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Kenya: Kenya Economy Profile


BIMAS microcredit clients' meeting Embu. Kenya


2013 was a crucial year for Kenya, as domestic political stability improved on the back of peaceful elections, which contributed to better economic prospects. Unfortunately, the terrorist security threat increased, which partially offsets these improvements.

Strengths (+) and weaknesses (-)

(+) Regionally significant and relatively well diversified economy

The economy is relatively well diversified and that provides a strong base for weathering problems in any one industry. Furthermore, Kenya’s central role in regional transport, telecommunications and financial services should keep is supportive of economic activity.

(-) Ethnically heterogeneous society prone to violent outbreaks

The high degree of ethnic diversity and the rivalry amongst the various tribes on issues such as land division and political preferences, make up for an environment prone to violent conflicts.

(-) High reliance on external flows as a result of structural twin deficits

Kenya’s reliance on fuel imports results in structural current account deficits, while excessive spending leads to persistent fiscal deficits. This renders Kenya highly reliant on external financing.

(-) Economy vulnerable to weather conditions

Droughts have a significant negative impact on the Kenyan economy. Output is affected in agriculture, agro-processing industries and through reduced energy supply from hydroelectric plants. This as well impacts inflation, through higher prices for food and fuel.

Key developments

1. Terrorist threat increases and hurts tourism…

In the completed year, Kenya has witnessed an increase in terrorist activity by the militant Somali group Al- Shabaab. So far, the economic impact has been limited to the tourism sector, but the economic fallout could be much better if attacks persist or intensify. In September 2013, Kenya and the world were shocked by the Westgate mall terrorist attack that cost almost 70 lives. The event was followed by a string of smaller attacks. In June-July 2014, terrorist activity intensified and several massacres killed additional than 100 people. Attacks have been concentrated in the coastal region, where terrorists have capitalized on existent issues, such as marginalization of the ethnic Somali people and land disputes part tribes. The increase in militant activity is as well reported to have increased organized crime targeting expats in the capital, though no major events have taken place there this year.

Several Western governments, inclunding the UK and the US, decided to advise against travelling to some regions of Kenya in 2014. As the coastal region is particularly relevant for tourism, the economic damage has so far been limited to this sector. However, the region is as well relevant for the nascent oil infrastructure, so persistent terrorist activity could hurt the development of this sector. Moreover, if terrorism intensifies or spreads out to other regions, it will affect investor and consumer confidence and economic damage would increase markedly.

2. … and threatens the development in increase prospects

Kenya’s economic increase perspectives improved on the back of years of sound economic policy under IMF scrutiny, improved domestic stability and new oil finds. However, the increasing security threat is endangering these prospects. Successful completion of several IMF programmes has placed Kenya on a additional solid macroeconomic footing.

Improved political stability next the peaceful 2013 elections and new oil finds were expected to slowly attract additional investments and boost increase prospects. In 2013, economic increase was fairly flat at 4.7% and broad based. The hospitality sector was the exception, as it contracted by 4.5% y-o-y, reflecting an 11% drop in foreign visitors as a result of fears of unrest ahead of the elections, a major fire at Nairobi airport and increased security risks. This trend is set to persist in 2014 and 14Q1 data reinforce these expectations. Indeed, the hospitality sector contracted further by 3% y-o-y. 41Q1 data as well point towards weak performance in the agriculture sector, as rainfall was below expectations.

As a result of these adverse circumstances, the economy is expected to only gradually gain momentum and grow by around 5% in 2014, supported by major infrastructure projects and strong domestic request. However, a further increase of the terrorist security threat or capital underspending due to capacity constraints and corruption are significant downside risks to this scenario.

3. The public deficit soars and the debut Eurobond alters deficit structure

The devolution of power to 47 counties next elections in 2013, a one-time event, as well contributed to the higher wage bill. The government has announced critical measures to contain the wage bill, inclunding a fee freeze and restructuring of the public sector. In 2014, the budget deficit is estimated to fall to 6.3% of GDP on the back of austerity measures inclunding some improvements in tax revenue collection.

They were as well lower than the price paid by Zambia in April 2014, the only other African Eurobond issue this year. The bond issue is a welcome diversification of financing sources. It is as well comforting that request for Kenyan deficit was high. However, given the considerable size of the bond, equal to 4.5% of GDP, it represents a marked increase of the share of commercial deficit in total external deficit, which translates to a higher risk profile. Besides, as it pushed external public deficit from 23% of GDP to 26% of GDP, it exposes Kenya to higher foreign currency risks.

Factsheet of Kenya

Factsheet of Kenya-globserver

Gender Equality

Kenya ratified the Convention on the Elimination of All Forms of Discrimination against Women in 1984 and has submitted periodic reports on schedule. As alluded to above, men and women are guaranteed equal status and protection under the law and this is made additional explicit in the new Constitution. In 2006 Kenya as well enacted the Sexual Offences Act which outlaws violence against women and provides them with better protection. The law has been used favourably to protect and curb violence against women.

Background information

The Kenyan political landscape is highly divided along ethnical lines and the changing nature of coalitions makes it very volatile. Kenya gained independence in 1963 and became a one-party national under the Kenya African National Union (KANU). In 1991 it switched to a multi-party system. The fragile democratic credentials built up by the initial (peaceful) shift of power in 2002 was damaged by the post-electoral violence in 2007. In response, a new constitution was adopted in 2010 to strengthen the democratic institutions and Kenya presently has a presidential system characterized by a clear division of powers between the executive, the legislative and the judiciary.

Economic indicators of Kenya