial market instability and capital flight from frontier economies. Figure 15: External debt and foreign reserves 60 % External debt stocks (% of GNI) Total reserves (% of external debt) Source: World Bank (2016a) Consumption, investment and savings Private consumption expenditure, which constitutes nearly three-quarters of GDP, has been growing at a robust annual rate averaging 6% since 2009 (Figure 16 and Figure 17). Consumption was boosted in 2015 by growing employment, rising real incomes as fuel prices fell, and a rise in remittances. A cut in interest rates by the Central Bank of Kenya in May 2016 has provided further stimulus to consumption in recent months (World Bank 2016b). The share of consumption in GDP has rose from 71% in 2002 to 81% in 2011, before dipping back to 78% in

19 % of GDP Annual % change Billions of KSE % of GDP Figure 16: Household consumption expenditure Source: World Bank (2016a) Total investment as a percentage of GDP has been on an upward trend since the early 2000s, rising from 16.4% in 2002 to 22.5% in 2014, before dipping slightly to 21.2% in However, gross national savings have trended downwards, from 17.7% of GDP in 2003 to 12.7% in National savings are bolstered by net inflows of remittances from other countries, while gross domestic savings amounted to only 7.9% of GDP in The Kenyan authorities should aim to raise the investment component of GDP in order to improve the foundation for future growth. Figure 17: Consumption, investment and savings Household consumption (RHS) Investment Savings 0-5 Source: IMF (2016) 18

20 Business Environment Indicators of business activity and confidence are up in 2016, buoyed by factors such as lower input costs, improvements in electricity supply (thanks to earlier public investments), expanding export orders, more stable macroeconomic environment and decline in interest rates (World Bank 2016b: 6). Furthermore, following targeted reforms Kenya has risen to 92 nd position on the World Bank Group s Ease of Doing Business ranking, up from 113 th the previous year. This puts Kenya among the top five economies for ease of doing business in sub-saharan Africa. However, private domestic investment, in particular by small and medium sized enterprises (SME), remain constrained. These constraints include: high cost of credit (notwithstanding the decline in interest rates), delays in payments by the exchequer and a challenging business regulatory environment (World Bank 2016b: 6). Table 5: Ease of Doing Business rankings for selected countries in sub-saharan Africa Country Global Rank 2015 Global Rank 2016 SSA Rank 2016 Mauritius Rwanda Botswana South Africa Kenya Zambia Uganda Tanzania Malawi Mozambique Ethiopia Nigeria Angola Source: World Bank (2016a) Socioeconomic Welfare Table 6 presents key indicators of socioeconomic welfare for the most recent year available. Extreme poverty (defined as incomes less than $1.90/day in international PPP terms) still afflicts a quarter of the Kenyan population, although this is substantially below the average of 41% for sub-saharan Africa. The rural poverty rate is substantially higher than the urban rate. Income inequality is also a significant challenge, with a Gini coefficient estimated at 48.5 in Life expectancy at birth stands at 62 years, slightly above the 58.9 years for the SSA region. Youth unemployment is estimated at 17.4%, with the rate slightly higher for females than for males. Slightly less than a quarter of Kenyans live in urban areas, 19

21 compared to 38% across SSA. The proportion of the Kenyan population with access to electricity (23%) and improved water (63%) are somewhat below the regional figures, while the prevalence of undernourishment (21%) is slightly above the continental proportion (18.5%). These statistics underscore the need for Kenya to adopt an inclusive growth model that creates job opportunities, especially for the youth and in urban areas, and thereby reduces poverty. This will require labour-intensive industrialisation and economic diversification, assisted by appropriate skills development. Table 6: Key socioeconomic indicators for Kenya and sub-saharan Africa Socioeconomic Indicator Kenya Sub-Saharan Africa Poverty headcount ratio (national poverty line) - urban - rural Year 2005 Poverty headcount ratio at $1.90 a day (2011 PPP) Income inequality (Gini coefficient) Life expectancy at birth - females - males Unemployment rate - females - males Youth unemployment - females - males Infant mortality rate Residence - urban - rural Access to electricity - urban - rural Access to improved water source - urban - rural Prevalence of undernourishment Source: World Bank (2016a) Notes: (1) World Bank (2016b) (2)

22 Urbanisation Like much of Sub-Saharan Africa, Kenya is undergoing a rapid process of urbanisation. According to the World Development Indicators database, the proportion of Kenya s population living in urban areas has expanded from 20.2% in 2001 to 25.6% in 2015 (World Bank 2016a). The country as a whole is urbanising at approximately 4.3 percent per annum (Cira, Kamunyori & Babijes 2016). The largest cities have grown rapidly in recent years. For example, the population of Nairobi grew from 2.1 million in 1999 to 3.2 million in 2009 (the last census year), and is estimated at around 4 million currently. Nevertheless, compared to other countries at a similar level of development (or per capita income level), Kenya is considered underurbanised (Cira et al. 2016). This presents positive opportunities for the country s economic development, as historically urbanisation and industrialisation have been closely correlated processes. In Kenya s burgeoning cities, there is great potential for investments in construction, real estate and infrastructure. For example, Chinese companies are building a railway in the city, while local investors are building office blocks and hotels. However, rapid urbanisation also brings several challenges, such as high unemployment rates, the development of slums, a mushrooming informal sector, growing inequality, inadequate infrastructure for basic services and transport, and traffic congestion (Cira et al. 2016). Managing its urbanisation process in a planned fashion with a rapid roll-out of public services and infrastructure will be critical to Kenya s successful transition to an upper-middle income country over the coming decades. Sectoral Issues Infrastructure Over the past few years, Kenya s expenditure on infrastructure has ramped up significantly, growing by a factor of four. This has expanded available infrastructure and improved its quality. Approximately half of the government s capital budget is devoted to energy, transport and ICT infrastructure, comprising roughly 7% of GDP in 2014/15 (World Bank 2016b). However, the productivity of such capital spending has stagnated on account of diminishing total factor productivity and a rising capital/output ratio. The system of public investment management needs to be improved, and the process of land acquisition requires streamlining (World Bank 2016b). The government has resorted to external borrowing to help finance electricity capacity and transport infrastructure, placing a US$2 billion Eurobond at favourable interest rates in 2014 (IMF 2014). Electricity Kenya generates electricity from both renewable sources including hydropower (35% of capacity), geothermal (27%), biomass, wind (1.1%) and solar PV, as well as from cogeneration (1.1%) and oil-based thermal sources (36%) (KNBS 2016b). Electricity net generation was over 9 billion kilowatthours in 2014, with the percentage contributions from various sources shown in Figure 18 (IEA 2016). Total geothermal generation capacity increased substantially in 2014 to 534 megawatts (MW) (KenGen 2016). Electricity is consumed in three main sectors: industry (54%), residential (31%) and commercial and public services (15%). The vast majority of people, especially rural dwellers, depend on traditional biomass and waste (e.g. wood, charcoal, manure, and crop residues) for household heating and cooking. 21

23 Figure 18: Electricity generation by source, 2014 Geothermal 44% Oil 19% Biofuels 1% Wind 0% Solar PV 0% Hydro 36% Source: IEA (2016) Oil resources British oil firm Tullow Oil first discovered oil in Kenya s north-west region of Turkana in In April 2016, the company revised upwards its estimate of recoverable resources to 750 million barrels, suggesting exploration potential demonstrates a possibility of one billion barrels. 7 Commercial production is expected to commence in March Initially, the government plans to have the oil transported by road from Turkana to Eldoret, and from there by rail to the port of Mombasa. However, the government has announced its intention to build a pipeline from the Lake Turkana Basin to Lamu on the coast. The 865- kilometre pipeline is mooted to have a capacity between 80 and 120 thousand barrels per day (kbpd) and to cost KES210 billion. Construction is expected to begin in 2018 and be completed in In August, however, the government announced that the crude oil would be transported to Mombasa, where the Kenya Petroleum Refinery has recently been acquired by the state-owned Kenya Pipeline Company. 9 The development of oil resources could benefit the Kenyan economy substantially, either by generating foreign exchange revenues through crude oil exports, or by substituting for imported refined petroleum fuels if the crude oil is refined domestically. Oil sales will also contribute to fiscal revenue. Nevertheless, substantial investments in transport infrastructure (and upgrading of the refinery) are required to realise this potential

24 Millions KES billions Tourism & hospitality Kenya s tourism industry has been hard hit in recent years by security issues such as attacks by terrorists and militants, Ebola-related health concerns, and related negative travel advisories in tourist originating countries. As illustrated in Figure 19, all three main indicators have trended downward over the past five years. The number of international visitor arrivals fell by 35% from 1.82 million in 2011 to 1.18 million in Over the same period, the number of hotel bed-nights occupied declined by 16%, while tourism earnings declined by 13.6% from KSh 97.9 billion to KSh 84.6 billion. Although the number of international conferences dropped by 9.5% from 241 in 2014 to 218 in 2015, the number of local conferences and delegates increased by 4.0% and 7.4%, respectively (KNBS, 2016b). Figure 19: Tourism sector statistics, Visitor arrivals Hotel bed-nights occupancy Tourism earnings (RHS) Source: KNBS (2016b) 23

25 References Bloomberg Cira, Dean A., Kamunyori, Sheila W. & Babijes, Roderick M Kenya urbanization review. Washington, DC: World Bank. Energy Information Administration (EIA) Kenya Analysis Brief. Government of Kenya (GoK) Kenya Vision popular-version Government of Kenya (GoK) Second Medium Term Plan, International Energy Agency (IEA) Energy Statistics. International Monetary Fund (IMF). 2016a. World Economic Outlook database. International Monetary Fund (IMF). 2016b. Primary Commodity Prices. August KenGen Kenya National Bureau of Statistics (KNBS). 2016a. Quarterly Gross Domestic Product and Balance of Payments Report: 2 nd Quarter Nairobi, 30 September Kenya National Bureau of Statistics (KNBS). 2016b. Economic Survey World Bank. 2016a. World Development Indicators. World Bank. 2016b. Beyond resilience: increasing productivity of public investments. Kenya Economic Update; no. 14. Washington, D.C.: World Bank Group. (Lead authors: Kiringai, Jane Wangui & Kristensen, Jens Kromann.) 24