Why Innovation and Diversification are Driving Kenya’s Economic growth

Besides a shrinking private-sector credit growth that has slowed every month over the past year, to a rate of 7.2 percent in July, according to the Central Bank of Kenya data, and the 2017 General Elections, Kenya’s economy has grown faster in the second quarter compared with the same period in 2015.

According to the Kenyan National Bureau of Statistics (KNBS), this was due to the expansion in agriculture and a strong recovery in tourism.

KNBS said the economy expanded by 6.2 percent year-on-year in the second quarter compared with 5.9 percent in the same period in 2015.

It said agriculture grew 5.5 percent versus 4 percent in the year-ago period, while accommodation and food services – which includes tourism – rose 15.3 percent compared with a contraction of 5 percent.

“Our economy is extremely resilient because it is very highly diversified,” says Dr. Patrick Njoroge, the CBK Governor.

In comparison to a sluggish global economic growth, market analysts state that the Sub-Saharan Africa region has registered mixed performance in the 9 months to September 2016.

For the Kenyan market, investment in infrastructure such as the $3.2 billion standard gauge railway line and other capital projects is helping to boost output and the economy’s global competitiveness.

The economy is projected to grow 6 percent this year, with inflation unlikely to breach the government’s target band of 2.5 percent to 7.5 percent, Cytonn Investments say.

Kenya’s economy will hit the government’s growth target of 6 percent this year on the back of private sector performance, the central bank governor said last Wednesday.

“This is the time for investors to actually place a long term bet on the economy,” said Njoroge in an interview with Reuters, but he said the Monetary Policy Committee now faced a tougher job determining how policy, on how it would feed through into the wider economy since the decision to cap commercial lending rates. The current rate is 14 percent after the regulator cut its CBR by 50 basis points to 10 percent from 10.5 percent.

Bloomberg reported that the Kenyan shilling has been supported by rising earnings from tourism, with arrivals up 13 percent in the first half of the year, and from tea, with the country producing a record crop after good rains. Helped by lower oil prices, the Kenyan central bank has accumulated $7.5 billion of reserves, enough to cover 5.2 months of imports and almost a record.

On the other hand, Ernst and Young’s Africa Attractiveness Program 2016 report says, “The economic growth outlook for Kenya, for example, is positive, with close to 7 percent forecast over the next few years, underlining the potential of Kenya (and East Africa generally) as a growth market.”

However, it cites the country’s large current account deficit and growing debt levels provide the government with less flexibility to fund longer-term growth and leading cap programs as downside risks.

Kenya is ranked fourth in the Africa Attractiveness Index report  where together with Ivory Coast have been mentioned to have a strong economic growth performance and prospects, with both performing moderately well in terms of infrastructure and business enablement. In the report, South Africa is ranked number one.

Subsequently, Kenya has been ranked together with Niger, Rwanda, Côte d’Ivoire, and Togo to have progressed by more than +10.0 points in Business Environment over the decade by the 2016 Ibrahim Index of African Governance (IIAG), that was launched on Monday by the Mo Ibrahim Foundation.

In contrast, with the manufacturing sector having experienced the slowest growth at 3.2 per cent during the review quarter compared to 5.1 percent in a similar period in 2015, analysts note that Kenya’s real attractiveness would arise when the Kenyan economic conversion is able to facilitate: greater inclusion in production; a higher share of manufacturing to the Gross Domestic Product (GDP) through improved value chains and; conversion of informal sector activities so they can improve the overall economic outlook.

With the Treasury projecting a budget deficit amounting to Ksh 398.1billion with an aim of bringing it below 4 percent of the GDP, it is confident it will bring it down by mobilising domestic resources and increasing tax revenues, which will allow it to control deficits while financing developmental projects to benefit Kenyans.

To withstand the global markets volatility, Kenya will need to continuously diversify its dependence on commodity exports by establishing more favorable environments for private investment in downstream agricultural processing, manufacturing, and services to help expand job creation, accelerate long-term growth, reduce poverty, and minimize vulnerability to price volatility.