Kenya: Economy

Kenya is the largest economy in east Africa and is a regional financial and transportation hub. 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.

After experiencing moderately high growth rates during the 1960s and 1970s, Kenya's economic performance during the 1980s and 1990s was far below its potential. 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. In the mid-1990s, the government implemented economic reform measures to stabilize the economy and restore sustainable growth, including lifting nearly all administrative controls on producer and retail prices, imports, foreign exchange, and grain marketing. Nevertheless, the economy grew by an annual average of only 1.5% between 1997 and 2002, which was below the population growth estimated at 2.5% per annum, leading to a decline in per capita incomes. The poor economic performance was largely due to inappropriate agricultural, land, and industrial policies compounded by poor international terms of trade and governance weaknesses. Increased government intrusion into the private sector and import substitution policies made the manufacturing sector uncompetitive. The policy environment, along with tight import controls and foreign exchange controls, made the domestic environment for investment unattractive for both foreign and domestic investors.

The Kenyan Government's failure to meet commitments related to governance led to a stop-start relationship with the International Monetary Fund (IMF) and World Bank, both of which suspended support in 1997 and again in 2001.

During President Kibaki's first term in office (2003-2007), the Government of Kenya began an ambitious economic reform program and resumed its cooperation with the World Bank and the IMF. There was some movement to reduce corruption in 2003, but the government did not sustain that momentum. Economic growth began to recover in this period, with real GDP growth registering 2.8% in 2003, 4.3% in 2004, 5.8% in 2005, 6.1% in 2006, and 7.0% in 2007. However, the economic effects of the violence that broke out after the December 27, 2007 general election, compounded by drought and the global financial crisis, brought growth down to less than 2% in 2008. In 2009, there was modest improvement with 2.6% growth, while the final 2010 growth figure was expected to be about 5%.

In May 2009, the IMF Board approved a disbursement of approximately $200 million under its Exogenous Shock Facility (ESF), which is designed to provide policy support and financial assistance to low-income countries facing exogenous but temporary shocks. The ESF resources were meant to help Kenya recover from the negative impact of higher food and international fuel and fertilizer costs, and the slowdown in external demand associated with the global financial crisis. In January 2011, the IMF approved a 3-year, $508.7-million arrangement for Kenya under the Fund's Extended Credit Facility.

To a considerable extent, the government's ability to stimulate economic demand through fiscal and monetary policy is linked to the pace at which the government is pursuing reforms in other key areas. The Privatization Law was enacted in 2005, but only became operational as of January 1, 2008. Parastatals Kenya Electricity Generating Company (KenGen), Telkom Kenya, and Kenya Re-Insurance have been privatized. The government sold 25% of Safaricom (10 billion shares) in 2008, reducing its share to 35%. Accelerating growth to achieve Kenya's potential and reduce the poverty that afflicts about 46% of its population will require continued deregulation of business, improved delivery of government services, addressing structural reforms, massive investment in new infrastructure (especially roads), reduction of chronic insecurity caused by crime, and improved economic governance generally. The government's Vision 2030 plan calls for these reforms, but realization of the goals could be delayed by coalition politics and line ministries' limited capacity.

Economic expansion is fairly broad-based and is built on a stable macro-environment fostered by government, and the resilience, resourcefulness, and improved confidence of the private sector. Despite the post-election crisis, Nairobi continues to be the primary communication and financial hub of East Africa. It enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years.

In FY 2010, tea was Kenya's top export, accounting for $1.15 billion. Fresh horticulture exports were $718 million, well short of the record high of $1.12 billion in 2007, in part due to unfavorable global weather conditions that affected air transportation. Tourism rebounded from the drop experienced in 2008 after the post-election violence, bringing in $807 million in 2009, an increase of 19% from 2008. In 2010, the Kenyan Ministry of Tourism recorded nearly 1.1 million tourists--an all-time high--and an 18% revenue growth, in local currency terms. Africa is Kenya's largest export market, followed by the European Union (EU). Kenya benefits significantly from the African Growth and Opportunity Act (AGOA), but the apparel industry is struggling to hold its ground against Asian competition. Currently there are 19 apparel factories, 1 yarn/fabric company, and 6 accessory companies (labels, sewing supplies, hangers) operating in the Export Processing Zones. Approximately 90% of Kenya's AGOA exports in 2010 were garments, and Kenya’s garment exports under AGOA totaled $202 million in 2010 (a slight increase over 2009 but still well below the 2006 level of $265 million).

Kenya does not systematically collect foreign direct investment (FDI) statistics, and its historical performance in attracting FDI has been relatively weak. The stock of FDI in 2005 was estimated to be about $1.04 billion, less than half of that in neighboring Tanzania. Net foreign direct investment was negative from 2000-2003, but started trickling back in 2004. The stock of U.S. FDI (at historical prices) was estimated to be about U.S. $180 million as of 2010.

Remittances are Kenya’s single largest source of foreign exchange and a key social safety net. According to the Central Bank of Kenya, recorded remittances totaled about $640 million in 2010; however, the actual number may be as high as $1 billion.

Kenya faces profound environmental challenges brought on by high population growth, deforestation, shifting climate patterns, and the overgrazing of cattle in marginal areas in the north and west of the country. Significant portions of the population will continue to require emergency food assistance in the coming years.

Kenya is pursuing regional economic integration, which could enhance long-term growth prospects. The government is pursuing a strategy to reduce unemployment by expanding its manufacturing base to export more value-added goods to the region while enabling Kenya to develop its services hub. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East African Community (EAC). The EAC's objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement paving the way for a common market. The Customs Union and a Common External Tariff were established on January 1, 2005, but the EAC countries are still working out exceptions to the tariff. Rwanda and Burundi joined the community in July 2007. In May 2007, during a Common Market for Eastern and Southern Africa (COMESA) summit, 13 heads of state endorsed a move to adopt a COMESA customs union and set December 8, 2008 as the target date for its adoption. On July 1, 2010, the EAC Common Market Protocol, which allows for the free movement of goods and services across the five member states, took effect. In October 2008, the heads of state of EAC, COMESA, and the Southern African Development Community (SADC) agreed to work toward a free trade area among all three economic groups with the eventual goal of establishing a customs union. If realized, the Tripartite Free Trade area would cover 26 countries.

Sources:

CIA World Factbook (May 2012)
U.S. Dept. of State Country Background Notes ( May 2012)

Glossary