83267 December 2013 | Edition No. 9 1,600 1,491.8 1,400 Net Loans and Advances by banks KSh Billion 1,200 N GS LOANS A V I T I 1,000 S D 13 CREDIT E 20 R 800 SAVINGS C 3 $104 196 400 337.5 OVERDRAFT $865 200 0 2005 OVERDRAFT 2013 GDP per capita SAVINGS SAVING C LOANS CREDIT R S TIDE Reinvigorating Growth with a Dynamic Banking Sector Reinvigorating Growth with a Dynamic Banking Sector TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS i FOREWORD ii ACKNOWLEDGEMENTS iii MAIN MESSAGES AND KEY RECOMMENDATIONS iv EXECUTIVE SUMMARY v THE STATE OF KENYA’S ECONOMY 1 1. Economic Performance in 2013 2 2. Growth Outlook: 2014 and Beyond 24 Special Focus: Increasing Access to Credit 31 REFERENCES 44 ANNEXES Annex 1: Macroeconomic environment 44 Annex 2: GDP growth rates for Kenya SSA and EAC (2008-2013) 44 Annex 3: Kenya annual GDP 45 Annex 4.a: Broad sectors growth (half year, percent) 45 Annex 4.b: Quarterly growth rates (percent) 46 Annex 5: Inflation 47 Annex 6: Tea production and exports 48 Annex 7: Coffee production and exports 49 Annex 8: Horticulture exports 50 Annex 9: Local electricity generation by source 51 Annex 10: Soft drinks and sugar production 52 Annex 11: Tourism arrivals 53 Annex 12: New vehicles registration 54 Annex 13: Exchange rates 55 Annex 14: Interest rates 56 Annex 15: Credit to private sector 57 Annex 16: Money aggregate 58 Annex 17: Mobile payments 59 Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) 60 Annex 19: Nominal and real exchange rate 61 Annex 20: Fiscal position 62 Annex 21: 12-months cumulative balance of payments 63 Annex 22: Growth Outlook 64 List of Figures Figure 1: Kenya’s macroeconomic environment is strong v Figure 2: Budget execution remains a challenge vii Figure 3: Kenya has made tremendous progress in financial inclusion vii Figure 4: Kenyan banks lend more to small and medium-size enterprises than banks in some viii other countries in the region Figure 5: Overheads and profits account for the bulk of interest rate spreads in Kenya viii Figure 1.1: Modest growth in the first half of 2013 represented Kenya’s best first-half 2 performance since 2008 Figure 1.2: Average growth was lower in Kenya than in most of its neighbors and 3 Sub-Saharan Africa as whole between 2009 and 2013 Figure 1.3: For decades, Kenya has been more globally integrated than its neighbors 3 Figure 1.4: All sectors except services showed strong growth in the first half of 2013 3 Figure 1.5: Performance in the services sector was mixed in 2013 4 Figure 1.6: Kenyans continue to embrace information and communications technology products 5 Figure 1.7: The mobile money (M-Pesa) transfer boom continued 5 Figure 1.8: Tourism contracted—partly as a result of security concerns 5 Figure 1.9: A good harvest led to lower food prices 7 Figure 1.10: Food inflation rose after June 2013, driving overall inflation 7 Figure 1.11: The contribution of food to overall inflation rose in 2013 8 Figure 1.12: Inflationary trends in the regions are roughly similar 8 Figure 1.13: Rwanda has much stronger Doing Business indicators than Kenya 8 Figure 1.14: Implementation of the new constitution triggered expansionary spending 9 Figure 1.15: After years of narrowing, the gap between recurrent and development expenditure 10 widened Figure 1.16: Low execution rates reduced development expenditure 11 Figure 1.17: Income tax revenues rose and VAT and excise duties fell between 1999 and 2012 12 Figure 1.18: Total and domestic public debt as a percent of GDP increased, and external debt fell 12 Figure 1.19: The upward movement in the yield curve reflects market concerns about 12 budget implementation Figure 1.20: To support economic activity, Kenya’s Central Bank increased the money supply 13 Figure 1.21: Liquidity shortages in the banking system dampened the effect of monetary policy 13 on interest rates Figure 1.22: Lending rates declined marginally, but interest spreads remained wide 14 Figure 1.23: Banking sector credit expanded, but the level remains below historical levels 14 Figure 1.24: Credit to the private sector has not grown as rapidly as GDP since 2011 15 Figure 1.25: Credit flowed to private households, trade, and business services—but 15 not to productive sectors Figure 1.26: Households, trade, and real estate received the lion’s share of loans from 16 the banking system Figure 1.27: Asset quality deteriorated in most sectors 16 Figure 1.28: The Nairobi Stock Exchange outperformed the Dow Jones Industrial average 17 Figure 1.29: Short-term capital inflows are financing the current account deficit 18 Figure 1.30: The trade balance improved significantly, as oil imports declined 18 Figure 1.31: Slower global activity and weak local conditions reduced Kenya’s exports and imports 18 Figure 1.32: Remittances continued to rise 20 Figure 1.33: Kenya is attracting more short-term than long-term flows 20 Figure 1.34: The Kenya shilling stabilized 21 Figure 1.35: Kenya’s trade-weighted exchange rates are starting to depreciate as the 22 global economy recovers Figure 2.1: Growth will pick up in 2014, driven by investment and public spending 25 Figure 3.1: Ownership structure of Kenyan banks 31 Figure 3.2: Deposits, loans, and credit to the private sector have grown steadily 32 Figure 3.3: Kenyan banks lend more to SMEs than in banks in some other countries in the region 33 Figure 3.4: Banks’ response to the monetary policy rate has been asymmetric 37 Figure 3.5: Interest rate spreads in Kenya have fallen over time 38 Figure 3.6: Spreads are made up largely of overheads and profits 38 Figure 3.7: Large banks account for most deposits and loans in Kenya 38 Figure 3.8: Large banks in Kenya have higher spreads than smaller banks 39 Figure 3.9: Large banks in Kenya offer lower rates on deposits than small banks 39 Figure 3.10: Average lending rates are higher and less volatile than Treasury-bill rates 39 List of Tables Table 1.1: Kenya’s Doing Business environment has deteriorated since 2008 10 Table 1.2: Government expenditure rose between 2008/09 and 2012/13 11 Table 1.3: Shares of imports by broad economic category, 2009–2013 19 Table 2.1: GDP is projected to grow by a little more than 5 percent through 2016 25 (annual percentage increase) Table 3.1: Large banks dominate both the share of deposits and net yield 35 Table 3.2: Selected donor partnerships with Kenyan banks 36 Table 3.3: Donors have partnered with Kenyan banks to increase lending to small and 42 medium-size enterprises List of Boxes Box 1.1: Tourism: A pillar for economic growth and job creation 6 Box 1.2: Is Kenya’s real exchange rate over- or undervalued? 23 Box 2.1: Lack of efficiency in education and health: Results from the World Bank’s 29 Service Delivery Indicators ABBREVIATIONS AND ACRONYMS ABC African Banking Corporation AML/CFT Anti-money Laundering - Combating the Financing of Terrorism CBA Commercial Bank of Africa CBK Central Bank of Kenya CBR Central Bank Rate CIF Cost Insurance Freight COMESA Common Market for Eastern and Southern Africa Coop Bank Cooperative Bank CRB Credit Reference Bureau DB Doing Business DEG Deutsche Investitions- und Entwicklungsgesellschaft (Germany Investment Corporation) DSA Debt Sustainability Analysis EAC East African Community FDI Foreign Direct Investment FMO Financierings-Maatschappij voor Ontwikkelingslanden (Netherlands Development Finance Company) FSAP Financial Sector Assessment Program G2P Government to Person GDP Gross Domestic Product GEMS Growth Enterprise Market Segment I&M Investments and Mortgages ICT Information Communication and Technology IFMIS Integrated Financial Management Information System IMF International Monetary Fund KCB Kenya Commercial Bank KfW Kreditanstalt für Wiederaufbau (Reconstruction Credit Institute) MTPII Second Medium Term Plan NEO Net Errors and Omissions NFS Non-factor Services Norfund Norwegian Investment Fund NSE Nairobi Stock Exchange PFM Public Financial Management PROPARCO Promotion et Participation pour la Coopération Economique REER Real Effective Exchange Rate SACCOs Savings and Credit Cooperatives SIDA Swedish International Development Agency SIM Subscriber Identity Module SMEs Small and Medium Enterprises TTCI Travel and Tourism Competitiveness Index US United States USAID United States Agency for International Development VAT Value Added Tax December 2013 | Edition No. 9 i FOREWORD I t is my pleasure to present the ninth edition of the Kenya Economic Update, which coincides with Kenya’s 50th independence anniversary. There is much for Kenya to celebrate—economically, socially, and institutionally. Kenya has a strong track record of macroeconomic management, with low inflation, low fiscal deficits, and sustainable debt levels. Economic growth has not been as high as in its peers, but Kenya’s market-oriented policies have paid dividends. Kenya’s private sector is more vibrant, its financial sector is now the third largest in terms of assets in Sub-Saharan Africa, and citizens have benefited enormously from the mobile revolution. In the social sectors, Kenya has made tremendous progress. Kenyans are living two decades longer than they did at independence, infant mortality has fallen by 50 percent, and primary school enrollment is now almost universal (and full gender parity almost achieved). What’s more, the new Constitution, passed in 2010, has created a strong foundation for better institutions. The jubilee year is a time for celebration. But it is also a time to reflect on the measures needed to transform the lives of the majority of Kenyans. Nearly 4 of every 10 Kenyans is poor; maternal mortality remains among the highest in Africa, with 488 deaths per 100,000 live births; secondary school enrollment is at a low 32 percent; and learning achievement levels, well below their potential for what is needed to fuel a modern market economy. This report has three main messages. First, the economy is estimated to have grown at 5 percent in 2013, and Kenya will enter 2014 on a strong economic position. This is a major achievement, as Kenya’s growth usually collapses during election years. With a strong macroeconomic foundation and ongoing structural reforms, this growth momentum is expected to be maintained in 2014, when output is projected to grow by 5.1 percent. Second, an enabling framework for significant private sector–led growth is critical. Continued investment is needed in infrastructure, bottlenecks that increase the cost of doing business need to be addressed, and sound monetary and fiscal policies need to be maintained. Third, Kenyan banks are ahead of their counterparts in other African countries in many innovations, including lending to the SMEs but the cost of bank financing remains high,an issue the report discusses in some depth. The World Bank remains a committed partner as Kenya celebrates its jubilee year and beyond. Its series of Economic Updates, published every six months, have become its main vehicle for analyzing development trends in Kenya. Through these reports and other knowledge products, the World Bank aims to support all those who want to improve economic management in Kenya. As in the past, we are proud to have worked with many Kenyan economic stakeholders during the preparation of this report. We hope that they will join us in debating the policy issues that are topical in Kenya and in contributing to helping Kenya grow, permanently reduce poverty, and bring shared prosperity to all Kenyans. Diarietou Gaye Country Director for Kenya World Bank ii December 2013 | Edition No. 9 ACKNOWLEDGEMENTS T his edition of the Kenya Economic Update was prepared by a team led by John Randa and Smita Wagh, supervised by Apurva Sanghi. The core team consisted of Angélique Umutesi, Kennedy Mukuna Opala, Margaret Nyamumbo, Barbara Karni, and Sophie Rabuku. The team gratefully acknowledges contributions from Robert Waiharo. The report benefitted from the insights of several peer reviewers, including Yira Mascaro, Ravi Ruparel, and Prof. Terry Ryan, as well as comments from Jane Kiringai, Gunhild Bergn, Maria Paulina Mogollon, and Evans Osano. The team also received guidance from Pablo Fajnzylber, Thomas O’Brien, and Diarietou Gaye. Partnership with key Kenyan policy makers was instrumental in the production of this report. On December 3, 2013, a draft of the report was presented at the Quarterly Economic Roundtable. The meeting was attended by senior officials from the National Treasury, the Ministry of Devolution and Planning, the Central Bank of Kenya, the Kenya National Bureau of Statistics, the Kenya Revenue Authority, the Kenya Institute of Public Policy Research and Analysis, the International Monetary Fund, and the National Economic and Social Council. December 2013 | Edition No. 9 iii MAIN MESSAGES AND KEY RECOMMENDATIONS Main Messages • Macroeconomic conditions are favorable in Kenya, with the economy projected to grow 5.0 percent in 2013 and 5.1 percent in 2014. Inflation remains low, the fiscal deficit remains manageable, and the exchange rate remains stable. • The government has maintained fiscal discipline, adopting domestic revenue-raising measures. However, execution of the budget, especially investment spending, leaves room for improvement. Higher execution rates would help promote the much sought after growth take-off. • Small and medium-size enterprises (SMEs) cite the cost of credit as a barrier to bank financing. High lending rates can be traced to a range of factors, including the macroeconomic environment, high bank overheads and profits, information gaps, the structure of the banking sector, and the volatility of the risk-free return. A multipronged approach is needed to increase bank lending to this critical sector if growth and job creation are to take-off. Key Recommendations for Reinvigorating the Economy • Continue structural reforms to improve the ease of doing business environment and boost growth in the near term. Reductions in delays in the clearance of cargo at the Port of Mombasa and recent measures to address the challenges of transporting cargo along the northern corridor are steps in the right direction to promoting regional trade. The removal of all roadblocks along the routes of cargo destined to countries in the region as part of the wider initiative to curb trade bottlenecks is a major step. Scaling up Huduma centers, which provide one-stop- shop delivery of services, should enhance the business environment and reduce inefficiency, which encourages corruption. • Improve budget absorption of development expenditures, which are key to growth. Execution of the budget, especially investment spending, needs improvement. Higher execution rates would help promote the much sought after growth take-off. As part of the transition to the new government, new procurement has been a challenge. • Deepen reforms in public financial management (PFM) to increase savings and efficiency in the use of public resources. Adopting and operationalizing PFM regulations to entrench the PFM law would help ensure accountability, transparency, and the effective and efficient collection and utilization of public resources. Efforts should include making the Integrated Financial Management Information System (IFMIS) and the Treasury Single Account fully functional. Key Recommendations for Increasing access to Credit to SMEs • Study the factors that influence the way in which banks price loans, in order to develop a comprehensive policy agenda for reducing the cost of credit. The competitive structure of the banking sector in Kenya cannot be viewed in isolation. A host of other factors, such as the macroeconomic environment, government borrowing, bank overheads, risk premiums, and market maturity, all contribute to determining the interest structure, including the cost of credit, in an economy. • Strengthen credit information systems and other parts of the financial infrastructure. Information asymmetries raise the pricing of loans to SMEs in Kenya. The high levels of informality within the sector and inadequate systems of collateral verification hinder lending. Banks, savings and credit cooperatives (SACCOs), payment service providers, and utility companies should be encouraged to share positive information about consumers. Effective collateral registries should be developed and creditor rights framework strengthened. • Diversify funding sources and instruments for SMEs. It is important that at least some SMEs look beyond bank financing to meet their working capital needs if they are to fully realize their growth and job-creating potential. Efforts should be made to enable some SMEs to tap equity funding, either through private funds or through the Growth Enterprise Market Segment of the Nairobi Stock Exchange. iv December 2013 | Edition No. 9 EXECUTIVE SUMMARY Growth has picked up, and prospects Kenya’s overall macroeconomic conditions are for 2014 are strong favorable. Growth is picking up, inflation remains low, the fiscal deficit remains manageable, and A fter 50 years of independence, there is much for Kenya to celebrate. Kenyans are living two decades longer; the fertility and infant the exchange rate remains stable. The economy is estimated to have grown by 5.0 percent in 2013, up from 4.6 percent in 2012—the highest mortality rates have been cut in half; and school level since 2010, when the economy grew by enrollment, at both the primary and secondary 5.8 percent. This performance, although weak level, has more than doubled. On the economic for East Africa, is commendable given Kenya’s front, GDP per capita increased eightfold; the history of low growth during election years largest share of GDP is the services sector, not (during which output rose less than 3 percent agriculture; and the financial sector is now the on average). Growth was driven mainly by third largest in Sub-Saharan Africa (after South consumption and to some extent investment. Africa and Nigeria). These accomplishments are There was little volatility in international oil extraordinary. But the country’s 50th anniversary prices, and rainfall was adequate, which helped is also the time to reflect on measures needed to stabilize both food and energy prices. Year-on- transform the lives of the majority of Kenyans. year inflation was 7.4 percent in November 2013, Nearly 4 of every 10 Kenyans live in poverty; and average inflation was 5.6 percent, down maternal mortality is among the highest in from 9.6 percent in 2012. Netting out the impact Africa, with 488 deaths per 100,000 live births, of the recent VAT increases, the inflation rate is secondary school enrollment is at a low 32 within the 2 percentage-point margin of the 5 percent; and learning achievement levels are well percent medium-term target. below their potential and what is needed to fuel a modern market economy. GDP growth, while Kenya will enter 2014 from a strong economic solid, has yet to takeoff at the rapid, sustained position. With inflationary pressure subdued— rate needed to transform the lives of ordinary underpinned by stable energy prices and citizens. Figure 1: Kenya’s macroeconomic environment is strong GDP growth is picking up Inflation has remained within the target range 10 30 8 25 6 20 Percent 4 15 Percent 2 10 0 5 4 1 2 3 4 1 2 3 4 1 2 3 4 12 3 4 1 2 3 4 1 2 3 4 1 2 34 1 2 -2 0 Sept Sept Sept Sept May May May May Mar Mar Mar Mar Nov Nov Nov Nov Feb Aug Feb Aug Feb Aug Feb Aug Jun Jun Jun Jun Apr Apr Apr Apr Dec Dec Dec Oct Jan Oct Jan Oct Jan Oct Jul Jul Jul Jul -4 2006 2007 2008 2009 2010 2011 2012 2013 2010 2011 2012 2013 -6 Total GDP Agriculture GDP Non-agriculture GDP Food inflation Core inflation Overall inflation Source: World Bank, based on data from the Kenya National Bureau of Statistics December 2013 | Edition No. 9 v Executive Summary moderation in food inflation, a stable exchange foreign investors look for higher yields on their rate, and supportive monetary policy—Kenya portfolios. Such inflows help to build reserves has the potential for a growth spurt in 2014 at the Central Bank and to finance the current (Figure 1). The government has set a bold account deficit, but they also increase Kenya’s agenda of reform outlined in the second Medium vulnerability, because they are prone to investor Term Plan (MTP II). However, it is the structural risk aversion and can change abruptly in response reforms currently being implemented that will to political and economic events. boost growth in the near term. Reductions in delays in the clearance of cargo at the Port The government maintained fiscal discipline, of Mombasa and recent measures to address adopting domestic revenue-raising measures. the challenges of transporting cargo along the However, execution of the budget, especially northern corridor are steps in the right direction investment spending, leaves room for to promoting regional trade. The removal of all improvement. Higher execution rates would help roadblocks along the routes of cargo destined promote the much sought after growth take-off. to countries in the region as part of the wider As part of the transition to the new government, initiative to curb trade bottlenecks new procurement was suspended is a major step. “Huduma” centers, in the first quarter of 2013, and which provide one-stop-shop spending by the government delivery of services, should curb The government’s slowed dramatically. The result the inefficiency that encouraged policy of avoiding was two-fold. First, low spending corruption and enhance the nonconcessional meant that government deposits business environment. borrowing has been a built up at both the Central Bank key factor in sustainable (draining the banking system of Kenya strengthened its external debt management liquidity) and at commercial banks position substantially in recent where government holds deposits years, accumulating international reserves to (skewing liquidity to few banks). As a result, meet program targets under the successfully liquidity was tight in the banking system, with completed IMF program. At the same time, the some banks with excess cash and others short financing of current account deficit presents of liquidity causing interbank rates to sour and challenges and risks. The current account deficit, muting the impact of supportive monetary policy which averaged more than 10 percent of GDP in actions. Second, the freeze in spending before 2011 and 2012, narrowed in 2013 to 7.5 percent the election and the changes in administration of GDP by September 2013. The improvement after it, brought development spending almost reflected lower import demand and higher to a halt. Concerns about governance during exports of services. However, there are risks the electioneering period limited government that the current account will deteriorate when procurement and payments and reduced capital imports pick up as the economy regains strength. spending in the second half of fiscal 2012/13. The The current account deficit is expected to remain effect on infrastructure projects slowed economic high partly because of the need for imports of growth. Moreover, the new administration capital goods to support the construction of large- reduced the number of ministries from 44 to 18. scale infrastructural projects and exploration for This consolidation though commendable had the gas and oil. Financing of the current account undesirable effect as new procedures delayed deficit is primarily through short-term flows, as the disbursement of funds (Figure 2). vi December 2013 | Edition No. 9 Executive Summary A more dynamic banking sector could (SMEs) in their portfolios. Use of hire-purchase accelerate growth and invoice-discounting has facilitated the entry by a tier of mid-sized Kenyan banks into the SME F inancial inclusion is increasing. The personal financial behavior of the average Kenyan changed dramatically in recent years. The financing space (Figure 4). These successes notwithstanding, the high cost number of people relying on informal institutions of credit may be constraining the growth of SMEs. plummeted, as Kenyans turned to mobile money SMEs cite the high cost of credit as the reason services to manage their savings and transactions for cash flow challenges faced by entrepreneurs. needs (Figure 3). High rates leave them with little recourse but to dig deeper into their personal savings or turn to Kenya’s banking sector is resilient. The sector family and friends to raise funds for day-to-day has undergone significant transformation over operations. Given the seminal role SMEs play in the last decade or so. Reforms have improved growth and job creation, channeling credit to this the resilience of the sector to domestic and sector is a critical function of banks. international shocks. The state presence in the sector has been shrinking, and with it the share Figure 3: Kenya has made tremendous progress in financial inclusion of nonperforming loans in bank portfolios. Capitalization is well above the required 2013 33 33 1 8 25 minimums, credit information systems are beginning to take shape, and the use of agency 2009 22 15 4 27 31 banking has drastically improved the reach of banking sector. With the advent of mobile information and communications technology 2006 15 4 8 33 39 (ICT) developments, the ceiling for innovation targeting specific segments of the market and 0 10 20 30 40 50 60 70 80 90 100 Percent outreach has been raised almost indefinitely. Formal Prudential Formal Non-prudential Formal Registered Informal Excluded Source: Finaccess National Survey, 2013 Note: Formal prudential: Commercial banks, deposit-taking microfinance Kenyan banks are ahead of their counterparts institutions, foreign exchange bureaus, capital markets, insurance providers, and deposit-taking savings and credit cooperative societies(SACCOs). Formal in Sub-Saharan Africa in terms of the share of nonprudential: Mobile financial service providers, postbanks, NSSF, and NHIF. Formal registered: Credit-only microfinance institutions and SACCOs, lending to small and medium-size enterprises hire-purchase companies, and the government of Kenya. Informal: Informal groups, shopkeepers/merchants, employers, and moneylenders/shylocks Figure 2: Budget execution remains a challenge Education Energy, infrastructure and ICT 63 Governance, justice and order Environment protection, water and housing 69 Energy, infrastructure and ICT Social protection, culture and recreation 74 National security Public administration and 74 Public administration and international relations international relations Agriculture and rural development 76 Health General economic, commercial 85 Agriculture and rural development and labor affairs Environment protection, Health 86 water and housing Social protection, culture and recreation Education 87 General economic, commercial Governance, justice and order 89 and labor affairs 0 50 100 150 200 250 300 National security 100 Total expenditure by sectors (billions of KSh) 0 20 40 60 80 100 June 2013 target June 2013 actual Budget implementation rate as at the end of June 2013 (percent) Source: World Bank, based on data from the National Treasury December 2013 | Edition No. 9 vii Executive Summary Figure 4: Kenyan banks lend more to small and medium-size Figure 5: Overheads and profits account for the bulk enterprises than banks in some other countries in the region of interest rate spreads in Kenya 20 12 18 Share of total bank lending that goes 10 16 5.6 8 4.2 5.0 5.7 14 to SMEs (percent) Percent 12 6 0.5 0.8 0.9 0.4 10 4 8 4.7 4.5 4.0 4.3 6 2 4 0 0.6 0.6 0.7 0.9 2 2009 2010 2011 2012 0 Reserves Overheads Provisions Profit Nigeria South Africa Tanzania Rwanda Kenya Source: World Bank, 2013 Source: World Bank, based on data from the Central Bank of Kenya Note: Ex post spreads are calculated based on the actual balance sheets and profit and loss accounts (ex ante spreads are based on the difference One criticism of the Kenyan banking sector is that between deposit and lending rates). The trends in the two measures are similar the interest rate spread is high. The difference between the average rate of interest charged by banks on loans to customers and the average Other challenges remain. The building blocks for rate of interest banks pay on savings deposits the path forward are already falling into place, remains persistently high, at the same time as though some areas may need more effort than banking sector profitability has grown (Figure 5). others. Recent improvements in the financial This perception of high spreads and growing infrastructure through a better collateral registry profitability has left the industry open to repeated system and a more effective creditor rights criticisms of collusive price-setting behavior. framework will plug some of the information gaps However, it is important to note that no hard and enable banks to price risks at a lower level. rules prescribe the optimal interest spreads that A sound government debt management policy correspond to specific market conditions; there is (essentially a regular issuance policy that lowers no definitive way to determine whether spreads the volatility of the returns on the risk-free asset) are too high, too low, or just right, especially when that informs a stable interest rate structure will information markets are incomplete. improve the transparency and predictability of the credit pricing models. Efforts to strengthen Although it is difficult prima facie to determine capital markets, pensions, and the insurance whether spreads are “appropriate,” it is possible sector so that SMEs can access alternative sources to dig deeper into the factors that affect the cost and instruments for their financing needs will of credit in Kenya. Such factors include the overall pay dividends. These developments will serve macroeconomic and policy environment; market Kenya well in reaching its goal of attaining middle- structure and price-setting behavior; the return income status. A mature banking sector—and on risk-free assets; the interest rate structure; more generally, a well-developed financial sector and the risks (and perceived risks) associated with that supports a vibrant private sector—will be an lending to SMEs, which are affected by information important advantage to achieving the Vision 2030 asymmetries, the level of informality, and the high goals. costs of loan recovery in case of default. viii December 2013 | Edition No. 9 Executive Summary The State of Kenya’s Economy The State of Kenya’s Economy 1. Economic Performance in 2013 T he World Bank expects that Kenya’s GDP will grow 5.0 percent in 2013, marginally higher than the 4.6 percent growth achieved in 2012. Domestic factors played a role in the lower than expected growth, reflecting a weakening investment climate, unsupportive fiscal environment at both the national and county level, and slow transmission of accommodative monetary policy stance into lower lending rates. There was good news in 2013, however: the current account deficit narrowed considerably, from more than 10 percent of GDP to 7.5 percent, reducing the economy’s vulnerability to external shock, and for the first time in years, the economy avoided the election-growth curse of lower growth in an election year. 1.1 Growth Picked Up—Although It Remains activity remained subdued, as banks became below Potential more reluctant to lend during the transition G rowth accelerated in 2013. Macroeconomic and demand for credit waned in light of weaker conditions continued to improve, as business prospects. Kenya’s economy entered the third year of relative stability, with single-digit inflation and a GDP growth of 4.7 percent in the first half of stabilized exchange rate. GDP growth was lower 2013 was driven by the robust performance of than projected. However, despite the peaceful agriculture and industry. Growth was higher than presidential election and smooth transfer of the 4.3 percent during the same period in 2012 power in March 2013, the growth momentum and the highest growth in the first half of the year generated in the last quarter of 2012 was lost in since 2008 (Figure 1.1). Abundant rain increased the second and third quarters of 2013, held down crop production and hydropower generation, by lack of government spending and inadequate which improved performance in both agriculture transmission of the monetary policy stance to the and industry. Low interest rates, low inflation, and real economy. a stable shilling created a better macroeconomic environment for industry and businesses in the The challenges facing government spending first half of 2013. during the transition slowed growth, which is Figure 1.1: Modest growth in the first half of 2013 represented Kenya’s best first-half performance since 2008 expected to reach 5.0 percent in 2013. Monetary 9 policy efforts to stimulate the economy through 7.8 8 accommodative monetary policy were thwarted 7 by lack of liquidity in the banking system, which Annual growth (percent) 6 5.3 increased short-term rates, as government 5 4.5 4.8 4.7 4.2 4.3 4.0 deposits accumulated at the Central Bank and the 4 3.7 few commercial banks where the government had 3 its deposits outside the Central Bank. 2 1.7 1.4 1.6 1 0 Monetary policy supported growth in 2013, H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 as the Central Bank reduced its policy rate and 2008 2009 2010 2011 2012 2013 provided liquidity support to the banking system. Source: World Bank calculations based on data from the Kenya National Bureau of Statistics. Intervention through repo operations prevented Note: Estimate for the second half of 2013 is based on revised annual growth projection of 5.0 percent. interbank rates from overshooting. Credit 2 December 2013 | Edition No. 9 The State of Kenya’s Economy The economy is still underperforming compared The recent decline in global commodity prices to its neighbors. Average annual growth in Kenya constrained exports in the region as a whole; was 4.4 percent in 2008-2013, much lower than Kenya’s greater integration into the global in Uganda (5.6 percent), Tanzania (6.6 percent), economy leaves it particularly vulnerable to global Rwanda (7.3 percent), and Sub-Saharan Africa oil price upsurges, exchange rate volatility, and average as a whole (5.5 percent) (Figure 1.2). global recession. Figure 1.2: Average growth was lower in Kenya than in most of its neighbors and Sub-Saharan Africa as a whole between 2008 and 2013 The first half of 2013 saw a rebound in agricultural 8 output. Agriculture grew at an annual rate of 6.7 7.3 percent—three times the rate in the previous two Annual growth 2009-2013 (percent) 7 6.6 6 5.6 years (Figure 1.4). Strong agricultural performance 5.5 5 4.4 was the result of above-average rainfall, which 4 4.0 boosted crop production. The uptick reflected 3 much better climatic conditions than in 2012, 2 when frost adversely affected tea production. Tea 1 production rose from a low of 11 percent in the year 0 ending July 2012 to a robust rate of growth of 38 Burundi Kenya Sub-Saharan Uganda Tanzania Rwanda Africa excluding percent during the same period in 2013, according South Africa to the Kenya National Bureau of Statistics. The Source: World Bank, based on data from the Kenya National Bureau of Statistics and the World Bank. production and export of tea increased despite Note: 2013 projections are based on World Economic Prospects, except for Kenya, which was based on the revised projection of 5 percent. civil unrest in Egypt, a major importer of Kenyan tea. Improved supply and continued low demand Global volatility affected Kenya’s economic from Kenya’s trading partners caused commodity activity more than its neighbors’ because its prices to fall. Despite the decline, exports from economy is more integrated with the global tea and horticulture exports increased, as a result economy (Figure 1.3). Average trade (exports of higher volume. The volume of tea production plus imports) as a share of GDP stood at 66.6 grew 42.6 percent in the first half of 2013, while percent during 2005-2011—a larger share than the auction price dropped 7.6 percent. The volume Tanzania (63.4 percent) or Uganda (51.5 percent). of horticulture exports increased 12.2 percent, Figure 1.3: For decades, Kenya has been more globally Figure 1.4: All sectors except services showed strong growth integrated than its neighbors in the first half of 2013 80 9 8.8 70 8 Share of trade (exports + imports) 6.7 Annual growth rate (percent) 60 7 to GDP (percent) 50 6 4.9 5.2 5 4.8 40 4.2 4.3 4.0 4 3.5 30 3 20 2.0 2.1 2 1.8 10 1 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agriculture Manufacturing Other industries Services Burundi Kenya Rwanda Uganda Tanzania 2011 2012 2013 Source: World Development indicators database Source: World Bank, based on data from the Kenya National Bureau of Statistics December 2013 | Edition No. 9 3 The State of Kenya’s Economy and the value of exports grew 7.3 percent. Export period in 2012. Domestic cement production and volume expanded 38.5 percent for vegetables, 6.7 consumption rose 3 percent. Recent data from percent for fruits, and 2.6 percent for cut flowers. the Kenya National Bureau of Statistics indicate In contrast, the volume of coffee production that electricity generation grew 7.3 percent in the decreased 8.8 percent and the value fell 32.1 year ending August 2013, an increase over the percent, as both acreage under coffee and prices 4.0 percent rise in 2012. Sugar production rose declined. 0.6 percent in the year ending July 2013, up from 0.01 percent in 2012. For cement production, The industrial sector expanded. Manufacturing growth for the first seven months of 2013 stood (which accounts for 9.8 percent of total GDP) at 3 percent, up from a 0.1 percent contraction in grew by 4.2 percent, electricity and water by 2012, suggesting annual growth of 3.1 percent in 7.9, construction by 9.8 percent, and mining 2013. and quarrying by 5.4 percent during the first half of 2013. Performance was attributed to Growth of the services sector was subdued. above-average rainfall, a stable macroeconomic Services have accounted for 47 percent of Kenya’s environment, improved access to credit, and lower GDP since 2005. The sector grew at an annual energy costs. Significant hydropower generation rate of just 4.0 percent during the first half of increased the domestic electricity supply and 2013, down from 4.8 percent during the same reduced the cost associated with power losses. period in 2012. The transport and communication Hydropower generation increased 14.1 percent, subsectors (which accounted for 25 percent of and geothermal generation rose 10 percent. total services output) contracted. Growth in Thermal electricity generation contracted 10.8 financial intermediation wholesale and retail percent, indicating the shift away from reliance trade, which usually grow much faster, was on nonrenewable energy. Electricity consumption modest (Figure 1.5). Other services continued to rose 3.2 percent. The construction subsector experience very limited growth, following high grew 9.8 percent, underpinned partly by growing lending rates. Wholesale and retail trade grew domestic investment in buildings. The real value by 1.3 percent; financial intermediation by 0.6 of buildings approved by the Nairobi City Council percent; real estate, renting, and business services during the first half of 2013 rose to KSh 1.4 by 0.4 percent; and public administration by 0.2 billion, up from KSh 1.3 billion during the same percent. Figure 1.5: Performance in the services sector was mixed in 2013 Transport and communication 1.3 8 Wholesale and retail trade 1.3 7 Weighted growth (percent) Financial intermediation 0.6 6 Education 5 0.5 Real estate, renting, 4 business services 0.4 3 Other services 0.3 2 Public administration 0.2 1 Financial intermediation indirectly measured 0 Hotels and restaurants -1 -0.5 0 0.5 1.0 1.5 2.0 -2 2006 2007 2008 2009 2010 2011 2012 2013 Weighted growth (percent) Wholesale and retail trade Transport and communication First half of 2013 First half of 2012 Financial intermediation Services Source: Kenya National Bureau of Statistics, Leading Economic Indicators 4 December 2013 | Edition No. 9 The State of Kenya’s Economy Within the communications subsectors, results retail purchases. Mobile money grew despite the were mixed. Mobile telephone penetration rate 10 percent excise duty on all financial services was affected by a SIM card registration exercise imposed in February 2013. The number of that reduced the number of mobile subscribers transactions increased 39.6 percent, and their by 0.9 million people between December 2012 value rose 26.7 percent, to KSh 165.6 in September and March 2013.1 Internet operators reduced the 2013, up from KSh 130.6 million in September cost of Internet packages and increased market 2012. Some 43,131 new jobs were created to penetration, expanding year-on-year Internet meet the increased demand for M-Pesa services. subscriptions by 1.9 percent by the end of March (Figure 1.6). The transport sector experienced modest growth. Arrivals at Jomo Kenyatta International Figure 1.6: Kenyans continue to embrace information and communications technology products Airport rose a mere 0.8 percent in the first half 35 of 2013, and departures rose just 1.9 percent. 30 The number of passengers from Asia grew 14.4 Number of people (million) 25 percent, up from 6.1 percent in 2012. Asia’s share 20 of total landed passengers stood at 17.1 percent. 15 In contrast, travel to and from Europe declined, 10 with arrivals falling 5.1 percent and departures 5 falling 6.3 percent. Europe’s share of total landed passengers fell to 21.1 percent, down from 22.5 0 percent in 2012. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* Population over 15 Mobile subscriptions Mobile money customers Internet users Security concerns in the region were partly Source: World Bank, based on data the Central Bank of Kenya, and the Communication Commission of Kenya responsible for weaker tourist arrivals in the first half of 2013. The number of tourist arrivals fell 12.2 The mobile money (M-Pesa) transfer boom percent in the first half of 2013, partly as a result continued (Figure 1.7). M-Pesa is now being of security concerns in the region (Figure 1.8). used not only to pay utility bills and handle other Hotel and restaurants contracted 0.4 percent. The bank-related transactions but also to pay for decline is worrisome, because tourism is critical Figure 1.8: Tourism contracted—partly as a result Figure 1.7: The mobile money (M-Pesa) transfer boom continued of security concerns Mobile money payments 160 180 165.6 Number of tourist arrivals (thousands) 160 140 140 120 120 100 100 80 63.43 80 60 40 23.97 60 20 40 0 Jan Mar May Jul Sep Nov Jan Mar May Jul Mar May Mar May Sep Nov Jan Jul Sep Nov Jan Jul Sep 20 2010 2011 2012 2013 0 Number of Customers (millions) Transaction (millions of KSh) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Value (billions of KSh) 2011 2012 2013 Source: World Bank, based on data from the World Bank, the Central Bank Source: World Bank, based on data from KNBS of Kenya, and the Communication Commission of Kenya 1 At the beginning of 2013, Kenya’s Communication Commission ruled that all mobile subscribers must be registered. At the end of the exercise, all nonregistered subscribers were suspended. December 2013 | Edition No. 9 5 The State of Kenya’s Economy to Kenya’s economy (Box 1.1). The sector’s direct the domestic supply chain and investment were contribution stood at 5 percent of GDP in 2012, estimated at KSh 267.6 billion. and its indirect contribution was significant, with strong links to supply chains. Tourism is a major Inflation remained modest, underpinned by source of earnings and employment. In 2012, relatively stable energy prices and moderation in it brought in KSh 96 billion and directly created food inflation. Although there were expectations 232,500 new jobs (Box 1.1). Wider effects on that prices would pick up in 2013, inflation Box 1.1: Tourism: A pillar for economic growth and job creation Tourism plays an important role in Kenya’s economy, directly accounting for 5.0 percent of GDP in 2012 and indirectly contributing as much as 12.5 percent (Table B1.1.1). In 2013, the Travel and Tourism Competitiveness Index (TTCI) ranked Kenya 8th of 31 Sub-Saharan countries and 96th of 140 countries in the world (Rwanda ranked 9th, Tanzania 12th, Uganda 13th, and Burundi 30th). These rankings represented an improvement from the 2011 rank of 108th among 139 countries. Table B1.1.1: Selected indicators of Kenya’s tourism sector, 2012 Indicator Value Tourism arrivals 1.71 million Tourism revenues KSh 96 billion Direct contribution of travel and tourism to GDP 5.0 percent (KSh 180.8 billion) Total contribution of travel and tourism to GDP 12.5 percent (KSh 448.4 billion) Employment in travel and tourism 232,500 (4.3 percent of total employment) Vacation tourism 71.2 percent of total Business tourism 13.8 percent of total Hotel bed-nights available 18,850 Hotel bed-nights occupied 6,861 Average occupancy (percent) 36.4 Travel and Tourism Competitiveness Index (TTCI) 2013 8th out of 31 countries (rank in Sub-Saharan Africa) TTCI 2013 (world rank) 96th out of 140 countries Source: World Bank, based on data from the Kenya National Bureau of Statistics, the World Travel and Tourism Council, and the World Economic Forum The ongoing global recession has hurt tourism in Kenya. The number of tourism arrivals in 2012 declined by 6.1 percent, following expansion of 13 percent in 2011. Terrorism and civil/political instability are also affecting the sector. Following post-election violence in 2007/08, tourism arrivals shrank 33.8 percent. Fear of Al Shabaab and the Mombasa Republican Council following the March 2013 elections contributed to the 12.2 percent decline in tourism during the first half of 2013. Policy rules and regulations in Kenya have created a favorable environment for tourism, but the lack of property rights continues to undermine the sector’s revenue contribution and investment. Other problems include a shortage of premium conference facilities and high-quality restaurants; infrastructure challenges, such as unreliable communications and high-cost electricity; high tourism taxes; and corruption (informal payments add as much as 12 percent to costs). Despite these problems, tourism has been successful in Kenya. Sustaining this success requires constant innovation and diversification (in both products and markets), preservation of existing tourism resources, human resource development in the tourism industry, and social and environment sustainability. Sources: World Bank 2013b; World Travel and Tourism Council 2013; World Economic Forum 2013 6 December 2013 | Edition No. 9 The State of Kenya’s Economy remained in single digits, underpinned by relatively Figure 1.10: Food inflation rose after June 2013, driving overall inflation stable energy prices and low food inflation. 30 Average inflation in the first 10 months of 2013 Inflati on (year-on-year, percent) 25 averaged 5.4 percent, down from 10.9 percent in 2012. Moderate inflation is attributed to a good 20 harvest, which resulted in lower prices for food 15 items such as maize (the price of which was 10.8 10 percent lower than in the first half of 2012) and 5 beans (the price of which was 5.2 percent lower) 0 (Figure 1.9). Stable international oil prices kept Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 energy inflation at a low level. Core (nonfood/ nonfuel) inflation declined from 5.5 percent in Food inflation Transport Inflation Core Inflation Overall Inflation December 2012 to 5.2 percent in October 2013. Source: World Bank, based on data from KNBS Note: Core inflation is excludes food and fuel prices in the computation of inflation Since July 2013, there have been mild increases slightly exceeded the government’s medium-term in inflation, as a result of two factors. First, target for 2013 of 5 percent (Figure 1.12). implementation of the Value-Added Tax (VAT) Act in September 2013 increased the price of some Growth would be higher if the business essential food items, including milk. This change environment were stronger. Kenya’s private led to a hike in food inflation of 290 basis points in sector is deemed attractive and vibrant by one month, from 9.7 percent at the end of August investors—as evidenced by the increase in the to 12.6 percent in September (Figure 1.10). number of registered companies, which rose 35 Second, food prices have been increasing faster percent between 2008 and 2011, from 166,793 than other commodities, driving overall inflation to 225,048. However, the sector faces numerous higher (Figure 1.11). challenges, including inadequate infrastructure, onerous business regulations, and corruption. Inflationary trends are similar to regional peers. Addressing these challenges will help reinvigorate At the end of September 2013, headline inflation growth. was 8.3 in Kenya, 8.0 percent in Uganda, 6.7 percent in Rwanda, and 6.1 percent in Tanzania. It Kenya’s ease of doing business rankings have fallen since 2008, when it was among the Figure 1.9: A good harvest led to lower food prices Dry maize Dry beans 47 84 Average retail price (KSh per kilo) 45 Average retail price (KSh per kilo) 82 43 80 78 41 76 39 74 37 72 35 70 33 68 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 2013 2012 2013 Source: World Bank, based on data from the Kenya National Bureau of Statistics December 2013 | Edition No. 9 7 The State of Kenya’s Economy Figure 1.11: The contribution of food to overall inflation rose in 2013 Figure 1.12: Inflationary trends in the regions are roughly similar 31 Contribution to overall inflation (percent) 100 26 Inflation (year-on-year, percent) 80 21 16 60 11 40 6 20 1 May May May Mar Mar Mar Dec Dec Nov Nov Feb Sep Feb Sep Feb Sep Aug Aug Aug Jun Jun Jun Apr Apr Apr Jan Oct Jan Oct Jan Jul Jul Jul -4 0 Feb-10 Apr-10 Dec-12 Apr-13 Aug-13 Oct-13 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Feb-13 Jun-13 -9 2011 2012 2013 Food Energy Core Kenya Rwanda Tanzania Uganda Source: World Bank, based on data from the Kenya National Bureau of World Bank, based on data from the Kenya National Bureau of Statistics Statistics world’s top 10 reformers (Table 1.1). Over the investment (FDI)—is very mobile, countries same period, by relative comparison, Rwanda’s need to create and maintain attractive business rankings soared, catapulting it from 106th place environments if they are to help local businesses in 2008 to 32nd place overall in 2014 (Figure expand and attract new players. 1.13). As investment—particularly foreign direct Figure 1.13: Rwanda has much stronger Doing Business indicators than Kenya Overall ease of doing business Starting a business 160 129 134 130 140 120 112 Doing business rank Doing business rank 106 110 100 90 80 72 70 60 50 40 50 20 9 32 30 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 Kenya Rwanda Kenya Rwanda Registering property Enforcing contracts 170 163 170 151 150 150 130 Doing business rank 114 130 110 107 Doing business rank 110 90 90 70 70 50 45 50 40 30 30 19 10 8 -10 10 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 Kenya Rwanda Kenya Rwanda Source: Doing Business Indicators database 8 December 2013 | Edition No. 9 The State of Kenya’s Economy 1.2 Fiscal Discipline Maintained Despite Government efforts to restructure spending from Emerging Pressures recurrent to capital spending suffered a setback. K enya maintained fiscal discipline despite After years of stagnation and decline, recurrent spending pressures in 2012/13. The overall spending expanded from 20 percent of GDP in fiscal deficit rose in the face of increased spending 2011/12 to 22 percent in 2012/13 (Figure 1.15). pressures and slow revenue growth. The fiscal The increase came at the expense of development buffers the government had been trying to build spending, which fell from 9.3 percent of GDP to were eroded in 2012/13, as both the overall fiscal 8.2 percent. Spending on wages and salaries balance and the primary balance worsened, with increased from 6.9 percent of GDP to 7.5 percent, public debt as a share of GDP rising from 45.5 and interest payments increased by 0.5 percent percent to 47.1 percent. The main causes were of GDP. Nominal salaries and wages increased by the costs of the general elections of March 2013 22.2 percent, largely as a result of increases in the and implementation of the new constitution, salaries of teachers and doctors and the hiring of which included devolved government structures new constitutional offices employees (Table 1.2). to the county level, increased salaries for teachers Interest payments rose 32.9 percent, as a result and doctors, and high interest rate payments. The of expanded borrowing to finance expanded overall fiscal deficit widened from 5.7 percent of expenditures. GDP in 2011/12 to 6.4 percent in 2012/13. The change reflected increased government spending, which rose by 1.3 percent of GDP, and stagnant The freeze in spending before and the changes government revenue, which remained constant in administration after the election brought at 23.1 percent of GDP (Figure 1.14). The primary development spending almost to a halt. Concerns balance deteriorated from 2.9 percent of GDP in about governance during the electioneering period 2011/12 to 3.5 percent of GDP in 2012/13. limited government procurement and payments Figure 1.14: Implementation of the new constitution and reduced capital spending in the second triggered expansionary spending half of fiscal 2012/13. The new administration 35 29.1 29.2 30.5 reduced the number of ministries from 44 to 18. 30 25 25.1 24.0 23.1 23.1 The consolidation and new procedures delayed 21.6 the disbursement of funds. As a result, execution Percent of GDP 20 15 of the development expenditure stood at just 71 10 percent (spending of KSh 300 billion of KSh 420 5 0.6 billion). 0 -2.3 -1.8 -2.9 -3.5 -5 -4.3 -10 1999/2000- 2009/10 -5.7 -6.4 Infrastructure development remained a 2010/11 2011/12 2012/13 Government revenue Government expenditure government priority. Accordingly, energy, Overall balance, including grants Primary balance, commitment basis infrastructure, and information and Source: World Bank, based on data from the National Treasury communications technology (ICT) received the In the face of stagnant revenue mobilization, largest share of development spending (40.7 the government turned to domestic borrowing percent). Public administration and international to finance the deficit. The share of domestic relations accounted for 14.5 percent, and financing doubled, from 2.3 percent of GDP in environment protection, water, and housing 2011/12 to 4.6 percent in 2012/2013. Foreign received 10.1 percent. financing accounted for only 1.7 percent of GDP. December 2013 | Edition No. 9 9 The State of Kenya’s Economy Table 1.1: Kenya’s Doing Business rankings have declined since 2008 Indicator 2008 2009 2010 2011 2012 2013 2014 Starting a business 112 109 124 125 132 128 134 Dealing with construction permits 9 9 34 35 37 45 47 Getting electricity — — — — 115 163 166 Registering property 114 119 125 129 133 161 163 Getting credit 13 5 4 6 8 11 13 Protecting investors 83 88 93 93 97 95 98 Paying taxes 154 158 164 162 166 171 166 Trading across borders 148 148 147 144 141 157 156 Enforcing contracts 107 107 126 125 127 151 151 Resolving insolvency 76 76 79 85 92 101 123 Overall ease of doing business 72 82 95 98 109 122 129 Number of countries surveyed 178 181 183 183 183 185 189 Source: Doing Business Indicators database Note: — Not available Figure 1.15: After years of narrowing, the gap between Given the political sensitivity of the VAT bill, the recurrent and development expenditure widened 25 government delayed parliamentary discussion of the bill until after the general election. As a 20 result, government revenue stood at 23.1 percent Percent of GDP 15 of GDP in both 2011/12 and 2012/13. VAT revenue declined from 5.6 percent of GDP in 2011/12 to 5.0 10 percent in 2012/13. Revenue from excise duty also 5 declined, falling from 2.4 percent to 2.3 percent of GDP in the same period. There was, however, 0 good news from income tax revenues, which 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 increased from 9.6 percent of GDP in 2011/12 to Recurrent expenditure Development expenditure 10.2 percent in 2012/13. The increase was driven Source: World Bank, based on data from the National Treasury by higher pay-as-you-earn (PAYE). Both PAYE and income tax from corporations exceeded their Low execution rates are threatening the targets - together - accounting for 44.0 percent of achievement of government targets. Although total revenue. the combined energy, infrastructure, and ICT sector remained among the top three sectors in The VAT Act enhances tax administration. The the government budget, the implementation rate new act makes collection easier and reduces the was lower than in other sectors because of delays number of tax exempt goods from 400 to 40. It and in procurement and the slow absorption of donor other measures are poised to increase revenues. funds. Overall, 80.2 percent of the budget was The reforms were long overdue, as revenues executed (91.5 percent for recurrent expenditure). from taxes that discourage production (such as In contrast, just 61.5 percent of the development income tax) had increased whereas revenue from budget was executed (Figure 1.16). consumption taxes (VAT) had been declining (Figure 1.17). 10 December 2013 | Edition No. 9 The State of Kenya’s Economy Table 1.2: Government expenditure rose between 2008/09 and 2012/13 Item 2008/09 2009/10 2010/11 20011/12 2012/13 Recurrent spending 19.5 20.8 21.3 20.0 22.1 Wages and salaries 6.9 7.0 7.1 6.9 7.5 Interest payments 2.3 2.6 2.7 2.8 3.3 Domestic Interest 2.1 2.3 2.5 2.5 3.0 Foreign Interest 0.3 0.3 0.3 0.3 0.3 Pensions 1.2 1.2 0.9 0.8 0.7 Operations and maintenance 9.0 10.0 10.5 9.4 10.5 Transitional transfer to counties n.a. n.a. n.a. n.a. 0.3 Development expenditure and net lending 7.2 8.7 7.9 9.3 8.2 Total expenditure and net lending 26.6 29.5 29.1 29.2 30.5 Source: National Treasury, 2013 Note: n.a. Not applicable More tax revenues streams have been identified percent of GDP in 2011/12 to 47.1 percent in to expand the base. The government targeted 2012/13. The increase was financed mainly from new revenue streams by imposing a 10 percent domestic resources, with domestic debt rising excise tax on mobile banking and other financial from 26.5 percent of GDP to 28.7 percent. External services and a 1.5 percent import levy on debt declined, falling from 23.9 of GDP to 23.0 railway development. Both of these measures percent (Figure 1.18). Kenya is set to tap into the will significantly raise revenue and expand the international financial market by issuing a US$ 1.5 tax base. These measures are a step in the right billion of Eurobonds in January 2014. Although the direction, as they rebalance tax composition away issuance will increase its external indebtedness, from taxation of sources of production toward the overall debt sustainability outlook remains taxation of consumption. favorable: the 2013 joint Word Bank/IMF Debt Sustainability Analysis shows that Kenya’s debt Public debt as a ratio of GDP increased, reducing distress rating remains low, thanks partly to the the fiscal space Kenya had built up. The share government’s policy of avoiding nonconcessional of net public debt in GDP increased from 45.5 borrowing. Figure 1.16: Low execution rates reduced development expenditure Education Energy, infrastructure and ICT 63 Governance, justice and order Environment protection, water and housing 69 Energy, infrastructure and ICT Social protection, culture 74 and recreation National security Public administration and 74 international relations Public administration and international Agriculture and rural development 76 Health General economic, commercial 85 Agriculture and and labor affairs rural development Health 86 Environment protection and water Education 87 Social protection, culture Governance, justice and order 89 and recreation General economic, commercial National security 100 and labor affairs 0 50 100 150 200 250 300 0 20 40 60 80 100 Total expenditure by sectors (billions of KSh) Budget implementation rate June 2013 target June 2013 actual as at the end of June 2013 (percent) Source: World Bank, based on data from the National Treasury December 2013 | Edition No. 9 11 The State of Kenya’s Economy Figure 1.17: Income tax revenues rose and VAT and market. Worries about fiscal risks and the strength excise duties fell between 1999 and 2012 of the economy pushed the yield curve upward, 12 especially at short maturities. 10.2 10 9.6 9.3 1.3 Monetary Policy Remained Supportive Percent of GDP 8 T 7.0 6.2 5.7 he Central Bank’s Monetary Policy Committee 6 5.4 5.0 eased monetary conditions to boost economic 4 3.2 2.9 activity. To spur credit to the private sector, the 2.4 2.3 2 2.0 1.7 1.6 1.6 Central Bank lowered its policy rate 250 basis points to 8.5 percent in September 2013, down 0 1999/2000 2010/11 2011/12 2012/13 from 11.0 percent in December 2012. As a result, -2009/10 Income tax VAT Import duty Excise duty interest rates at both the short and long ends of Source: World Bank, based on data from the National Treasury the market declined in 2013 from the high rates of December 2012. The upward movement of the yield curve reflects recent uncertainty over fiscal policy. The The Central Bank operationalized its monetary downward movement in the yields on government policy stance by allowing monetary aggregates securities between December 2011 and to expand. Between July 2012 and July 2013, M0 December 2012 reflected the improved economic increased 12.2 percent to 15.2 percent, and M1 environment after the 2011 economic crisis, when increased 16.2 percent to 18.7 percent (Figure inflation reached a peak of more than 19 percent 1.20). However, because of a build-up in liquidity a year and the exchange rate was volatile. The at the Central Bank, M2 increased just 13.8 peaceful election, smooth transfer of power, and percent in July 2013, to the same level as in 2012. enthusiasm among investors that followed pushed the yield curve further down in June 2013 (Figure Kenya’s monetary policy stance has kept 1.19). However, challenges in implementing the inflation in check and spurred economic activity. budget combined with the slow absorption by Inflationary pressure eased in 2013, with core ministries and the standoff between the national inflation declining from an average rate of 9.5 and county governments have disappointed the percent in 2012 to 4.7 percent in 2013. Economic Figure 1.18: Total and domestic public debt as a percent of GDP Figure 1.19: The upward movement in the yield curve reflects increased, and external debt fell market concerns about budget implementation Kenya's public debt 25 70 60 20 55.5 Interest rate (percent) Percent of GDP 50 24.2 48.3 44.9 45.5 47.1 15 42.2 27.4 40 39.5 26.5 28.7 23.3 26.9 21.9 30 10 20 35.8 22.6 24.2 23.2 25.9 23.9 23.0 5 10 0 0 s s s s s s s s s ar th th ar ar ar ar ar ar ar 1999/2000 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 ye on on ye ye ye ye ye ye ye 1 m m -2006/07 10 15 20 25 30 2 5 Tenor 3 6 External debt Domestic debt December 2011 December 2012 June 2013 October 2013 Source: World Bank, based on data from the National Treasury Source: Africa Alliance Kenya Investment Bank 12 December 2013 | Edition No. 9 The State of Kenya’s Economy Figure 1.20: To support economic activity, Kenya’s Central Bank increased the money supply 40 Change in money supply (percent) 35 30 25 20 15 10 5 0 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 -5 Reserve money M0 M1 Source: World Bank, based on data from the Central Bank of Kenya activity also increased. Growth also increased in holds deposits. As a result, liquidity was tight in the the first half of the year, to 4.7 percent, up from banking system, with some banks with excess cash 4.3 percent during the same period in 2012. and others short of liquidity. As a result, interbank rates soared. Government deposits at the Central Several factors dampened the transmission of Bank also increased, draining the banking system the Central Bank’s monetary stance to short- of liquidity. Short-term rates were nevertheless term rates. Although the Central Bank rate was lower than the peak in 2012, with interbank rates reduced by 250 basis points, interbank rates rose down by 1,650 basis points and 91-day Treasury 168 basis points and 91-day Treasury bill rates bill rates down by 1,098 basis points by the end of rose 128 basis points between December 2012 September of 2013. and the end of September 2013 (Figure 1.21). As part of the transition to the new government, Long-term rates declined in 2013, as lending new procurement was suspended in the first rates corrected for the overshooting in 2012. The quarter of 2013, and spending by the government decline reflects not the transmission mechanism slowed dramatically. Low spending meant that from short-term rates but the reduction in government deposits built up at both the Central commercial banks’ perceptions of risks following Bank and commercial banks where government the general election and the smooth transfer of power. Average weighted lending rates declined Figure 1.21: Liquidity shortages in the banking system dampened the effect of monetary policy on interest rates by 119 basis points and overdraft lending rates by 30 90 basis points between December 2012 and the 25 end of September 2013. Had liquidity concerns not hindered the transmission from the Central Bank Interest rate (percent) 20 rate to short-term rates, lending rates might have 15 fallen further. 10 5 Interest rate spreads remained high, despite improved economic conditions. Spreads (lending 0 minus deposit rates) remained in double digits in May-12 May-13 May-11 May-08 May-09 May-10 May-07 Sep-11 Sep-12 Sep-13 Sep-09 Sep-10 Sep-07 Sep-08 Jan-13 Jan-10 Jan-11 Jan-12 Jan-07 Jan-08 Jan-09 2013, despite an improved economic environment Interbank 91-day Tbill Central bank rate and lower political risk. Measured as the difference Source: World Bank, based on data from the Central Bank of Kenya December 2013 | Edition No. 9 13 The State of Kenya’s Economy Figure 1.22: Lending rates declined marginally, but interest spreads remained wide 30 Long-term rates 18 16 25 Interest rate spreads (percent) 14 20 12 10 Percent 15 8 10 6 4 5 2 0 0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Deposit Savings Lending Overdraft Spread (lending rate-deposit Rate) Spread (lending rate-91 Treasury bill rate) Source: World Bank, based on data from the Central Bank of Kenya between lending and deposit rates, the spread Figure 1.23: Banking sector credit expanded, but the level remains below historical levels averaged about 11 percent (Figure 1.22). Measured 40 as the difference between the lending rate and the 35 91-day Treasury bill rate, the spread averaged 9 30 percent. Spreads capture perceived risk by lenders 25 Percent of borrowers’ ability to pay; they can also capture 20 inefficiency in the banking system (as examined in 15 the special topic section of this update). 10 5 Private sector credit is flowing again to finance 0 May-11 May-12 May-13 Mar-11 Mar-12 Mar-13 Nov-12 Sep-11 Sep-12 Sep-13 Jan-11 Jan-11 Jan-12 Jan-13 Jul-11 Jul-12 Jul-13 economic activity, but the growth level of credit is still below recent historical levels. There was Private sector credit growth M0 M1 Source: World Bank, based on data from the Central Bank of Kenya a significant increase in credit uptake in 2013, following the easing of monetary policy (Figure which increased short-term rates. Under such 1.23). Credit to the private sector grew 17.4 circumstances, monetary easing had only limited percent in 2013, up from 7.7 percent growth in impact on growth. 2012. Credit growth in 2013 was still well below normal, however. Private credit as a share of Credit to households and to trade and business GDP increased from 23.0 percent in 2003 to services rose significantly. In contrast, the 37.6 percent in 2013. Since 2011, the growth in increase in credit to the more productive sectors— private sector credit has not kept pace with GDP agriculture and manufacturing—was minimal growth (Figure 1.24). Credit activity remains (Figure 1.25). Between the end of December 2012 subdued, as banks have become more reluctant and the end of September 2013, commercial to lend given weaker economic activity during the banks lent KSh 169 billion to the private sector. government transition. At the same time, demand The other main beneficiaries were: households for credit has waned in light of weaker business (32 percent of lending), trade (19 percent), prospects. Efforts to stimulate the economy business services (18 percent), and real estate through accommodative monetary policy were (12 percent). A number of sectors made net thwarted by lack of liquidity in the banking system, repayments to the banking system. They included 14 December 2013 | Edition No. 9 The State of Kenya’s Economy Figure 1.24: Credit to the private sector has not grown as rapidly as GDP since 2011 4.5 45 40 Credit to private sector growth (percent) 4.0 37.6 40 38.1 35 3.5 34.8 35 30 3.0 30 25 KSh billion 26.5 Percent 2.5 25 23.3 20 2.0 20 15 1.5 15 10 1.0 10 0.5 5 5 0 0 0 Jan-11 Mar-11 Apr-11 May-11 Aug-11 Oct-11 Dec-11 Feb-11 Jun-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Apr-12 May-12 Aug-12 Oct-12 Dec-12 Mar-13 Apr-13 May-13 Aug-13 Feb-12 Jun-12 Jul-12 Sep-12 Nov-12 Jan-13 Feb-13 Jun-13 Jul-13 Sep-13 2011 2012 2013 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 Credit GDP Credit to GDP ratio Source: World Bank, based on data from the Central Bank of Kenya and the Kenya National Bureau of Statistics finance and insurance (KSh 4.9 billion), agriculture 2012 and September 2013, reaching KSh 1.52 (KSh 1.4 billion), and mining and quarrying trillion. Most of the KSh 192 billion increase went (KSh 0.8 billion). Significant increases in credit to households (32 percent), trade (25 percent), growth were seen in the business services (35.5 real estate (16 percent), and manufacturing percent), household (32.0 percent), and trade (9 percent) (Figure 1.26). The banking sector’s (20.0 percent) subsectors. Agriculture as a whole aggregate balance sheet size expanded by 12.4 made a net repayment to the banking system of percent, from KSh 2.33 trillion in December 2012 KSh 1.4 billion, and manufacturing grew a paltry to KSh 2.63 trillion by the end of September 2013. 6.8 percent. When these growth numbers are Total assets included loans and advances (56 weighted by the percentage of total credit each percent of total assets), government securities (22 sector receives, credit rose 4.6 percent to private percent), and placements (6 percent). households, 3.3 percent to trade, and 2.5 percent to business services. Despite a difficult economic environment, the quality of assets in aggregate terms did not The banking sector remained healthy and deteriorate in real terms. Despite challenging experienced significant growth in 2013. Gross economic times, the quality of bank assets loans increased by 14 percent between December remained resilient. The ratio of nonperforming Figure 1.25: Credit flowed to private households, trade, and business services—but not to productive sectors Sectoral growth of credit to the private sector (unweighted) Sectoral growth of credit to the private sector (weighted) Finance and insurance 20.3 Finance and insurance 0.5 Agriculture 0.7 Agriculture 0.0 Manufacturing 7.1 Mining & quarrying 0.3 6.8 Transport & communication 13.1 Building & construction 1.1 Building & construction 25.9 0.7 13.5 Transport & communication 0.8 Real estate 23.7 0.9 11.2 14.7 Manufacturing 0.9 Other activities 15.0 0.5 1.2 Consumer durables Total private Sector 7.7 17.4 1.1 1.6 Consumer durables 8.0 Other activities 18.3 2.6 Mining & quarrying 18.8 Real estate 0.1 1.9 Trade 3.2 20.3 Business services 2.5 Private households 5.9 Trade 0.5 3.3 Business services 0.8 Private households 0.8 4.6 -20 -10 0 10 20 30 40 -1 0 1 2 3 4 5 Percent Percent 2012 2013 2012 2013 Source: World Bank, based on data from the Central Bank of Kenya December 2013 | Edition No. 9 15 The State of Kenya’s Economy Figure 1.26: Households, trade, and real estate received the lion’s share of loans from the banking system 450 400 389 350 327 312 300 Billion KSh 264 250 197 208 200 180 177 150 99 105 100 65 67 69 77 51 54 52 62 50 32 37 14 15 0 Mining and Tourism, Financial Energy Agriculture Building Transport Manufacturing Real Trade Households quarrying restaurant services and water and and estate and hotels construction communication December 2012 September 2013 Source: World Bank, based on data from the Central Bank of Kenya to gross loans improved marginally, from 5.3 of October 2013, increasing from 4,133 to 4,970 percent in December 2012 to 5.2 percent in 2013. (Figure 1.28). Market capitalization increased 41 However, 7 out of 10 subsectors experienced percent in the same period, rising from KSh 1.3 deterioration in asset quality (Figure 1.27). The trillion to KSh 1.8 trillion. The NSE outperformed exceptions were finance and insurance, where the the Dow Jones Industrial average, which rose decline was 19.6 percent; mining and quarrying, 18.6 percent over the same period. A number of where the decline was 0.8; and households, factors explain the boom in the equities market. where the decline was 0.7 percent. In nominal First, the political risk and uncertainties associated terms, the volume of nonperforming loans rose with the elections declined as the elections 13 percent, from KSh 72 billion to KSh 80 billion. were peaceful. Second, the equities market fell The increase was experienced in all sectors, with significantly from its peak value of 5,774 in January more than half of the deterioration experienced 2007. The steep decline was associated with by households, trade, and real estate. concerns about governance at the NSE that have since been resolved. The regulator (the Capital The equities market is booming, with the Nairobi Markets Authority) implemented deep reforms Stock Exchange (NSE) market index rising 20 to streamline operations. Returns on equities percent between December 2012 and the end increased significantly, given the bullish forecast. Figure 1.27: Asset quality deteriorated in most sectors Non-performing loans Ratio of non-performing loans to gross loans 25 8 7 20 6 5 Billion KSh 15 4 Percent 10 3 2 5 1 0 0 quarrying Energy Mining and and water services Tourism, Financial restaurant and hotels Agriculture Building and construction Manufacturing Transport and comm. Real estate Trade Households Energy Mining and quarrying and water services Tourism, Financial Manufacturing Real estate Households Transport and comm. restaurant and hotels Building and construction Trade Agriculture December 2012 September 2013 December 2012 September 2013 Source: World Bank, based on data from the Central Bank of Kenya 16 December 2013 | Edition No. 9 The State of Kenya’s Economy Figure 1.28: The Nairobi Stock Exchange outperformed the Dow Jones Industrial average in both nominal terms and as a share of GDP, is 7,000 18,000 a great relief for Kenya’s economy, which had 16,000 been facing considerable pressure from growing 6,000 14,000 external imbalances. NSE index (1966 = 100) 5,000 12,000 Dow Jones 4,000 10,000 Threats to Kenya’s external vulnerability 3,000 8,000 6,000 still exist, however. The inherent structural 2,000 4,000 weaknesses that drove the current account deficit 1,000 2,000 to unsustainable levels have not been dealt with. 0 0 The external balance fell to sustainable levels in Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 2013, but the improvement seems temporary. NSE 20 share index, End-month Dow Jones industrial average A healthier improvement would have been Source: World Bank, based on data from the Nairobi Stock Exchange caused by an increase in exports or a reduction Foreign participation in the Kenyan stock market in nonessential imports. However, despite poor remains as high as 50 percent of equity turnover. performance in exports in the last five years, the The market’s performance and the significant ratio of exports to GDP declined, dropping 2.1 increase in market capitalization signal investors’ percent in 2013 from 2012. Between 2005 and confidence in the real economy and could herald 2013, exports grew at an average annual rate better economic performance. It also signal the of 10.1 percent in nominal terms, while imports confidence of nonresidents in Kenya’s equities grew 16.1 percent a year. The importance of market. However, the foreign dominance also exports growth becomes particularly salient in the poses a significant risk to the NSE as nonresidents context of Kenya’s large current account deficit can quickly offload their assets if U.S. interest rates and significant external vulnerability. Weather- induced shocks, a pick-up in government capital rise or a version to equities of emerging markets spending, and an increase in private sector credit increases. pose risks for further deterioration of the current account. 1.4 The External Position Strengthened K enya’s current account balance improved considerably in 2013. Imports fell from 41.8 percent of GDP in December 2012 to 36.5 percent The balance of payments remained in surplus in 2013. The balance of payments declined in nominal terms by almost 50 percent, falling from in September 2013. The decline is attributed US$ 1.2 billion in December 2012 to US$ 0.6 billion to sluggish private sector credit growth; lower in October 2013. As a percentage of GDP, the capital spending, as the government was slow in surplus fell from 3.2 percent in 2012 to 1.4 percent paying contractors for various capital projects; in 2013 (Figure 1.29). The softening of the balance and lower demand for oil, as the country had of payments was attributed to a decline in project adequate rainfall to generate power. As a result, loans (including defense loans), which decreased external vulnerability declined significantly. The from 3.6 percent in 2012 to 2.1 percent in 2013, cumulative 12-month current account deficit and net flows to commercial banks in the financial increased from US$ 4.27 billion (10.7 percent account, which decreased from 2.3 percent to of GDP) in September 2012 and US$ 4.25 billion 1.1 percent. Short-term flows remained the main (10.6 percent of GDP) in December 2012 but fell source of current account financing, contributing by 3.2 percent of GDP to US$ 3.35 billion (7.5 about 63 percent, excluding net errors and percent of GDP) in September 2013. The decline, omissions (66 percent when they are included). December 2013 | Edition No. 9 17 The State of Kenya’s Economy Figure 1.29: Short-term capital inflows are financing the current account deficit 20 15 3.5 10 1.2 2.2 3.0 Percent of GDP 5 10.3 3.1 5.8 8.4 6.1 0.5 1.4 0 -0.1 -7.8 -5 -9.7 -10.7 -7.5 (sept) -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -15 Current account Short-term flows (including NEO) Other flows Overall Balance Source: World Bank, based on data from the Central Bank of Kenya Figure 1.30: The trade balance improved significantly, as oil imports declined 30 20 7.5 9.1 9.4 10 16.9 15.5 13.4 Percent of GDP 0 -10 -13.7 -20 -17.2 -18.8 -27.7 -31.3 -30.6 -30 -8.7 -11.9 -10.1 -40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -50 (sept) Exports (fob) Oil Imports Non-factor services Imports (Non-oil) Balance of Trade Balance of Trade (non-oil) Source: World Bank, based on data from the Central Bank of Kenya The balance of trade deficit improved in the year ending September 2013 (Figure significantly, driven by a sharp reduction in 1.31). This modest decline reflects the poor imports (Figure 1.30). The overall balance of trade performance of manufactured exports, which deficit improved by 3.6 percentage points between declined 2.5 percent; exports of raw materials, December 2012 and September 2013, rising from which declined 21.0 percent; and chemical 17.2 percent of GDP to 13.7 percent. Excluding Figure 1.31: Slower global activity and weak local conditions oil imports, the balance of trade deficit improved reduced Kenya’s exports and imports from 16.1 percent of GDP to 14.3 percent. The 80 improvements in the balance of trade deficit in 70 60 Annual growth (percent) 2013 mainly reflected significant reduction in the 50 import bill, which declined by 5.3 percent of GDP. 40 The balance of trade position would have been 30 21.9 stronger had exports of goods and services not 20 19.5 12.916.8 10 8.0 10.8 4.2 fallen by 1.8 percent of GDP in 2013. 6.0 0.5 0 -10 Exports are still depressed. Exports contracted, as 2007 2008 2009 2010 2005 2006 2000 2001 2002 2003 2004 2011 2012 2013 -20 (sept) commodity exports slowed and showed no signs Exports of goods and NFS Imports (cif) Services of recovery. Exports of goods shrank 0.1 percent Source: World Bank, based on data from the Central Bank of Kenya 18 December 2013 | Edition No. 9 The State of Kenya’s Economy exports, which declined 14.8 percent. The only identify exports as a key driver of faster growth good news coming from the export sector was tea and sets no targets for export diversification or exports, the value of which increased 11.2 percent growth. as a result of favorable weather conditions in the highlands. Tea volume increased 42 percent, but Import growth slowed significantly in 2013, as its price declined 7.6 percent. Horticulture exports the oil import bill declined. Year-on-year imports increased 7.2 percent, the largest increase since grew 0.5 percent in September 2013, down from 2006. As a share of GDP, Kenya’s exports declined 12.3 percent in 2012. However, there was a decline from 23.2 percent in September 2012 and 24.6 in imports of about 2 percent between December percent in December 2012 to 22.8 percent in 2012 and September 2013, compared with 12.3 September 2013. percent growth in the same period in 2012 (Table 1.3). Oil imports fell 4.9 percent, from US$ 4.1 The structure of exports remained unchanged in billion in 2012 to US$ 3.9 billion in 2013. The decline 2013. Kenya’s main exports are tea (21 percent of reflects a slight reduction in international oil prices total exports), manufacturing (12 percent), and and an increase in the production of hydropower horticulture (12 percent). Tea is exported mainly in 2013, which reduced demand for oil to generate to Egypt and Pakistan, horticulture products thermal power. Imports of manufactured goods are exported mainly to Western Europe, and rose 10.4 percent, machinery and transport rose manufacturing exports go largely to the Common 7.6 percent, and chemicals rose 6.1 percent for Market for Eastern and Southern Africa (COMESA). the 12 months ending in September 2013. Exports are critical to reinvigorating Kenya’s Imports as a share of GDP declined significantly, growth prospects, but policy makers have not falling from a peak of 43.2 percent of GDP in explicitly prioritized them. Increasing exports, 2011 to 40.7 percent in 2012 and 36.5 percent particularly in the manufacturing sector, is crucial in September 2013. The drop reflects 3 percent for low-skilled job creation of the magnitude declines in imports of both fuel and lubricants needed to reduce high unemployment, particularly (primarily as a result of the decline in international among young people, whose unemployment oil prices) and industrial nonfood supplies. The poses a threat to social stability. The Second shares of machinery, capital equipment, and Medium-Term Plan (2013-2017) does not even Table 1.3: Shares of imports, by broad economic category, 2009-2013 As percent of total imports As percent of GDP Category 2013 2010 2011 2012 2013 2010 2011 2012 (Aug) Food and beverages 8.7 6.9 8.7 7.3 3.2 3.8 3.6 2.6 Industrial supplies (non-food) 30.6 32.0 30.1 29.9 13.3 15.2 13.4 10.8 Fuel and lubricants 23.2 24.4 26.3 23.4 9.3 13.2 11.1 8.4 Machinery and other capital equipment 17.1 17.8 16.7 18.4 7.9 7.8 8.3 6.6 Transport equipment 13.0 11.1 10.6 12.9 5.8 4.9 5.4 4.6 Consumer goods not elsewhere specified 7.2 7.5 6.9 6.8 3.2 3.5 3.2 2.5 Goods not elsewhere specified 0.2 0.4 0.7 1.3 0.1 0.4 0.3 0.5 Source: Kenya National Bureau of Statistics 2013 Note: Data are for 12 months ending in July of each year December 2013 | Edition No. 9 19 The State of Kenya’s Economy transport equipment continue to increase (see (0.6 percent of GDP) in December 2012 to US$ Table 1.3). Together with industrial supplies 249 million (0.6 percent of GDP) in September (mainly intermediate goods), imports of these 2013. In the first three quarters of 2013, Kenya goods accounted for more than 60 percent of managed to attract just US$186 million. The Kenya’s total imports (including oil increases their inability to attract FDI is closely associated with share to more than 80 percent). This large share the regulatory environment, which is hostile to signals the importance of imports to Kenya’s investment, as summarized by the ease of doing economic activity and the narrow policy space business indicators outlined in Table 1.1. policy makers have to deal with external balance problem. Net capital flows to Kenya have grown very rapidly. With the growth pick-up after 2003 and Remittances were strong, with inflows of US$ improved economic prospects, Kenya has been a 1.23 billion (2.7 percent of GDP) for the 12 months major beneficiary of the surge in private capital ending August 2013, a 7.7 percent increase in flows. Net capital flows more than doubled, from U.S. dollar terms over the same period in 2012 an average of 4.3 percent of GDP in 2000–08 to (Figure 1.32). In the first eight months of 2013, 9.7 percent in 2009 (Figure 1.33). US$ 844 million in remittances flowed into Kenya, Figure 1.33: Kenya is attracting more short-term a 10.3 percentage increase over the same period than long-term flows in 2012. The boom in remittances reflects both 6,000 5,278 improved data collection by the Central Bank of 5,000 Kenya and improved economic activity in North 4,000 3,768 Millions US$ America (the source of 50 percent of remittances) 3,000 3,053 2,480 2,438 and Europe (the source of 27 percent). 2,000 1,678 1,000 1,213 923 140 FDI flows improved marginally but remain low. 0 (Sep) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Kenya is still unable to attract significant FDI to (1,000) finance economic activity and power its growth, Capital account Official, medium & long-term Short Term (incl. portfolio flows) with average inflows remaining below 1 percent Financial Account Private, medium & long-term Net Errors and Omissions (NEO) of GDP. FDI increased from US$ 177 million Source: World Bank, based on data from the Central Bank of Kenya Figure 1.32: Remittances continued to rise 120 1,400 3.5 100 1,200 3.0 1,000 2.5 Percent of GDP 80 Million US$ Million US$ 800 2.0 60 600 1.5 40 400 1.0 20 200 0.5 0 0 0.0 Nov-04 Apr-05 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jun-09 Nov-09 Apr-10 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jun-04 Sep-05 Feb-06 Jul-06 Sep-10 Feb-11 Jul-11 Jan-04 Jan-09 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Monthly 12-month average 12 month cumulative Percent of GDP Source: World Bank, based on data from the Central Bank of Kenya 20 December 2013 | Edition No. 9 The State of Kenya’s Economy Kenya is not attracting adequate long-term flows economic activity weakened, especially in the to finance its development. The financial account United States and Europe; excessive liquidity was has been crucial in financing the current account. pumped into advanced economies; and bond The share of both capital and financial account yields fell, as global interest rates and risk aversion was 13.8 percent of GDP in December 2012 declines. Kenya’s economy has realized increased (with capital account contributing 0.6 percent). inflows when global risk appetite has been high, This share declined to 8.8 percent by September reflecting the higher perceived riskiness of the 2013, largely as a result of the reclassification by economy. the Central Bank of a large share of net errors and omissions into some elements of nonfactor Short-term flows continue to pose challenges. services. Net errors and omissions declined from Compared with FDI, short-term flows are prone US$ 923 million (2.3 percent of GDP) to US$ 140 to investor risk aversion and can change abruptly million (0.3 percent of GDP). in response to political as well as economic events. They tend to be more volatile and more Kenya has received growing volumes of short- sensitive to changing conditions in global financial term flows, especially portfolio capital flows, as markets. Although Kenya has so far largely foreign investors look for higher yields. With a escaped turbulence in financial markets, there is strong macroeconomic environment, reasonable no guarantee that it will do so in the future. debt levels, and relatively developed capital and securities markets in Africa, foreign investors have Kenya has built enough cushion in international become active players in Kenya’s domestic bond reserves to buffer it from short-term shocks. and equity markets, accounting for 50–60 percent Gross reserves increased by 11.2 percent, from of transactions in the market. Short-term flows, US$ 7.2 billion (3.5 months of import cover) in including errors and omissions, increased from December 2012 to US$ 8.0 billion (4.3 months of 3.7 percent of GDP to 6.5 percent in the between import cover) in October 2013. The Central Bank December 2012 and September 2012. These increased its official reserve holdings by 10.5 inflows supplemented domestic financing of percent, from US$ 5.7 billion to US$ 6.3 billion. investment. Net capital flows were highest during International reserves were equivalent to four the 2009-2013 period, when global economy months of import cover. Figure 1.34: The Kenya shilling stabilized Shilling volatility against the US Dollar KSh exchange rate versus other currencies 180 4 Period of excess Volatility of the KSh against the US$ 160 macroeconomic 3.5 volatility 140 3 120 100 2.5 80 2 Exchange rate market stable without excess 60 1.5 volatility 40 1 20 0.5 0 Apr-13 Apr-08 Apr-10 Apr-11 Apr-12 Apr-09 Oct-11 Oct-12 Oct-09 Oct-10 Oct-08 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jul-12 Jul-13 Jul-09 Jul-10 Jul-11 Jul-08 0 May-11 Oct-11 Dec-11 Oct-13 Jan-11 Mar-11 Nov-11 Oct-12 Dec-12 Jan-13 Mar-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Feb-11 Apr-11 Jun-11 Jul-11 Aug-11 Sep-11 Jan-12 Mar-12 May-12 Feb-12 Apr-12 Jun-12 Jul-12 Aug-12 Sep-12 Nov-12 Feb-13 Apr-13 UK pound US dollar Euro Source: World Bank, based on data from the Central Bank of Kenya. December 2013 | Edition No. 9 21 The State of Kenya’s Economy Nominal exchange rates remained stable as translated into a real depreciation of 3.9 percent inflation declined. The exchange rate remained (Figure 1.35). stable in 2013, despite the political uncertainties of the general election. The shilling traded at an Figure 1.35: Kenya’s trade-weighted exchange rates are starting to depreciate as the global economy recovers average rate of US$ 86.1, € 113.0, and £133.7 150 between January and October 2013 (Figure 1.34). 140 These rates represented depreciations of 2.2 130 January 2003 = 100 120 percent with respect to the dollar, 5.2 percent 110 with respect to the euro, and 0.3 percent with 100 respect to the pound. In terms of volatility, the 90 shilling remained relatively stable, fluctuating by 80 less than 1 percent in 2013. 70 60 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Improved economic activity in the European Union and the United States strengthened their Nominal e ffec tive exchange rate Real effective exchange rate Source: World Bank, based on data from the Central Bank of Kenya currencies with respect to the shilling. Kenya’s trade-weighted exchange rate depreciated in both nominal and real terms. The nominal effective There is no evidence of persistent over- or exchange rate depreciated by 1.2 percent between undervaluation of the shilling. Because of the December 2012 and July 2013, driven mainly by a free floating exchange rate policy, the shilling strengthening euro following a mild recovery in always oscillates around its equilibrium level. It Europe and stronger growth performance in the has gone through periods of overvaluation and United States. As domestic inflationary pressures undervaluation, however, associated with shocks remained subdued, these nominal changes (Box 1.2). Box 1.2: Is Kenya’s real exchange rate over- or undervalued? Kenya’s real exchange rate appreciated by more than 30 percent since 2003. It has been assumed that this appreciation hurt exports, by making Kenya’s goods less competitive abroad. Real appreciation was accompanied by higher current account deficits, raising questions as to whether the shilling was overvalued in real terms. Sichei and Randa (2013) conducted an in-depth study Figure B1.2.1: The actual and equilibrium real effective exchange of this policy issue. They developed a model of the rate in Kenya fell between 1998 and 2012 fundamental real effective exchange rate (REER) and 120 estimated Kenya’s long-run REER equation to obtain a long-run relationship between it and its fundamentals 110 (Figure B1.2.1). They simulated various scenarios of Index (Jan. 2003=100) 100 under- and overvaluation and estimated their potential effects on Kenya’s growth rate. Their findings suggest 90 that there is an optimal level of REER misalignment. 80 The study finds that the long-run real exchange 70 rate is driven by investment, net foreign assets, the terms of trade, productivity, openness, and the stock 60 of FDI. Using the estimation results in Table B.1.2.1, 1998:1 2000:1 2002:1 2004:1 2006:1 2008:1 2010:1 2012:1 Period the authors computed misalignment by feeding the Actual REER Equilibrium REER 22 December 2013 | Edition No. 9 The State of Kenya’s Economy estimated model with the permanent components Figure B1.2.2: There is an optimal level of misalignment of the real of the fundamentals (estimated with a Hodrick- effective exchange rate on growth of real GDP Presscott filter). These permanent components are 5 characterized as sustainable levels and are therefore consistent with the concept of equilibrium. The Real GDP growth (percent) 0 analysis reveals that episodes of overvaluation and No misalignment Optimal level of RER misalignment 3.68% undervaluation are associated with shocks (Figure -5 B1.2.2). -10 The econometric analysis yields several important results: -15 • The coefficient for REER misalignment is positive RER overvaluation RER undervaluation -20 and stable in both regressions, suggesting that -30 -20 -10 0 10 20 30 40 undervaluation promotes economic growth RER misalignment (percent) and overvaluation restrains it. The relationship between RER misalignment and economic growth Figure B1.2.2: Misalignment of the real effective exchange rate is nonlinear, suggesting that the positive effects of is associated with shocks misalignment on growth have diminishing marginal 15 undervaluation Macroeconomic returns. The optimal level of REER misalignment is Severe drought Percent instability of 3.7 percent for GDP and 8.4 percent for GDP per 10 2011 capita (Figure B1.2.2). • REER volatility has negative and significant effects 5 on economic growth (measured in terms of both GDP and GDP per capita). Although undervaluation 0 overvaluation of the REER promotes growth, its volatility hampers Percent it, because large fluctuations in the REER increase -5 Global the uncertainty of investment decisions and financial crisis consequently hamper investment and long-term -10 growth. This finding is consistent with the work of 1998:1 2000:1 2002:1 2004:1 2006:1 2008:1 2010:1 2012:1 Rasin and Collins (1999) and Aguirre and Calderon Period (2005). • The impact of real exchange rate on the trade balance (the Marshal-Lerner condition) does not hold. • The government can use a combination of modest expansionary monetary, fiscal, and exchange rate policies that build reserves to target specific zones of REER overvaluation or undervaluation. Table B1.2.1 Long-run determinants of the real effective exchange rate in Kenya Variable Coefficient P-value Constant -16.16388 0.0000 Investment/Gdp -0.675886 0.0000 Net foreign assets/GDP -0.179956 0.0003 Terms of trade 0.204802 0.0490 Productivity -21.79558 0.0000 Openness 0.171172 0.0350 FDI stock/GDP 0.198090 0.0017 December 2013 | Edition No. 9 23 The State of Kenya’s Economy 2. Growth Outlook: 2014 and Beyond W ith ample slack remaining in the economy as inflation remains anchored at a lower level, Kenya is well positioned for stronger growth in 2014. Assuming that it overcomes the transitional issues that hindered spending in 2013 and continues to implement structural reforms that make it easier to do business, it should growth at 5.1 percent in 2014 and 6.0 percent over the medium term. Two significant downside risks threaten this outlook. On the external front, the tapering of the liquidity injection by the U.S. Federal Reserve will cause volatility in Kenya’s exchange rate and increase domestic interest rates, as Kenya is a major recipient of short-term flows, which finance the current account. Domestically, the fiscal risk emanating from the burgeoning wage bill; inadequate implementation of the devolution process, and poor absorption of budget funds could dampen GDP growth. 2.1 Growth Prospects Are Solid output rose 5.2 percent. It lost steam in the T he World Bank estimates that Kenya’s second quarter, however, growing just 4.3 economy will grow 5.0 percent in 2013 and percent. The slowdown reflected the strong and 5.1 percent in 2014. Performance this year and high correlation between government spending next will be the strongest since 2010, when on the one hand and private spending and the economy grew 5.8 percent. It will be well economic activity on the other. Low absorption below the 7.0 percent growth achieved in 2007. of development spending curtailed economic However, these projections are lower than the activity, as actual development spending fell 29 projections made in June, because they reflect percent short of its target of KSh 420.4 billion, two important domestic factors that slowed a shortfall of KSh 121.4 billion. Development economic activity. First, transmission of the spending declined 0.6 percent in nominal terms accommodative monetary policy stance into the (7.6 percent in real terms), falling from KSh 301 real sector has been weak: real lending rates billion in 2011/12 to KSh 299 billion in 2012/13. remain high, hindering growth in private sector credit and failing to inspire confidence among Aggregate demand will increase in 2014 (Table investors. Credit activity remained subdued, as 2.1). The government will soon overcome the weaker economic activity during the government transitional challenges of implementing the transition increased banks’ reluctance to lend budget, putting its spending program back on and reduced demand for credit. Second, the new track. In addition, credit to the private sector will government faced difficulty implementing the pick up, as commercial bank loans that are in the budget during the transition period. Given Kenya’s pipeline are processed and reach businesses. history of low growth following general elections, annual growth of 5.0 percent is commendable. The baseline scenario for 2014 remains the same as in the June Kenya Economic Update. Challenges in implementing the government The increase in credit flows to the economy budget constrained economic activity. The will support an investment-led recovery. The economy started on a strong footing in the first government is assumed to maintain a prudent quarter of the year, as a result of the momentum fiscal stance, consolidating fiscal policy to reduce gathered in the fourth quarter of 2012, when public debt, which increased significantly in 24 December 2013 | Edition No. 9 The State of Kenya’s Economy Table 2.1: GDP is projected to grow by a little more than 5 percent through 2016 (annual percentage increase) Item 2008 2009 2010 2011 2012 2013 2014 2015 2016 GDP 1.5 2.7 5.8 4.4 4.6 5.0 5.1 5.2 5.3 Private consumption -1.3 5.0 7.2 3.0 5.5 4.0 3.1 3.1 3.1 Government consumption 2.5 3.8 6.3 5.2 9.3 4.6 5.5 4.0 4.0 Gross fixed investment 9.5 2.8 7.7 12.6 11.5 15.6 9.7 11.0 11.7 Gross domestic expenditure 1.0 5.0 6.7 5.8 6.8 6.5 4.9 5.1 5.3 Exports of goods and nonfactor services 7.2 –9.3 17.5 6.6 4.7 6.4 6.1 6.3 6.0 Imports of goods and nonfactor services 6.6 2.8 6.1 15.6 12.5 9.6 5.1 5.5 5.8 Source: World Bank staff projection Note: Figures for 2013 estimates. Figures for 2014-2016 are forecasts 2013. Capital spending is expected to increase Figure 2.1: Growth will pick up in 2014, driven by investment and public spending in line with the ambitious development program 6.5 outlined in the Second Medium-Term Plan (2013- 5.9 6.1 High 6.1 6.0 2017). Exports are assumed to grow in line with Annual growth (percent) Baseline the strengthening of the economies of Kenya’s 5.5 5.1 5.2 5.3 5.0 trading partners. Imports depend on the strength 5.0 of domestic demand, particularly for capital goods. 4.5 4.4 Low 4.2 4.3 Performance of the agricultural sector is expected 4.0 to be strong. Based on these assumptions, the 3.5 World Bank forecasts accelerated growth in the first half of 2014. 3.0 2011 2012 2013 2014 2015 2016 Source: World Bank staff projections In the high-growth case, GDP is projected to increase 5.9 percent in 2014 (Figure 2.1). Under In the low-growth scenario, GDP grows at 4.2 this scenario, investment is much stronger than percent. This scenario assumes that capacity in the baseline, thanks to stronger domestic constraints in implementing the budget investment (both private and public) and greater continue and growing pains in implementing than expected inflows of FDI. Much of the decentralization prevent local governments increased investment is projected to be used from executing public spending. It also assumes to purchase imported equipment, leading to tightening of liquidity in global markets, leading to strong growth in imports. Reforms at the Port of volatility in the exchange rate and higher interest Mombasa, creation of a single customs window, rates, which hinder economic activity. The high expansion of the Huduma centers, enhanced correlation between public and private spending service delivery, reductions in the cost of doing as well as the weak response of private sector business, and operationalization of the Treasury credit to an accommodative monetary policy Single Account are expected to improve the stance hold back private investment. business environment. The high-growth scenario also assumes that macroeconomic stability will The Central Bank’s monetary policy stance be sustained and agriculture harvests will be boosted economic activity in 2013 and favorable, supporting household incomes. counteracted the deleterious effects of weak December 2013 | Edition No. 9 25 The State of Kenya’s Economy spending by the government. Supportive and capital markets. Lower debt levels would calm monetary policy helped buffer the decline in these fears and bring Kenya’s debt levels closer to demand. Uncertainty about fiscal spending at those of its peers. both the national and county level, low inflation, continued weakness in the export sector, and the Consolidation of the fiscal space ought to potential impact of higher Central Bank rates on be possible without reducing infrastructure household budgets argue for a continuation of the spending. Fiscal buffers could be rebuilt by current monetary policy stance to support growth monitoring the new wage and salary structures in the short term. Room for further easing remains, related to the constitutionally mandated as inflationary expectations are still anchored at devolution process; managing and rationalizing a low level. The challenge for the Central Bank the number of county staff; implementing the Civil going forward is to support growth while keeping Servants Pension Act, to reduce the contingent inflation low. liability of the government; increasing public investment in infrastructure, to stimulate private Economic activity will move into higher gear investment; and increasing the efficiency of as the government ramps up public spending, to create space for spending. Although fiscal policy increased infrastructure investment. space is narrowing, there is still room to maintain infrastructure Gross debt increased to 2.2 Risks Remain Unchanged and social sector spending. more than 50 percent However, the government of GDP in 2012/13, up should reduce the burgeoning from 45 percent T he risks to the outlook remain the same as they were in the June update. On the external front, the wage bill, which threatens in 2011/12 winding down of the liquidity injection macroeconomic stability. On the revenue side, the into the global economy by the U.S. Federal reforms in taxation ushered in by the VAT Act 2013 Reserve will cause volatility in Kenya’s exchange enhance tax administration and improve efficiency, rate and increase domestic interest rates, as Kenya reducing the list of exemptions from 400 to 40 and is a major recipient of short-term flows, which reorienting taxation toward consumption rather finance the current account. Reversals of capital than production. flows when global liquidity tightens could lead to significant deterioration of domestic financial Putting public debt on a sustainable path over conditions and slow economic activity. Increased the medium term while supporting near-term volatility could hurt investment and growth. growth requires fiscal consolidation. Gross debt increased to more than 50 percent of GDP in On the domestic front, the government could fail 2012/13, up from 45 percent in 2011/12. This debt to absorb funds at both the county and national level is sustainable, according to 2013 IMF/World level, stifling aggregate demand and economic Bank debt sustainability analysis (DSA). Issuance activity. Lack of capacity at the county level poses of a Eurobond in 2014 will raise the level, however, a significant risk to budget implementation that potentially reducing Kenya’s ability to finance might subdue economic activity. Alternatively, larger fiscal deficits without creating pressure on county government could receive larger budget the economy. Higher levels of debt could raise allocations, crowding out financing for national fears among private investors about inflation and functions, which would have to be financed by depreciation, resulting in volatility in the money additional borrowing, creating macroeconomic 26 December 2013 | Edition No. 9 The State of Kenya’s Economy stability. Without a human resource audit of staff 2.3 What Can Policy Makers Do to Spur High at both the county and national levels, Kenya’s and Sustainable Growth? T wage bill is poised to significantly increase. A staff he immediate priority is to continue to rationalization exercise could indicate where cuts establish a strong foundation for high and could be made. sustainable growth while advancing structural reforms and reducing both domestic and external Risks related to the external imbalance remain. vulnerabilities. Preserving and enhancing service The improvements in the external account appear delivery and preventing waste could help reduce temporary, because imports are expected to fiscal risks at both the national and the county pick up once the economy regains strength. The level. Doing so will require structural reforms to deficit in the current account balance fell to 7.5 improve the domestic regulatory environment percent of GDP by September 2013, down from as well as efforts to achieve efficiency savings more than 10 percent in 2012. This improvement at big-spending ministries. A reform program cannot be attributed to conscious policy actions, could rapidly improve the business regulatory however. Increases in private sector credit, FDI, environment. Similar efforts in 2007 yielded or demand for oil (as a result of drought) would fruit as Kenya’s ranking vaulted Kenya to the top reignite pressure on the external account, creating 10 most improved countries. A weak regulatory exchange rate volatility. Current account balances and business environment are projected to weaken in the near continues to shackle investment to short term, thanks in part to the activity in Kenya. Strengthening need for imported capital goods to A weak regulatory and competitiveness and raising support large-scale infrastructure business environment productivity remain the most projects, as credit increases to the continues to shackle critical medium-term challenges private sector and FDI–financed investment activity if growth is to accelerate, as investment in infrastructure and in Kenya envisioned in Vision 2030 (Kenya’s natural resources flow in. blueprint for economic and human development) and the Second Medium-Term Plan. A new round A drought could slow growth by up to 3 percent. of structural reforms, including investment in Inadequate rainfall would force Kenya to increase public infrastructure and removal of barriers to food imports. It would also reduce the generation entry in product and services markets, could be of hydropower electricity and increase the need useful. for thermal power, raising oil imports. Both effects would have an impact on inflation and the current Reducing fiscal risks, rebuilding policy buffers, account balance. and creating fiscal space to withstand future shocks are critical. The urgent fiscal policy priority Security poses significant challenges to Kenya’s is to put in place a fiscal consolidation plan to prospects. The operations of Al Shabaab terrorists place public debt on a sustainable path over the and the associated travel advisories diminish the medium term while supporting near-term growth. allure of Kenya as a tourist destination. Security This priority could be implemented by increasing concerns, if pervasive, could then deter foreign public investment in infrastructure to stimulate investors from doing business not only in certain private investment and improving the efficiency counties perceived as dangerous but in Kenya as of public spending to create space for increased a whole. infrastructure investment in support of long-term December 2013 | Edition No. 9 27 The State of Kenya’s Economy growth objectives. Savings could also come from Going forward, a focus on generating higher, reductions in recurrent spending. sustained, and more inclusive growth will have payoffs in terms of more and better jobs and Reforms in public financial management (PFM) reducing poverty. Creating such growth will will increase efficiency in public resources and involve stepping up investment in physical and savings. Quick adoption and operationalization human capital, promoting agriculture, improving of PFM regulations would entrench the PFM law the business climate, and encouraging economic and help ensure accountability, transparency, and diversification. These goals can be achieved the effective and efficient collection and utilization with reforms that enhance competition; protect of public resources. The government also needs property rights; simplify regulations; and increase to make the Integrated Financial investment in infrastructure, Management Information education, and health. However, System (IFMIS) and the Treasury this journey cannot start before Single Account fully functional. Creating such growth the government provides the Kenya Roll-out of the IFMIS has been will involve stepping up National Bureau of Statistics with going on for some time, but its investment in physical the financial resources to undertake operationalization still faces and human capital, the second Integrated Household challenges. This tool has the promoting agriculture, Survey (the first one was conducted potential to substantially support improving the in 2005/06). Together with other the control process, significantly business climate, and surveys (including the labor force improving accountability and encouraging economic survey), this survey would help transparency in budgeting, diversification identify the level of poverty and and reporting. The Treasury income inequality and support the Single Account will improve the management monitoring and evaluation of government policy of government deposits, which lie in different on the welfare of Kenya’s people. accounts at the Central Bank and are allocated to government ministries and departments only when funds are ready to be absorbed. 28 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit Special Focus: Increasing Access to Credit 3. Increasing Access to Credit T he Kenyan banking sector underwent significant transformation over the last decade or so. Reforms improved the resilience of the sector to domestic and international shocks, and technology brought retail banking to millions of Kenyans. Small and medium-size enterprises still find it difficult to obtain bank loans, however, which are often priced beyond their reach. Channeling credit to this sector is critical to spurring growth and job creation. K enya frequently grabs headlines for its success in leveraging ICT to spur financial deepening. The story of mobile money is often seen as the (World Bank 2013). These numbers are supported by innovations in the banking sector that suggest a strong appetite for SME lending. story of financial access in Kenya. And there is no doubt that the numbers are impressive: as of There have been concerns, however, that the the end of April 2013, there were 96,319 mobile high cost of credit from the banking sector maybe money agents and more than 23 million registered constraining businesses, especially SMEs. Such users of mobile payment services in Kenya—74 concerns have been part of the policy debate since percent of the adult population. The number of the macroeconomic turbulence of late 2011 and transactions reached 56 million, with an average the asymmetric response from banks to changes transaction value of US$ 29.3 and a total value in the monetary policy rate, in which bank lending of KSh 142 billion mobile money transactions rates seem to track hikes in the Central Bank rate per month. These technology-driven innovations more closely than reductions. SMEs often cite the have led to significant differences in the personal cost of credit as a stumbling block in getting access savings, borrowing and transacting behaviors of to formal credit. typical Kenyans, especially the unbanked. 3.1 Reforms Strengthened the Banking Sector The primary function of a well-developed banking over the Last Decade system is financial intermediation—channeling savings into investment. This part of the report take a closer look at the borrowing environment for K enya’s banking sector has established itself as one of the pillars of the economy, both in Kenya and in the East African Community. This businesses, focusing on access to bank financing for SMEs. A sound accessible banking system is the achievement is remarkable given the problems backbone of a vibrant private sector. The seminal that plagued the sector just over a decade ago, role SMEs play globally in the development of the when competition was constrained, the quality private sector and the economy as a whole is well of loan portfolios was poor, and outreach to rural documented, as are the constraints they face in areas and SMEs was limited. raising adequate finance. Kenya’s financial sector is the third largest in Sub- Kenyan banks are ahead of their counterparts in Saharan Africa, after South Africa and Nigeria. lending to SMEs, but there have been concerns It has been relatively stable in the face of recent on the high cost. In Kenya, 17.4 percent of bank slowdowns and shocks, both domestic and global. lending goes to SMEs—a much larger share than The sector comprises a large banking sector, which in Nigeria (5 percent) or South Africa (8 percent) has leveraged its resilience and growth to establish 2 At the end of December 2012, Kenya’s banking sector comprised 44 banking institutions. This review covers 43 banks. It excludes Charterhouse Bank Ltd., which is under Central Bank statutory management. 30 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit a strong subregional presence; a relatively well- significant shareholding by the government and developed securities market (the third largest in state-owned corporations, 27 commercial banks, Sub-Saharan Africa in terms of capitalization); and and 1 mortgage finance institution (Figure 3.1). a relatively large pension and growing insurance sector. Banking sector reforms have been ongoing for more than a decade. These reforms have The banking sector dominates Kenya’s financial increased the resilience of the sector despite sector. As of the end of June 2013, it comprised 43 both domestic shocks (postelection violence in commercial banks, 1 mortgage finance company, 2008 and subsequent lower economic growth) 9 deposit-taking microfinance institutions, 7 and international shocks (in particular the global representative offices of foreign banks, 107 financial crisis and the rising prices of food and foreign exchange bureaus, and 2 credit bureaus.3 fuels). Of the 44 commercial banks and mortgage finance institutions, 31 are locally owned. The locally The sector is more than adequately capitalized. owned financial institutions include 3 banks with The ratio of total capital to total risk-weighted Figure 3.1: Ownership structure of Kenyan banks Commercial Banks and Morgage Financial Institutions Private Financial Public Financial Institutions Institutions* Foreign Consolidated Bank of Kenya (78%) Local (Over 50% of Ownership) Development Bank of Kenya (100%) National Bank of Kenya (71%) Commercial Banks Commercial Banks 27 13 Mortgage Financial Source: www.centralbank.go.ke Note: The shareholding by the government and state corporations in public financial institutions is indicated in parenthesis 3 At the end of December 2012, Kenya’s banking sector comprised 44 banking institutions. This review covers 43 banks. It excludes Charterhouse Bank Ltd., which is under Central Bank statutory management. December 2013 | Edition No. 9 31 Special Focus: Increasing Access to Credit assets was 22.9 percent in September 2013 (well for 73 percent of total funding liabilities as of above the required minimum of 12 percent), and September 2013. The number of deposit accounts the ratio of core capital to total risk-weighted assets in commercial banks increased from 4.7 million stood at 19.5 percent (well above the required in 2007 to 22.1 million as of October 2013. The minimum of 8 percent). The Central Bank of Kenya increase mostly comprised micro accounts and is increased the minimum capital requirement for attributable in a large part in the increase in the commercial banks from KSh 250 million to KSh 1 number of bank branches, which rose from 740 in billion, effective January 2013.4 As of December 2007 to 1,272 in 2012. 2012, all institutions had met the requirement. Technological innovations and the emergence of The asset quality of banking sectors remains financial institutions and initiatives that target high. As state ownership in the sector declined, traditionally underserved segments of the market the quality of assets improved, as the proportion have also expanded the reach of the banking of bad loans plummeted. Just 5.2 percent of gross sector. Banks have leveraged developments in ICT loans were nonperforming loans at the end of by introducing agency banking, facilitated by the September 2013, down from 30 percent in 2003, introduction of regulation to permit the use of when the high level of nonperforming loans, agents. As a result, the costs of providing financial mainly as a result of loans extended by state- services in sparsely populated areas have fallen owned banks, presented a risk to the system. and outreach increased. As of June 30, 2013, the Central Bank had authorized 13 banks to offer The expansion of retail banks into lower-income banking services through agents. Since its launch markets has led to an expansion in deposit in 2010, 22,423 agents have been contracted, accounts, bank branches, and agents (Figure facilitating 73.8 million transactions valued at KSh 3.2). Deposits, which constitute the main source 376.6 billion as of October 2013.5 of funding for the banking sector, accounted Figure 3.2: Deposits, loans, and credit to the private sector The success of M-Shwari (the savings and loan have grown steadily product it offers Safaricom M-Pesa users) vaulted 1,800 40 the Commercial Bank of Africa (CBA) into second 1,600 35 place in retail banking in Kenya.6 The uptake of 1,400 30 M-Shwari increased the number of CBA’s deposit KSh billions 1,200 25 accounts from 34,884 in 2011 to more than 5 Percent 1,000 800 20 million in September 2013, leaving it second only 600 15 to Equity Bank, which has more than 7 million 400 10 deposit accounts. 200 5 0 0 2007 2008 2009 2010 2011 2012 Kenya’s credit information system significantly Years Deposits Net Loans and Advances Private sector credit (percent of GDP) improved after approval of the 2008 banking Source: World Bank, based on data from the Central Bank of Kenya and regulations, which govern the licensing, World Development Indicators 2012 operation, and supervision of credit bureaus 4 In 2008, the Central Bank announced a phased increase in banks’ minimum capital requirements, from KSh 250 million to KSh 1 billion at the end of 2012. In addition to the requirement for a capital adequacy ratio of 12 percent and a core capital ratio of 8 percent, it introduced a capitalization buffer of an additional 2.5 percent, effective January 2013. 5 The banking agency network is nevertheless dwarfed by the network of mobile payment agents. 6 In 2011, Safaricom (the mobile network operator behind M-Pesa) and Cooperative Bank launched a joint product, M-Shwari, which allows customers to save and borrow through their mobile phone. Airtel and Faulu jointly launched a similar product. Safaricom and Airtel share the transactional data they collect exclusively with their banking partners. 32 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit by the Central Bank of Kenya. The legislation that provide financial services for SMEs, access to allows banks to share negative credit information credit is still an issue. An analysis of firms that made with one another. The new regulations obligate it into this year’s Top 100 Mid-Sized Companies banks to report all nonperforming loans on their survey shows that the number of SMEs that turned books each month. The regulations pertain to all to lenders for credit lines and overdrafts increased institutions regulated by the Central Bank. Two to 67 percent, up from 57 percent in 2012.7 Most credit bureaus are operating: Credit Reference of the surveyed entrepreneurs cited the high cost Bureau (CRB) Africa, which started operations of credit as the reason for cash flow challenges, in 2010, and Metropol Credit Reference Bureau, leaving them with no recourse but to dig deeper which opened in 2011. They cover about 5 percent into their personal savings or turn to family and of potential borrowers, or about 200,000 of the 5 friends to raise funds for day-to-day operations. million consumers who have loans with financial institutions, according to the Central Bank of 3.2 Kenyan Banks Show an Encouraging Interest Kenya. They also provide information on about in SME Lending T 10,000 businesses. Credit bureaus receive 80,000- he involvement of Kenyan banks in the SME 100,000 inquiries a month. The existence of segment is growing, in terms of both size and unique personal identification numbers in Kenya the diversity of their approaches to the SME client has helped them identify individuals and match relationship. Commercial banks have embraced data. SME financing as an integral part of their strategy. The recent initiative by the Central Bank and Kenyan banks lend more to SMEs than their the Treasury to revise the regulations to allow counterparts in Nigeria and South Africa. The information sharing of positive data is a welcome share of commercial bank lending to SMEs is development that will broaden the scope of larger in Kenya (17.4 percent) than in other the credit bureaus. Incorporating information major markets in Sub-Saharan Africa, including collected from microfinance institutions and Nigeria, where SME loans account for 5 percent savings and credit cooperatives (SACCOs) as well of total loan portfolios, and South Africa, where as other providers is equally important to allow they account for 8 percent (Figure 3.3).8 Kenya’s customers without access to banking products to establish a credit history. In particular, adding the Figure 3.3: Kenyan banks lend more to SMEs than in banks in some other countries in the region information from the more than 20 million M-Pesa 20 users would lead to a significant expansion of 18 the database. One problem with including other Share of total bank lending that goes 16 providers is the quality and reliability of data, 14 which need to be carefully assessed. Case-by-case to SMEs (percent) 12 inclusion of other providers therefore appears to 10 be appropriate. 8 6 4 The number of SMEs that turned to lenders 2 has increased significantly. Despite a range of 0 institutions, including banks, nonbank financial Nigeria South Africa Tanzania Rwanda Kenya institutions, SACCOs, and microfinance institutions Source: World Bank, based on data from Central Bank of Kenya 7 Top 100 Mid-Sized Companies is an annual survey by auditing firm KPMG East Africa and the Nation Media Group. 8 The surveys were conducted in different years. Some of the differences may reflect the difference in the year the survey was conducted. December 2013 | Edition No. 9 33 Special Focus: Increasing Access to Credit ratio is comparable to that of Rwanda, which is a Most Kenyan banks have dedicated units serving smaller market with a relatively small presence of SMEs. At most institutions, however, the unit large-scale firms (Aziz and Berg 2012). Banks are is a sub-unit of the retail banking unit or the interested in lending to SMEs despite the fact that business/commercial banking unit rather than elements of the enabling environment for SMEs a division. Products are largely standardized, are still under construction. although a number of banks—including Equity Bank, Cooperative Bank, and K-Rep Bank—are Kenyan banks are also ahead of their counterparts producing customized loan products for the SME in other African countries in innovations sector (Table 3.1). Some banks provide training to targeting this market. These innovations started their clients to improve their management skills when microfinance-rooted institutions scaled up and financial reporting. Lending remains based to become commercial banks. They now include on collateral. Risk management is increasingly innovative lending models and technology in automated, although domestically owned banks the retail banking segment. In addition, there have not yet embraced the use of scoring and risk- are other active markets for financial products rating technologies on a large scale. suited to SMEs, such as hire- purchase and invoice discounting, Banks prefer to engage with which deliver to government and formal firms. As part of the loan larger enterprises with reputable According to banks application, they require SMEs to payment histories. Adoption of interviewed, on average present a variety of documents these instruments has facilitated it takes 190 days to certifying their compliance with entry by a tier of midsize Kenyan recover bad loans in government regulations and banks into the SME financing space. Kenya, with a rate of providing details about their recovery of about 80 finances. The most common Kenyan banks tend to provide more percent documents required include the working capital than investment registration certificate from the loans. Demand factors play a role: Kenyan firms Business Registrar (Attorney General’s Office); the cite working capital shortages as the primary Single Business Permit, obtained from city councils; reason for approaching banks. The distribution and sometimes a certificate of compliance of loans may also reflect banks’ assessment that from the Kenya Revenue Authority. These filing long-term loans are too risky. According to banks requirements can be onerous and often discourage interviewed, on average it takes 190 days to SMEs from seeking bank financing. recover bad loans in Kenya, with a rate of recovery of about 80 percent; the cost is about 40 percent Kenyan banks are partnering with donor agencies of the amount of the loan. The situation seems to expand their SME lending portfolios (Table somewhat better in Rwanda, where on average 3.2). USAID operates the largest credit guarantee it takes 135 days to recover loans, the rate of scheme in Kenya, a US$ 70 million program. ARIZ, recovery is about 85 percent, and the cost is about a risk-sharing program funded by the African 10 percent of the loan. Nigerian banks operate in Development Bank, guarantees 50 percent of the most difficult environment: on average they all loans in the portfolio. Other donors that are need 246 days to recover a loan and are able to encouraging lending to SMEs include the European recover only 30 percent of the loan. Investment Bank, Proparco, FMO, DEG, SIDA, KfW, Norfund, and the China Development Bank. 34 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit Table 3.1: Kenyan banks are increasingly tailoring their products for SMEs Bank Product Target customer Amount CfC Stanbic SME quick loan  SMEs KSh 50,000 to KSh 2 million SME bizna loan  All SMEs Less than KSh 3 million Bizwise loan  All SMEs Less than KSh 50 million Maziwa loan  All SMEs Msamaria women’s loan Women entrepreneurs with legal KSh 5,000 to KSh 10 million businesses who are seeking working and investment capital Coop Bank Construction loan Less than KSh 50 million Unsecured loan for schools Schools 25 percent of expected school fees per term Distributor financing  SMEs KSh 100,000 to KSh 50 million Overdrafts  SMEs Guarantees and bonds  SMEs Kilimo Supa Agricultural traders, KSh 5,000 to KSh 500,000 microenterprises Kilimo Biashara Agro-input dealers, commercial crop Tier 1 (small scale): farmers KSh 1,000 to KSh 100,000 Tier 2 (large scale): More than KSh 100,000 Equity Bank Tier 3 (agribusiness): Loan amount varies SME business loan SMEs operating in transport, trade KSh 1 to KSh 50 million and commerce, construction, manufacturing, education, health, and other services sector Microbusiness loan Youth KCB Overdrafts Businesses with three years’ audited accounts with annual revenues of more than KSh 3 million SME term loan  SMEs Less than KSh 50 million Source: Various Kenyan commercial bank websites Across Sub-Saharan Africa, donors are demonstrate that lending to SMEs can be a viable encouraging banks to engage in SME financing, and profitable business line. providing bank-specific lines of credit and partial credit guarantees. Donors prefer this targeted Partial credit guarantees combined with technical bank-specific approach to establishing schemes assistance make improves SME lending. Donor that are open to all qualified institutions, although and government support programs such as partial a more open approach would be better suited to credit guarantees or credit lines can be useful, encouraging competition. In markets where SME especially if combined with technical assistance financing is in its infancy, schemes can augment for financial institutions to develop new SME banks’ willingness to push the frontier and lending technologies. However, more often than December 2013 | Edition No. 9 35 Special Focus: Increasing Access to Credit Table 3.2: Selected donor partnerships with Kenyan banks Donor Partner Amount African Guarantee Fund I & M Bank US$ 1.1 million Dutch Development Bank Bank of Africa (Kenya) US$ 25 million Chase Bank € 25 million East Africa Development Bank Cooperative Bank of Kenya € 70 million European Investment Bank Housing Finance € 20 million ABC KSh 770 million Consolidated Bank KSh 715 million Faulu Kenya € 4 million Equity Bank KSh 2 billion KfW I & M Bank US$ 15 million Sources: www.africaguaranteefund.com; http://www.chasebankkenya.co.ke/news-item/chase-bank-receives-part-eur-1015-million- european-investment-bank-support-smes; http://www.businessdailyafrica.com/Bank-of-Africa-signs-Sh2bn-deal-to-fund-expansion-retail- lending/-/539552/1853500/-/uh4p5h/-/index.html (accessed November 1, 2013). not these schemes are underutilized and can even the difference between the rate at which banks distort the market. Their success depends on their mobilize savings and the rate at which they lend design and conditions in the market. Their impact these savings—the interest rate spread. is best evaluated on a case-by-case basis. Efficiency in the banking sector could be A number of general factors continue to improved. One of the key criticisms of the Kenyan constrain SME lending in Kenya. They include banking sector is that efficiency—as measured by the macroeconomic environment (including the interest rate spread—remains low. Following inflation and foreign exchange risk), the legal and the macroeconomic turbulence of late 2011, the regulatory framework, the infrastructure of the spread moved above the average 10.4 percentage financial sector, and the capacity and technology points that had been maintained from 2000 to of banks. SME–specific factors include the poor 2010. Both deposit and lending rates rose in response to a sharp hike in the Central Bank rate, quality of financial records and collateral, the high effected to control inflation and stem currency level of informality and the high cost of credit. depreciation. Since then, despite improvement in the macroeconomic situation and a decline in 3.3 A Range of Factors Affects the Cost of Credit the policy rate, the spread has remained above and Spreads the long-term trend. The spread between the S everal factors drive lending rates. The lending rates banks charge depend on a number of factors, including general market conditions, the average yield on performing advances and the average interest paid on customer deposits was 11.8 percentage points in 2012, up from 11.3 risk premium, and the creditworthiness of the percentage points in 2011. The net yield—the borrower. One key factor is the cost at which banks difference between the average yield on interest- raise funds—that is, the interest rate on deposits. bearing investments and advances and the cost As it is difficult to judge the appropriateness of a of funds—was 9.3 percentage points, up from 8.8 given lending rate, the discussion often centers on percentage points in 2011. 36 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit The revenues and profits of the banking sector are a. Macroeconomic and policy environment strong. The major sources of income were interest The macroeconomic environment influences the on loans and advances (58.6 percent of total size of the spread. As a result of Kenya’s large income), fees and commissions (18.8 percent), structural current account deficit, the dramatic and government securities (15.1 percent) as of increase in imports, and volatility in global May 2013. Pre-tax profits of the banking sector financial flows, the Kenyan shilling underwent a rose 11.3 percent, from KSh 43.8 billion in May rapid devaluation between late 2011 and 2012, 2012 to KSh 48.7 billion in May 2013. and the inflation rate spiked to nearly 20 percent in November 2011. To curb the sudden rise in The persistently high spreads and growing inflation, the Central Bank raised the benchmark profitability of the industry have left it open to interest rate by nearly 300 percent (from 6.25 repeated criticisms of collusive price-setting percent to 18.0 percent) in less than three months. behavior. In the popular press and elsewhere, Correspondingly, banks raised their lending and Kenyan banks have repeatedly been portrayed as deposit rates (Figure 3.4). After August 2012, when using their market power to extract high interest the Central Bank started to lower the policy rate rates from businesses, especially SMEs.9 The as inflation moderated, bank lending rates were larger banks have been particularly subject to this less responsive. Although banks did eventually criticism, based on the perception that they use lower their lending rates, the interest rate spread remained high. their reputational advantage to charge higher rates on loans and advances while not having to pay high Figure 3.4: Banks’ response to the monetary policy rate has been asymmetric interest rates to attract deposits. This perception 25 of high spreads at big banks is reinforced by data 20 showing that these banks are the most profitable. Interest rate (percent) 15 No hard rules prescribe the optimal interest 10 spreads that correspond to specific market 5 conditions. There is therefore no definitive way to determine whether spreads are too high, too 0 Sept May Aug Nov Dec Nov Dec Oct Oct Mar Mar Feb Feb Apr Apr Jun Jan Jan Jul low, or just right. Market lending rates are typically 2011 2012 2013 a mark-up over the risk-free (government paper) Average Lending Rate Deposit rates, all banks interest rate; the magnitude of the mark-up Interest rate spread, all banks Central Bank of Kenya Rates Source: www.centralbank.go.ke depends on a host of factors, including industry structure, tenor, overheads, and risk. Time-trend data suggest that the mark-up is inversely related b. Financial sector development to the level of development of the financial sector. Globally, high interest spreads are associated Deconstructing this mark-up when information with low levels of financial sector development. markets are incomplete is especially challenging. In general, spreads in East Asia and Pacific, where Although it may be impossible to prima facie markets are better developed, are lower than determine whether a prevailing market lending in Sub-Saharan Africa. And within Sub-Saharan rate (and spread) is appropriate, it is possible to Africa, the most advanced market (South Africa) examine some of the factors underlying rates in exhibits lower spreads.10 As the financial sector Kenya. develops, spreads typically narrow (Figure 3.5). 9 The Competition Commission has launched an investigation into the price-setting behaviors of commercial banks, based largely on the concerns of consumers regarding interest rate spreads. 10 Spreads also depend on the market segment served. Banks in South Africa do not serve the low-income segment of the population; the majority of their lending portfolio is mortgages and loans to large corporations. South African and Kenyan banks have completely different business strategies and target groups, with Kenyan banks reaching much more down-market. Their spreads thus need to be larger. This argument is picked up again in the risk-premium analysis. December 2013 | Edition No. 9 37 Special Focus: Increasing Access to Credit Figure 3.5: Interest rate spreads in Kenya have fallen over time c. Bank-specific factors 18 16 Despite the large number of banks in the market, 14 the Kenyan banking sector is quite segmented. 12 Kenya’s top banks held 61 percent of total deposits 10 and accounted for 73 percent of the profitability Percent 8 6 of the banking sector in 2012. Their shares of 4 nonperforming loans are significantly lower than 2 those of the smallest banks. At the other end of 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 the spectrum, 21 banks with deposit bases of Botswana Kenya East Asia & Pacific (all income levels) Rwanda less than KSh 15 billion accounted for 9 percent South Africa Tanzania Sub-Saharan Africa (all income levels) Uganda of customer deposits and just 3 percent of total Source: World Development Indicators profitability (Figure 3.7). Banks in developing countries cite high overheads Figure 3.7: Large banks account for most deposits and loans in Kenya as one of the main reasons for the high lending 80 rates they charge. Salaries and other forms of 73 70 labor compensation make up a large part of their 61 63 Share of total (percent) 60 overheads, as the scarcity of skilled financial sector 50 workers leads to high turnover and compensation 40 packages geared to retain scarce skills. Gaps in 30 physical infrastructure also increase overheads. 19 18 20 11 11 10 14 9 8 10.0 10 Bank profits and overheads constitute a large 4.1 2.7 5.2 3 0 portion of spreads. Even though they have Category 1 Category 2 Category 3 Category 4 Percent of total deposits Percent of advances narrowed since the mid-1990s profits and Percent of profit before tax Gross non-performing advances to gross advances overheads still play an important role in explaining Source: Central Bank of Kenya Note: Banks are categorized by customer deposits, as follows: spreads in Kenya, accounting for 48 percent Category 1: More than KSh75 billion. Category 2: KSh 50–KSh75 billion. Category 3: KSh 15–KSh50 billion. Category 4: Less than KSh 15 billion and 40 percent of spreads in 2012 (Figure 3.6). Both contributed to the rising spreads since the Large banks have higher spreads than medium- macroeconomic disruption of 2011. size and small banks (Figure 3.8). The gap can Figure 3.6: Spreads are made up largely of overheads and profits be attributed to differences in the cost of raising 12 capital. Small and poorly capitalized banks find 10 it more difficult to raise funds. They have to 8 4.2 5.0 5.7 5.6 offer higher deposit rates to attract funds and compensate for the perception that they are Percent 6 0.8 0.9 0.4 0.5 riskier than large, more liquid, better-capitalized 4 4.7 banks, which are perceived to be “too big to fail.” 4.5 4.3 2 4.0 Consequently, big banks are able to mobilize 0 0.6 0.6 0.7 0.9 more deposits even at relatively low or near-zero 2009 2010 2011 2012 deposit rates while at the same time attracting Reserves Overheads Provisions Profit more loan applications despite charging higher Source: Central Bank of Kenya rates (Figure 3.9). 38 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit Figure 3.8: Large banks in Kenya have higher spreads Figure 3.9: Large banks in Kenya offer lower rates on deposits than smaller banks than small banks 20 20 18 18 16 16 14 Percent 12 Percent 14 10 12 8 6 10 4 8 2 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr Mar Oct Nov Dec Jan Feb Mar Apr May Jun Aug Oct Nov Dec Jan Feb Jul Apr Sep 2011 2012 2013 2011 2012 2013 Interest rate spread, all banks Interest rate spreads, small banks Deposit rates, all banks Deposit rates, small banks Interest rate spread, medium banks Interest rate spread, large banks Deposit rates, medium banks Deposit rates, large banks Central Bank of Kenya Rates Central Bank of Kenya Rates Source: Central Bank of Kenya Source: Central Bank of Kenya Note: For size categories, see note to Figure 3.8 The banking system is characterized by infrastructure, banks are likely to price these oligopolistic structure and market segmentation. deficiencies through a higher risk premium. The data in Figures 3.8 and Figures 3.9 indicate that larger banks control a large share of the The increase in 91-day T-bill rates in 2011 market (deposits and loans), partly as a result of substantially reduced the difference between their reputation and customer loyalty. Customers effective lending and T-bill rates (Figure 3.10). seem to be motivated more by finding a safe The risk-free return may provide an alternative parking place for their savings than by earning a explanation of why lending rates have not high return. According to Radha (2011), different tracked the policy rate with the return of relative segments of the banking sector in Kenya face macroeconomic stability. If banks do indeed use clients of significantly different size and type; this the risk-free rate as the floor rate in their pricing segmentation affects lending decisions, deposit model given a stable risk premium, then rising mobilization, and the governance of banks. and increasingly volatile returns on government Segmentation is based on size but shaped largely paper could explain why lending rates did not by social factors that determine the level of trust fall as expected when the Central Bank rate was between banks and their clients. Mwega (2012) lowered. A thorough understanding of banks’ suggests that monopolistic competition best Figure 3.10: Average lending rates are higher and less volatile characterizes the behavior of banks in Kenya. than Treasury-bill rates 23 d. Lending risk premiums 21 19 The difference between market lending rates 17 and short-term T-bill rates (the proxy for the Percent 15 perceived risk-free return) can be interpreted 13 as the risk premium. Calculated as the post facto 11 difference between the two rates, it should reflect 9 7 the market’s perception of risk factors. Over and Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr above the actual risk perception, where there 2011 2012 2013 are information gaps on credit history or market Average Lending Rate 91-day T-bill rates 182-day T-bill rate 364 day T-bill rate conditions and other deficiencies in the financial Source: Central Bank of Kenya December 2013 | Edition No. 9 39 Special Focus: Increasing Access to Credit pricing behavior would entail an analysis of will also ease these information constraints. An the entire interest rate structure, not just the efficient collateral registry and effective creditor monetary policy rate. rights framework would help increase SME access to financing. e. Borrower-specific characteristics Banks express an interest in growing their Many of the policies that could increase SMEs’ business with SMEs, but they have reservations access to affordable bank financing lie outside about the sector, largely relating to the high the sector. As the discussion of the risk premium degree of informality. Faced with a lack of reliable indicates, developments in the government debt information from SMEs, banks tend to price their market can affect the pricing behavior of banks. loans higher than they would for corporate clients. A sound debt management policy—a regular SMES are on average riskier prospects than large issuance policy that lowers the volatility of the firms, so the information difference accounts for returns on the risk-free asset—informs the only some of the premium banks charge them. interest structure. Sound macroeconomic policies are also key. Frequent spikes in inflation and 3.4 The Way Forward… depreciation make it more likely that banks will hedge against unpredictability with prices that are A mature banking sector—or more generally, a well-developed financial sector—will play a critical role in helping Kenya sticky downward. As the financial sector matures, reach its goal of attaining middle- a variety of new instruments income status. Increasing domestic Increasing domestic will ease the reliance on banks. financial intermediation, mobilizing financial intermediation, With the availability of attractive, domestic savings, and making these mobilizing domestic convenient alternatives to bank savings available for domestic savings, and making deposits, likely intermediated investment are critical components these savings available through the mobile money of achieving the Vision 2030 for domestic investment platform, the advantage that big growth targets. Ensuring adequate are critical components banks have in raising low cost financing for SMEs, the dominant of achieving the Vision funds will erode over time. The form of business organization in 2030 growth targets savings behavior of Kenyans has Kenya, is an important part of this already undergone a sea change equation. in just the last few years, and the market is rife with new ideas for mobilizing savings directly from Several of the building blocks for this path are retail savers. already in place. Improvements in the financial infrastructure that fill information gaps and Tapping the full growth and job-creation lower risk pricing are already underway. The potential of the SME sector will have to entail a increase in the coverage of the two licensed credit move toward providing growth capital, not just bureaus currently operating has been impressive. working capital. A growing number of private Encouraging the sharing of positive information equity providers are active in East Africa in general by banks and other credit providers, including and in Kenya in particular. Few of them are deposit-taking microfinance institutions, SACCOs, interested in SMEs, however. A number of new payment service providers, and utility companies, entrants cite lack of information and expertise as a 40 December 2013 | Edition No. 9 Special Focus: Increasing Access to Credit deterrent to venturing into this market. Technical equity funds or by issuing shares on the stock assistance could help bridge the distance between market. In fact, about 28 percent of firms surveyed the demand for and supply of private equity. in this year’s Top 100 Mid-Sized Companies survey said they were considering listing on the Nairobi Improving the listability of SMEs could increase exchange, which now has a special segment—the their access to equity finance. Kenyan SMEs have Growth Enterprise Market Segment (GEMS)—for shown some interest in tapping equity financing to SMEs. grow, by turning to the growing number of private December 2013 | Edition No. 9 41 REFERENCES ▪ Ayyagari, M., T. Beck, and Asli Demirgüç-Kunt. 2007. “Small and Medium Enterprises across the Globe. Small Business Economics.” 29 (4): 415–34. ▪ Aziz, A.T., and Berg, G. 2012. “Financing Small- and Medium-Sized Enterprises in Rwanda”. World Bank. Washington, DC. Mimeo. ▪ Beck, T., and A. Demirguc-Kunt, 2006. “Small and Medium-Size Enterprises: Access to Finance As a Growth Constraint.” Journal of Banking and Finance 30: 2931–43. ▪ Beck, T., A. Demirguc-Kunt, L. Laeven, and V. Maksimovic, 2006. “The Determinants of Financing Obstacles.” Journal of International Money and Finance 25: 932–52. ▪ Central Bank of Kenya. 2011. “Annual Supervision Report, 2011”. Nairobi. ▪ Central Bank of Kenya. 2013. “Monthly Economic Review, June”. Nairobi. ▪ De la Torre, A., M. Martinez Peria, and S. Schmukler, 2010. “Bank Involvement with SMEs: Beyond Relationship Lending.” Journal of Banking and Finance 34: 2280–93. ▪ Doing Business Indicators (database). World Bank, Washington, DC. http://www.doingbusiness.org/data. ▪ Fuchs, M., L. Iacovone, T. Jaeggi, M. Napier, R. Pearson, G. Pellegrini and C. Villegas Sanchez, 2011. “Financing Small and Medium Enterprises in the Republic of South Africa”. World Bank. Washington, DC. ▪ KNBS (Kenya National Bureau of Statistics). 2013. “Leading Economic Indicators, August”. Nairobi. ▪ KNBS (Kenya National Bureau of Statistics). 2013. “Gross Domestic Product: Second Quarter, 2013”. Nairobi. ▪ Mwega, F. M. 2012. “Regulatory Reforms and their Impact on the Competiveness ad Efficiency of the Banking Sector: A Case Study of Kenya.” In Bank Regulatory Reforms in Africa, ed. V. Murinde. London: Palgrave Macmillan. ▪ The National Treasury. 2013. “QBER Fourth Quarter 2012/13”. Nairobi. ▪ The National Treasury. 2013. “QBER First Quarter 2013/2014”. Nairobi. ▪ Radha, U. 2011. “Analysing the Sources and Impact of Segmentation in the Banking Sector: A Case Study of Kenya. Economics.” PhD diss., Department of Economics, School of Oriental and African Studies (SOAS), University of London. ▪ RSM Ashvir. 2013. “RSM Ashvir Communiqué: Kenya’s Banking Sector Performance in 2012”. www.rsmashvir.com ▪ UNCTAD (United Nations Conference on Trade and Development). “2012 Handbook of Statistics”. Geneva. ▪ World Bank. 2013. “Tourism in Africa: Harnessing Tourism for Growth and Improved Livelihoods”. Washington, DC. ▪ World Economic Forum. 2013. “The Travel and Tourism Competitiveness Report 2013: Reducing Barriers to Economic Growth and Job Creation”. Geneva. ▪ WTTC (World Travel and Tourism Council). 2013. “Travel and Tourism Economic Impact 2013: Kenya”. London. 42 December 2013 | Edition No. 9 ANNEXES Annexes Annex 1: Macroeconomic environment 2009 2010 2011 2012 2013 GDP growth Rates (percent)* 4.0 3.7 4.2 4.3 4.7 Agriculture -2.7 4.6 2.0 2.1 6.7 Industry 4.6 4.7 3.8 3.0 6.0 Services 7.0 2.9 5.2 4.8 4.0 Fiscal Framework (percent of GDP)** Total revenue 21.8 23.9 24.0 23.1 23.1 Total expenditure 26.6 29.5 29.1 29.2 30.5 Grants 0.8 1.3 0.7 0.5 0.6 Budget deficit (including grants) -5.2 -7.1 -4.3 -5.7 -6.4 Total debt (net) 42.2 44.9 48.3 44.6 47.1 External Account (percent of GDP)*** Exports (fob) 14.4 16.5 17.1 15.2 14.8 Imports (cif) 32.8 39.1 43.5 41.1 40.2 Balance of trade -12.4 -14.7 -18.9 -16.9 -15.1 Current account balance -5.3 -7.9 -9.8 -10.4 -8.2 Financial and capital account 7.8 8.4 9.7 13.5 9.7 Overall balance 2.5 0.5 -0.1 3.1 1.5 Prices**** Inflation (average) 10.5 4.1 14.0 9.6 5.0 Exchange rate (average KSh/$) 77.4 79.2 88.8 84.5 86.1 Source: World Bank, based on data from Kenya National Bureau of Statistics, International Monetary Fund and Central Bank of Kenya * 2012 Value are for H1 ** End of FY in June (e.g 2009 = 2008/2009) *** As at the end of September 2013 **** As at the end of October Annex 2: GDP growth rates for Kenya SSA and EAC (2008-2012) 2009 2010 2011 2012 2013 2009-2013 Kenya 2.6 5.6 4.5 4.6 5.0 4.5 SSA (excluding South Africa) 4.0 6.1 5.3 5.8 6.2 5.5 Uganda 7.2 5.9 6.7 3.4 4.8 5.6 Tanzania 6.0 7.0 6.3 6.5 7.0 6.6 Rwanda 4.1 7.2 8.6 7.7 7.0 6.9 ‘Source: World Bank,Global Economic Prospects 2013 44 December 2013 | Edition No. 9 Annexes Annex 3: Kenya annual GDP GDP, current prices GDP, constant prices GDP/capita, current GDP growth Years KSh Billions KSh Billions prices US$ Percent 2000 968 965 399 0.6 2001 1026 1011 413 4.7 2002 1039 1014 408 0.3 2003 1142 1042 456 2.8 2004 1274 1090 478 4.6 2005 1416 1156 547 6.0 2006 1623 1229 637 6.3 2007 1834 1315 749 7.0 2008 2108 1357 813 1.5 2009 2367 1394 793 2.7 2010 2554 1475 810 5.8 2011 3049 1540 833 4.4 2012 3440 1610 991 4.6 Source: World Bank, based on data from Kenya National Bureau of Statistics Annex 4.a: Broad sectors growth (half year, percent) Year Half Agriculture Industry Services GDP H1 2.5 4.7 8.0 6.1 2006 H2 6.1 5.3 5.1 6.5 H1 5.5 6.6 7.4 7.7 2007 H2 -0.1 7.6 8.8 6.3 H1 -2.7 4.6 2.6 1.7 2008 H2 -5.6 4.8 2.8 1.4 H1 -2.7 4.6 7.0 4.0 2009 H2 -2.3 1.1 3.0 1.6 H1 4.6 4.7 2.9 3.7 2010 H2 7.8 6.0 8.2 7.8 H1 2.0 3.8 5.2 4.2 2011 H2 1.2 2.0 5.2 4.5 H1 2.1 3.0 4.8 4.3 2012 H2 5.2 5.9 4.5 4.8 2013 H1 6.7 6.0 4.0 4.7 Source: World Bank, based on data from Kenya National Bureau of Statistics Agriculture = Agriculture and forestry + Fishing Industry = Mining and Quarrying + Manufacturing + Electricity and Water + Construction Services = Wholesale and retail trade + Hotels and restaurants + Transport and Communication + Financial intermediation + Real estate, renting and business services + Public administration + Education + Other services + FISIM December 2013 | Edition No. 9 45 46 Annex 4.b: Quarterly growth rates (percent) AGRICULTURE INDUSTRY SERVICES GDP (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ December 2013 | Edition No. 9 Years Quarters Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) 2009 1 -16.0 -1.5 -3.4 -1.4 7.5 5.8 5.1 10.3 4.6 -2.1 6.2 2.7 2 -6.9 -3.9 -4.3 3.6 1.9 4.7 -2.6 3.8 4.9 -2.9 1.9 2.7 3 18.9 -3.3 -3.8 0.2 -1.3 2.7 8.3 6.4 5.5 9.5 1.9 2.5 4 6.2 -1.3 -2.5 1.4 3.7 2.8 -10.3 -0.5 4.9 -2.8 1.2 2.7 2010 1 -9.9 5.9 -0.8 -0.7 4.4 2.1 5.9 0.2 2.5 -1.9 1.4 1.6 2 -9.2 3.3 0.8 4.2 5.0 2.9 2.7 5.7 2.9 1.5 6.1 2.6 3 25.0 8.6 4.0 2.2 7.2 5.1 8.8 6.1 2.9 10.7 7.2 4.0 4 4.6 7.0 6.3 -0.8 4.8 5.4 -6.6 10.5 5.5 -1.8 8.3 5.8 2011 1 -15.6 0.2 4.9 -0.6 4.9 5.5 1.5 5.9 7.0 -5.0 4.8 6.6 2 -5.7 4.1 5.1 1.9 2.7 4.9 1.3 4.5 6.7 0.3 3.5 6.0 3 20.5 0.3 2.9 0.5 1.0 3.3 9.5 5.2 6.4 11.2 4.0 5.1 4 6.4 2.0 1.5 1.3 3.1 2.9 -6.6 5.2 5.2 -0.8 5.1 4.4 2012 1 -15.5 2.2 2.0 -0.5 3.3 2.5 1.3 5.0 5.0 -5.9 4.1 4.2 2 -5.8 2.1 1.6 1.3 2.7 2.5 0.9 4.6 5.0 0.6 4.4 4.4 3 24.9 5.8 3.1 1.3 3.5 3.1 9.0 4.2 4.7 11.3 4.5 4.6 4 5.3 4.7 3.8 6.0 8.3 4.5 -6.0 4.8 4.6 -0.2 5.1 4.6 2013 1 -12.7 8.2 5.2 -2.6 6.0 5.1 -0.3 3.2 4.2 -5.9 5.2 4.8 2 -8.4 5.2 5.9 1.2 6.0 6.0 2.6 4.9 4.3 -0.2 4.3 4.8 Source: World Bank, based on data from Kenya National Bureau of Statistics Annexes Annexes Annex 5: Inflation Year Month Overall inflation Food inflation Energy inflation Core inflation January 5.4 8.6 5.7 1.4 February 6.5 9.8 7.8 1.8 March 9.2 15.1 9.6 2.5 April 12.1 19.1 12.7 3.6 May 13.0 20.1 14.4 4.0 June 14.5 22.5 15.5 4.8 2011 July 15.5 24.0 16.2 5.6 August 16.7 23.9 16.8 8.5 September 17.3 24.4 17.6 9.1 October 18.9 26.2 19.2 10.4 November 19.7 26.2 20.6 11.8 December 18.9 25.0 19.7 11.6 January 18.3 24.6 17.3 12.1 February 16.7 22.1 14.8 12.1 March 15.6 20.3 13.0 12.0 April 13.1 16.2 11.1 11.0 May 12.2 14.6 10.0 11.3 June 10.1 10.5 9.0 10.7 2012 July 7.7 6.6 7.4 9.7 August 6.1 3.6 6.7 9.0 September 5.3 2.9 6.0 8.3 October 4.1 1.4 5.0 7.0 November 3.3 1.7 3.1 5.5 December 3.2 1.7 2.8 5.5 January 3.7 2.4 3.9 5.2 February 4.5 4.0 4.6 4.9 March 4.1 2.9 5.3 4.8 April 4.1 3.6 4.3 4.6 May 4.1 4.3 3.5 4.1 2013 June 4.9 6.5 3.5 4.1 July 6.0 8.4 4.6 4.4 August 6.7 9.7 5.3 4.3 September 8.3 12.6 5.7 5.4 October 7.8 12.0 4.8 5.4 Source: World Bank, based on data from Kenya National Bureau of Statistics December 2013 | Edition No. 9 47 Annexes Annex 6: Tea production and exports Exports value Year Month Production MT Price KSh/Kg Exports MT KSh million January 35,999 256 31,110 7,871 February 26,711 251 28,814 7,223 March 22,459 243 35,852 8,890 April 31,482 241 32,084 7,900 May 32,856 245 31,898 7,825 June 28,955 264 34,957 7,825 2011 July 26,343 283 33,629 8,907 August 24,471 294 32,693 9,266 September 30,493 292 26,430 9,333 October 39,926 291 29,422 7,686 November 36,825 269 33,353 8,855 December 41,393 251 35,187 9,334 January 36,205 250 35,382 9,145 February 18,412 245 37,656 9,123 March 17,859 251 31,280 9,415 April 18,118 256 26,816 7,804 May 37,383 264 25,060 6,445 June 30,197 279 29,148 7,770 2012 July 24,306 288 28,054 7,813 August 31,920 288 30,996 8,798 September 33,549 280 30,689 8,771 October 40,235 272 33,167 9,448 November 39,977 277 38,681 10,840 December 41,401 281 30,067 8,463 January 45,390 284 40,190 11,383 February 38,503 271 34,585 10,071 March 33,368 241 32,534 8,619 April 38,230 210 33,662 8,012 2013 May 39,600 215 40,936 9,463 June 30,530 209 37,783 8,515 July 26,229 212 43,761 9,911 August 26,338 208 36,175 8,236 Source: World Bank, based on data from Kenya National Bureau of Statistics 48 December 2013 | Edition No. 9 Annexes Annex 7: Coffee production and exports Exports value Year Month Production MT Price KSh/Kg Exports MT KSh million January 3,774 682 3,067 1,282 February 3,851 640 3,261 1,671 March 3,639 587 4,204 2,155 April 2,298 474 4,254 2,294 May 0 0 3,878 1,963 June 1,136 596 2,677 1,322 2011 July 3,305 592 2,857 1,749 August 4,558 582 3,096 1,955 September 2,904 593 3,317 2,161 October 1,388 543 3,298 2,134 November 1,331 541 1,990 1,173 December 1,800 603 1,672 940 January 4,770 544 3,094 1,454 February 6,505 369 3,668 1,937 March 3,317 389 5,069 2,550 April 4,801 342 4,625 2,369 May 5,472 303 4,924 2,275 June 3,884 258 4,887 2,098 2012 July 3,086 298 5,727 2,397 August 3,948 277 4,484 1,712 September 4,474 265 4,421 1,596 October 2,924 263 4,482 1,690 November 1,794 272 4,110 1,453 December 1,075 308 2,223 740 January 3,938 344 2,790 1,062 February 4,825 320 3,955 1,429 March 4,074 327 3,179 1,188 April 6,038 279 3,986 1,362 2013 May 4,943 230 5,164 1,790 June 2,410 208 5,238 1,778 July 830 250 4,652 1,556 August 3,411 297 4,741 1,409 September 2,442 286 - - Source: Kenya National Bureau of Statistics December 2013 | Edition No. 9 49 Annexes Annex 8: Horticulture exports Year Month Exports Exports value January 16,231 7,470 February 17,531 7,368 March 21,287 7,548 April 23,448 7,159 May 21,839 8,315 June 17,730 6,836 2011 July 15,420 5,531 August 16,128 6,582 September 15,658 6,745 October 17,553 9,508 November 17,277 6,647 December 16,145 8,915 January 14,974 8,721 February 16,053 6,726 March 18,967 6,515 April 17,408 6,317 May 17,027 6,013 June 15,271 6,227 2012 July 17,349 7,813 August 15,869 5,825 September 16,506 7,567 October 19,708 11,368 November 18,347 7,742 December 18,250 9,036 January 18,398 9,071 February 21,576 9,198 March 19,814 7,061 April 19,790 5,228 2013 May 17,135 5,924 June 15,181 6,996 July 15,193 4,971 August 15,005 6,304 Source: Kenya National Bureau of Statistics 50 December 2013 | Edition No. 9 Annexes Annex 9: Local electricity generation by source Year Month Hydro Geothermal Thermal Total January 296 119 188 603 February 246 105 200 551 March 259 126 225 610 April 237 120 224 582 May 264 124 222 610 June 268 118 200 586 2011 July 263 122 226 611 August 254 125 234 614 September 249 121 224 595 October 253 122 225 601 November 263 115 208 587 December 331 125 156 613 January 330 129 169 627 February 332 125 159 616 March 293 134 194 620 April 273 124 175 572 May 323 132 159 615 June 342 129 147 618 2012 July 358 119 168 646 August 348 122 176 645 September 358 119 168 646 October 360 129 166 654 November 372 121 159 652 December 369 130 148 647 January 377 129 169 675 February 333 113 160 606 March 348 135 163 645 April 345 152 140 637 2013 May 377 159 133 668 June 378 162 131 671 July 386 158 157 701 August 377 158 182 717 September 377 153 175 705 Source: Kenya National Bureau of Statistics December 2013 | Edition No. 9 51 Annexes Annex 10: Soft drinks and sugar production Soft drinks litres Galvanized sheets Year Month Sugar (MT) Cement (MT) (thousands) (MT) January 34,446 55,974 22,094 364,432 February 32,457 52,069 22,386 335,247 March 36,156 53,842 22,928 355,858 April 31,162 52,061 20,957 363,035 May 26,622 49,130 24,744 376,246 June 28,910 38,818 24,677 365,494 2011 July 28,478 25,884 24,906 393,149 August 28,580 26,060 24,659 405,546 September 29,674 22,815 17,988 407,838 October 28,540 28,990 16,619 361,941 November 27,366 32,689 22,104 364,789 December 38,962 36,729 24,033 384,853 January 34,317 53,852 22,940 350,615 February 32,009 49,480 19,655 378,453 March 37,363 52,342 21,507 397,009 April 29,331 44,914 20,892 360,540 May 24,359 40,503 22,197 381,026 June 27,391 45,111 17,180 396,951 2012 July 22,073 41,607 21,411 398,458 August 24,458 37,058 23,040 399,873 September 31,113 32,503 23,268 382,141 October 32,540 30,123 20,473 421,579 November 31,497 31,886 21,969 415,866 December 33,067 34,651 21,283 357,212 January 34,246 49,046 22,925 393,921 February 32,026 50,036 20,514 383,683 March 41,694 43,647 25,122 379,114 April 40,207 39,151 22,080 368,067 2013 May 43,021 36,529 21,228 400,690 June 31,777 49,512 22,108 402,621 July 28,705 61,802 - 415,636 August - 58,687 - 407,074 Source: Kenya National Bureau of Statistics 52 December 2013 | Edition No. 9 Annexes Annex 11: Tourism arrivals Year Month JKIA MIA Total January 79,142 35,770 114,912 February 69,221 31,211 100,432 March 71,734 26,027 97,761 April 66,276 10,181 76,457 May 74,148 5,167 79,315 June 72,944 6,676 79,620 2011 July 131,519 12,037 143,556 August 113,438 23,402 136,840 September 85,397 17,317 102,714 October 88,918 18,741 107,659 November 89,394 19,641 109,035 December 94,355 21,624 115,979 January 83,450 28,134 111,584 February 80,405 24,636 105,041 March 75,668 19,965 95,633 April 72,023 7,531 79,554 May 71,287 4,830 76,117 June 90,972 5,934 96,906 2012 July 108,136 12,671 120,807 August 108,869 17,771 126,640 September 90,153 13,312 103,465 October 95,911 12,942 108,853 November 83,122 16,135 99,257 December 92,365 23,290 115,655 January 85,838 26,446 111,984 February 48,970 24,031 73,001 March 52,103 17,850 69,953 2013 April 61,685 6,739 68,424 May 69,751 4,772 74,523 June 91,083 6,692 97,775 July 112,332 11,480 123,812 Source: Kenya National Bureau of Statistics December 2013 | Edition No. 9 53 Annexes Annex 12: New vehicles registration Year Month All body types January 18,805 February 16,190 March 16,497 April 12,560 May 15,115 June 21,546 2011 July 19,128 August 18,797 September 16,802 October 17,202 November 17,640 December 15,559 January 13,730 February 12,693 March 13,066 April 8,257 May 16,652 June 15,091 2012 July 22,577 August 16,970 September 12,003 October 15,449 November 14,867 December 11,689 January 20,997 February 16,928 March 17,061 April 20,203 May 25,070 2013 June 23,527 July 23,223 August 15,224 September 15,749 October - Source: Kenya National Bureau of Statistics 54 December 2013 | Edition No. 9 Annexes Annex 13: Exchange rate Year Month USD UK pound Euro January 81.0 127.7 108.2 February 81.5 131.5 111.3 March 84.2 136.1 117.9 April 83.9 137.1 121.1 May 85.4 139.5 122.4 June 89.0 144.4 128.1 2011 July 89.9 145.0 128.5 August 92.8 151.9 133.0 September 96.4 152.1 132.7 October 101.3 159.4 138.7 November 93.7 148.2 127.1 December 86.7 135.1 114.1 January 86.3 133.9 111.4 February 83.2 131.4 110.1 March 82.9 131.2 109.6 April 83.2 133.2 109.6 May 84.4 134.3 108.0 June 84.8 132.0 106.5 2012 July 84.1 131.2 103.5 August 84.1 132.1 104.2 September 84.6 136.3 108.8 October 85.1 136.8 110.3 November 85.6 136.8 109.9 December 86.0 138.8 112.8 January 86.9 138.8 111.4 February 87.4 135.5 110.1 March 85.8 129.4 109.2 April 84.2 128.8 109.6 May 84.1 128.7 108.1 2013 June 85.5 132.4 112.0 July 86.9 131.9 113.7 August 87.5 135.5 116.5 September 87.4 138.5 116.7 October 85.3 137.3 116.3 Source: Central Bank of Kenya December 2013 | Edition No. 9 55 56 Annex 14: Interest rates Short-term Long -term Overall Central bank Average Interest rate Year Month Interbank 91-Treasury bill Savings weighted rate deposit rate spread* December 2013 | Edition No. 9 lending rate January 19.0 21.0 18.0 7.7 1.6 19.5 11.9 February 18.0 20.0 18.0 8.0 1.7 20.3 12.3 March 24.0 18.0 18.0 8.0 1.7 20.3 12.3 April 16.0 16.0 18.0 9.0 1.6 20.2 11.2 May 17.0 11.0 18.0 8.4 1.6 20.1 11.7 June 17.0 10.0 18.0 7.9 1.5 20.3 12.4 2012 July 13.7 12.0 16.5 8.3 1.7 20.2 11.9 August 9.0 10.9 13.0 7.8 1.6 20.1 12.3 September 7.0 7.8 13.0 7.4 1.6 19.7 12.3 October 9.1 9.0 13.0 6.9 1.6 19.0 12.2 November 7.1 9.8 11.0 6.7 1.6 18.7 12.1 December 5.8 8.3 11.0 6.8 1.6 18.1 11.3 January 5.9 8.1 9.5 6.5 1.6 18.1 11.6 February 9.3 8.4 9.5 6.3 1.6 17.8 11.6 March 8.9 9.9 8.5 6.5 1.4 17.8 11.2 April 7.9 10.4 8.5 6.4 1.4 17.9 11.5 2013 May 7.2 9.5 8.5 6.5 1.5 17.4 10.9 June 7.1 6.2 8.5 6.6 1.7 17.0 10.3 July 7.9 5.9 8.5 6.6 1.6 17.0 10.4 August 8.9 10.0 8.5 6.4 1.7 17.0 10.6 Source: World Bank, based on data from Central Bank of Kenya Annexes Annex 15: Credit to private sector Annexes annual growth rates Total private sector Agriculture Manufacturing Trade Real estate Other activities Month construction communication insurance Finance and quarrying Private households Consumer durables Business services Building and Transport and Mining and Year January 28.0 24.7 24.8 27.4 54.2 40.9 14.1 38.3 93.7 24.4 21.3 -15.4 53.7 February 26.0 21.1 22.2 26.3 65.2 31.1 22.9 39.4 28.3 17.4 19.2 -0.5 40.2 March 24.0 16.6 30.5 24.0 54.4 36.3 28.4 36.7 18.0 17.4 19.9 -5.0 23.7 April 22.6 14.5 29.7 27.4 59.4 25.0 19.3 29.0 37.9 15.7 -7.4 -5.7 47.6 May 21.8 14.3 26.9 25.4 51.8 28.7 17.9 29.7 10.0 13.0 16.3 0.0 25.0 June 16.1 10.1 23.4 21.4 49.9 10.3 10.0 27.8 1.8 7.0 14.7 -5.1 16.2 2012 July 13.5 3.6 19.0 10.5 36.7 -2.9 10.7 26.4 3.3 7.7 13.7 -1.3 27.0 August 11.9 3.9 14.8 7.8 35.2 -2.7 16.2 26.2 -10.4 8.1 12.5 0.5 21.7 September 7.7 0.7 7.3 3.2 27.8 -4.3 20.3 24.8 -13.7 6.0 8.0 0.9 8.8 October 7.1 3.7 3.6 2.8 32.5 -2.6 21.9 22.7 -24.0 5.4 4.5 2.2 11.0 November 9.1 6.7 10.2 4.8 37.0 -10.3 15.4 21.1 -23.8 7.6 6.7 8.2 15.0 December 10.4 8.1 15.8 10.6 36.2 -13.3 9.3 17.9 -0.9 8.2 9.4 7.5 10.8 January 12.0 13.3 16.9 9.0 33.6 -11.3 29.9 16.9 5.2 7.3 9.8 23.1 10.0 February 11.5 8.0 15.1 10.1 22.4 -12.9 -2.6 17.3 8.6 14.0 8.3 24.5 10.3 March 11.2 11.0 12.6 10.2 23.9 -15.3 -9.5 15.8 4.3 11.0 6.7 24.0 19.6 April 10.4 4.2 11.6 7.6 17.5 -12.1 -2.4 13.9 -17.7 16.5 8.2 28.3 15.4 May 9.5 2.0 4.9 7.3 13.2 -13.2 4.0 14.0 -9.8 24.8 7.7 37.4 -0.3 2013 June 12.7 1.9 5.5 10.3 11.1 -7.2 11.0 17.2 -16.0 27.1 13.5 45.6 5.2 July 13.5 6.5 6.4 11.0 9.6 6.3 -0.8 17.5 -13.4 27.3 13.6 36.0 7.3 August 16.2 3.6 9.6 15.4 11.4 9.8 -3.5 16.9 17.4 26.6 13.3 42.1 10.9 September 17.4 -0.5 6.8 20.3 13.5 13.1 -12.4 14.7 18.8 32.9 18.3 35.5 15.0 October December 2013 | Edition No. 9 ‘Source: Central Bank of Kenya 57 Annexes Annex 16: Money aggregate Broad money Year Growth rates (yoy) Money ( M1 ) Money ( M0 ) Reserve money supply ( M2 ) January 21.5 24.3 18.0 16.1 February 20.5 28.0 17.5 19.7 March 19.4 29.7 18.5 18.0 April 18.2 24.3 19.0 20.1 May 16.6 23.3 17.3 7.9 June 14.5 21.2 17.4 4.8 2011 July 14.7 19.6 19.2 11.5 August 15.2 20.4 19.7 14.8 September 14.3 16.9 18.2 12.5 October 14.0 19.6 16.2 8.1 November 13.8 12.4 16.3 9.5 December 14.1 7.9 11.4 14.5 January 10.6 5.3 13.0 17.2 February 11.2 5.7 12.5 10.4 March 11.5 1.4 13.1 23.2 April 13.0 6.1 8.1 14.7 May 12.5 1.7 10.6 13.2 June 13.1 0.6 6.6 16.7 2012 July 13.9 2.3 3.6 15.6 August 15.0 4.1 5.7 8.4 September 14.3 6.3 5.4 9.7 October 15.8 5.6 3.8 6.7 November 18.1 9.3 7.7 14.0 December 17.2 14.1 7.8 15.1 January 18.2 16.0 11.4 12.2 February 17.0 15.5 17.5 23.9 March 15.7 17.8 15.9 11.5 2013 April 18.5 19.9 13.5 9.5 May 17.8 22.1 14.8 18.9 June 15.6 20.9 16.6 11.7 July 13.9 18.7 15.5 10.3 Source: Central Bank of Kenya 58 December 2013 | Edition No. 9 Annexes Annex 17: Mobile payments Number of Number of Value of Number of Year Month customers transactions transactions agents (Millions) (Millions) (Millions) January 33,968 16.7 28.2 75.4 February 34,572 16.9 28.5 76.3 March 36,198 17.5 32.7 89.0 April 37,309 17.8 32.4 86.1 May 38,485 17.9 35.3 94.4 June 42,840 18.1 35.8 92.6 2011 July 43,577 18.3 38.0 99.7 August 44,762 18.6 39.3 107.4 September 46,234 18.9 39.2 108.6 October 47,874 19.2 40.6 109.1 November 49,091 19.5 41.2 112.3 December 50,471 19.2 41.7 118.1 January 52,315 18.8 40.2 114.1 February 53,685 18.8 41.8 116.7 March 55,726 19.2 45.8 126.1 April 56,717 19.5 44.4 117.4 May 59,057 19.7 48.0 128.4 June 61,313 19.8 47.9 124.0 2012 July 63,165 19.6 49.4 129.3 August 64,439 19.4 49.7 131.4 September 67,301 19.7 48.9 130.7 October 70,972 20.0 51.9 137.7 November 75,226 20.3 53.6 139.0 December 76,912 21.1 56.0 150.2 January 85,548 21.4 53.4 142.7 February 88,393 21.8 53.5 141.1 March 93,211 22.3 52.4 134.4 April 96,319 23.0 56.0 142.6 2013 May 100,584 23.5 60.3 158.8 June 103,165 23.8 60.0 152.5 July 105,669 24.3 62.7 162.8 August 108,559 23.9 64.7 168.1 September 110,432 24.0 63.4 165.6 Source: Central Bank of Kenya. December 2013 | Edition No. 9 59 Annexes Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) Year Month NSE Dow Jones January 4,465 11,892 February 4,240 12,226 March 3,887 12,320 April 4,029 12,811 May 4,078 12,570 June 3,968 12,414 2011 July 3,738 12,143 August 3,465 11,614 September 3,284 10,913 October 3,507 11,955 November 3,155 12,046 December 3,205 12,218 January 3,225 12,633 February 3,304 12,952 March 3,367 13,212 April 3,547 13,214 May 3,651 12,393 June 3,704 12,880 2012 July 3,832 13,009 August 3,866 13,091 September 3,972 13,437 October 4,147 13,096 November 4,084 13,026 December 4,133 13,104 January 4,417 13,861 February 4,519 14,054 March 4,861 14,579 April 4,765 14,840 2013 May 5,007 15,116 June 4,598 14,910 July 4,788 15,500 September 4,793 15,130 October 4,993 15,546 ‘Source: Nairobi Stock Exchange and New York Stock Exchange 60 December 2013 | Edition No. 9 Annexes Annex 19: Nominal and real exchange rate Year Month NEER 2003=100 REER 2003=100 January 114 74 February 115 73 March 119 76 April 120 74 May 122 75 June 127 77 2011 July 128 77 August 133 79 September 135 80 October 141 82 November 130 75 December 119 68 January 119 67 February 116 66 March 115 65 April 115 65 May 115 65 June 115 65 2012 July 114 65 August 114 66 September 116 67 October 117 67 November 117 67 December 118 67 January 119 66 February 119 67 March 116 64 2013 April 114 63 May 113 63 June 115 63 July 116 64 Source: Central Bank of Kenya December 2013 | Edition No. 9 61 62 Annex 20: Fiscal position Actual (percent of GDP) 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13* Revenue and grants 22.7 21.8 22.5 23.3 22.6 25.1 24.6 23.5 23.7 Total revenue 21.6 20.5 21.6 22.0 21.8 23.9 24.0 23.1 23.1 Tax revenue 19.76 18.66 19.72 20.20 20.37 21.92 21.86 21.29 21.28 Income tax 7.00 7.17 7.24 7.99 8.24 8.82 9.28 9.63 10.20 December 2013 | Edition No. 9 VAT 5.65 5.02 5.58 5.70 5.67 5.97 6.17 5.65 5.04 Import duty 1.75 1.35 1.60 1.68 1.62 1.68 1.65 1.59 1.57 Excise duty 3.28 3.31 3.27 3.15 3.12 3.04 2.89 2.4 2.33 Other revenues 2.08 1.81 2.03 1.68 1.72 2.41 1.87 2.0 2.14 Appropriation-in-aid 1.79 1.83 1.92 1.82 1.43 1.93 2.09 1.8 1.85 Grants 1.1 1.3 0.9 1.3 0.8 1.3 0.7 0.47 0.57 Expenditure and net lending 22.56 25.20 24.33 27.25 26.62 29.50 29.13 29.2 30.5 Recurrent 19.01 20.18 17.80 20.55 19.46 20.77 21.25 20.0 22.07 Wages and salaries 7.85 7.39 7.38 7.44 6.94 7.02 7.12 6.9 7.49 Interest payments 2.27 2.72 2.47 2.44 2.33 2.58 2.73 2.8 3.31 Development and net lending 3.39 4.46 4.66 6.70 7.16 8.73 7.87 9.3 8.16 Deficit (commitment basis) Excluding grants -1.01 -4.71 -2.70 -5.23 -4.82 -5.65 -5.18 -6.15 -7.37 Including grants 0.10 -3.39 -1.78 -3.93 -4.01 -4.38 -4.50 -5.68 -6.79 Financing -0.54 2.40 2.10 -0.39 5.23 7.09 4.26 5.29 6.35 Foreign -0.05 0.08 -0.14 0.32 1.84 0.93 1.02 3.04 1.71 Domestic borrowing -0.50 2.32 2.24 -0.71 3.39 6.16 3.24 2.26 4.64 Public debt to GDP (net) ` 42.6 39.5 42.2 44.9 48.3 44.6 47.1 External debt 23.3 22.6 24.2 23.2 25.9 23.4 23.0 Domestic debt 23.5 21.9 23.3 26.9 27.4 26.0 28.7 Annexes Source: National Treasury, 2013 *As at the end of June 2013 Annexes Annex 21: 12-months cumulative balance of payments 2006 2007 2008 2009 2010 2011 2012 2013* 1. CURRENT ACCOUNT -511 -1,034 -1,973 -1,671 -2,512 -3,330 -4,253 -3,348 Balance of trade -2,226 -2,996 -4,260 -3,892 -4,642 -6,440 -6,892 -6,129 2. MERCHANDISE ACCOUNT -3,817 -4,936 -6,444 -5,768 -7,169 -9,007 -10,541 -10,363 2.1 Exports (fob) 3,516 4,132 5,048 4,528 5,225 5,807 6,181 6,004 Coffee 138 166 155 201 209 222 269 198 Tea 656 693 924 892 1,159 1,153 1,199 1,285 Horticulture 509 607 763 692 725 678 695 721 Manufactured goods 422 513 625 526 608 729 700 695 Other 1,792 2,153 2,580 2,216 2,525 3,026 3,318 3,104 2.2 Imports (cif) 7,333 9,069 11,492 10,296 12,395 14,814 16,722 16,367 Oil 1,745 1,919 3,051 2,192 2,673 4,081 4,081 3,926 Chemicals 1,004 1,156 1,446 1,324 1,603 1,947 2,076 2,180 Manufactured goods 1,065 1,435 1,589 1,411 1,774 2,250 2,302 2,534 Machinery and transport equipment 2,252 2,800 3,063 3,065 3,808 3,686 4,748 4,721 Other 1,267 1,759 2,343 2,304 2,537 2,848 3,514 3,006 3. SERVICES 3,306 3,902 4,470 4,097 4,657 5,676 6,288 7,015 3.1 Non-factor services 1,591 1,940 2,184 1,876 2,527 2,566 3,648 4,234 3.2 Income account -70 -143 -45 -38 -158 7 -171 -104 3.3 Current transfers account 1,785 2,106 2,331 2,259 2,288 3,103 2,810 2,885 of which remittances 408 574 611 609 642 891 1,171 1,246 4. CAPITAL & FINANCIAL ACCOUNT 1,186 1,888 1,505 2,451 2,675 3,288 5,514 3,954 4.1 Capital account 211 267 294 290 154 235 235 185 4.2 Financial account 975 1,621 1,210 2,161 2,522 3,053 5,278 3,768 4.2.1.1 Official, medium and long-term -202 -16 106 466 308 340 1147 704 4.2.1.2 Private, medium and long-term 38 592 72 44 176 35 -84 -64 4.2.1.2.3 Direct investment (FDI) -11 438 153 127 106 107 111 188 4.2.1.3 Commercial banks (net) -156 -5 15 494 61 -213 854 508 4.2.2 Short term and net errors and 1,296 1,050 1,017 1,158 1,977 2,891 3,361 2,620 omissions (NEO) Short term (including portfolio flows) 714 1,032 995 577 1130 1678 2,438 2,480 Net errors and omissions (NEO) 582 18 22 581 847 1,213 923 140 5. OVERALL BALANCE 675 854 -469 781 163 -43 1,261 606 Gross reserves 3,331 4,557 4,641 5,064 5,123 6,045 7,160 7,959 Official 2,415 3,355 2,875 3,847 4,002 4,248 5,702 6,291 Commercial banks 916 1,202 1,765 1,217 1,121 1,797 1,458 1,668 Imports cover (calender year) 3.55 4.00 2.75 4.08 3.55 3.12 3.8 4.33 Import cover (36 months imports) 3.89 4.84 3.36 4.08 3.85 3.71 4.3 4.45 GDP market price (KSh million) 1,622,434 1,833,511 2,107,589 2,366,984 2,553,733 3,048,867 3,440,115 3,859,809 GDP market price (US$ million) 23,302 28,964 27,053 31,359 31,665 34,059 40,698 44,882 Source: Central Bank of Kenya December 2013 | Edition No. 9 63 Annexes Annex 22: Growth Outlook 2012 2013* 2014* 2015* 2016* BASELINE GDP 4.6 5.0 5.1 5.2 5.3 Private consumption 9.0 4.0 3.1 3.1 3.1 Government consumption 5.3 4.6 5.5 4.0 4.0 Gross Fixed investment 0.0 15.6 9.7 11.0 11.7 Exports, GNFS 6.5 6.4 6.1 6.3 6.0 Imports, GNFS 9.0 9.6 5.1 5.5 5.8 Output gap (percent of potential GDP) -0.3 -0.1 0.3 0.8 1.6 HIGH CASE SCENARIO GDP 4.6 5.0 5.9 6.1 6.1 Private consumption 9.0 4.0 3.1 3.1 3.1 Government consumption 5.3 4.6 7.0 5.5 5.5 Gross fixed investment 0.0 15.6 13.7 15.0 15.0 Exports, GNFS 6.5 6.4 6.0 6.3 6.0 Imports, GNFS 9.0 9.6 6.1 6.7 7.0 Output gap (percent of potential GDP) -0.3 -0.1 0.9 2.0 3.1 LOW CASE SCENARIO GDP 4.6 5.0 4.2 4.4 4.3 Private consumption 9.0 4.0 3.1 3.1 3.1 Government consumption 5.3 4.6 3.0 3.0 3.0 Gross Fixed investment 0.0 15.6 5.7 7.0 7.0 Exports, GNFS 6.5 6.4 6.0 6.3 6.0 Imports, GNFS 9.0 9.6 4.0 4.4 4.5 Output gap (percent of potential GDP) -0.3 -0.1 -0.4 -0.4 -0.1 Source: World Bank *Projections 64 December 2013 | Edition No. 9 Reinvigorating Growth with a Dynamic Banking Sector Macroeconomic conditions are favorable in Kenya. Growth is picking up, inflation remains low, the fiscal deficit remains manageable, and the exchange rate remains stable. The economy is estimated to have grown by 5.0 percent in 2013, up from 4.6 percent in 2012, and it is poised to grow 5.1 percent in 2014. The government has set a bold agenda of reform, outlined in its second Medium Term Plan (MTP II). However, it is the structural reforms currently being implemented that will boost growth in the near term. Reductions in delays in the clearance of cargo at the Port of Mombasa and measures to address the challenges of transporting cargo along the northern corridor will help promote regional trade. Huduma centers, which provide one-stop-shop delivery of services, should enhance the business environment and curb the inefficiency that encourages corruption. Kenyan banks are leaders in innovation, and they lead many of their counterparts in Africa in the share of lending to small and medium-size enterprises (SMEs) in their portfolios. Nevertheless, SMEs cite the high cost of credit as an obstacle to bank financing. The report looks at the factors behind the high cost of credit and makes recommendations on increasing access to finance by this critical sector. The World Bank Join the conversation! Delta Center Menengai Road, Upper Hill KENYA ECONOMIC UPDATE P. O. Box 30577 – 00100 @KEconomicUpdate Nairobi, Kenya Telephone: +254 20 2936000 Fax: +254 20 2936382 Website: www.worldbank.org Produced by Poverty Reduction and Economic Management Unit Africa Region Design by Robert Waiharo