April 2017 | Edition No. 15 Housing Housing SACCO’S Revenue Drought SACCO’S Revenue External Mortgage Drought Low Income External Mortgage Domestic Drought Percent Low Income Drought GDP Domestic Drought Perc Mortgage GDP Drought Property Housing Mortgage GDP Property GDP Housing Housing Rural Housing Fiscal Rural Public Growth Fiscal Public Growth SACCO’S Fiscal SACCO’S Fiscal Urban Mortgage Housing GDP Urban Mortgage GDP Housing HOUSING Unavailable and Una ordable HOUSING Unavailable and Unaffordable © 2017. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Photos © World Bank TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS ................................................................................................................................................................................... i FOREWORD ................................................................................................................................................................................................................................ ii ACKNOWLEDGEMENTS......................................................................................................................................................................................................... iii EXECUTIVE SUMMARY........................................................................................................................................................................................................... v PART 1: THE STATE OF KENYA’S ECONOMY 1. Recent Economic Developments: 2016 in Retrospect............................................................................................................................................ 2 1.1 Economic Activity in Kenya Remained Robust in 2016 ......................................................................................................................................................... 2 1.2 Growth was Broad-based with the Service Sector Being the Most Dynamic........................................................................................................... 2 1.3 The Macroeconomic Environment was Stable in 2016 ......................................................................................................................................................... 4 1.4 Fiscal Consolidation Remains a Challenge ..................................................................................................................................................................................... 6 1.5 Financial Markets Faced a Tough Environment in 2016.......................................................................................................................................................... 9 2.The Changing Economic Landscape and Kenya’s Growth Prospects ................................................................................................................ 10 2.1 Emerging Head and Tail Winds Influencing the Economic Landscape ....................................................................................................................... 10 2.2 How Will These Emerging Head and Tail Winds Impact on Growth Prospects? ..................................................................................................... 12 3. Downside Risks to the 2017 Growth Outlook............................................................................................................................................................ 14 3.1 Domestic Risks ................................................................................................................................................................................................................................................. 14 3.2 External Risks...................................................................................................................................................................................................................................................... 15 4. Policies...................................................................................................................................................................................................................................... 15 4.1 Kenya Needs to Safeguard its Robust Performance and Accelerate Growth Potential...................................................................................... 15 4.2 Prudent Fiscal and Monetary Policies will be Critical to Safeguard Macro Stability.............................................................................................. 16 4.3 Structural Reforms will be Required to Unleash Further Productivity Gains............................................................................................................. 16 PART 2: SPECIAL FOCUS 5. Affordable Housing and Housing Finance .................................................................................................................................................................. 24 5.1 Housing and Housing Finance in Kenya – Unaffordable and Unavailable ................................................................................................................ 26 5.2 Investing in Affordable Housing Pays Off ....................................................................................................................................................................................... 27 5.3 What is Holding Back Affordable Housing? .................................................................................................................................................................................. 27 5.4 It’s More Than Finance Constraining Affordable Housing .................................................................................................................................................... 30 5.5 Innovative Instruments to Address Financing Can Be Catalytic ....................................................................................................................................... 32 5.6 Regulatory Reforms for Unleashing Housing Finance Supply and Demand ........................................................................................................... 37 5.7 Accompanying Housing Finance Reforms .................................................................................................................................................................................... 38 5.8 What Role can the Government Play? .............................................................................................................................................................................................. 39 REFERENCES .............................................................................................................................................................................................................................. 42 STATISTICAL TABLES .......................................................................................................................................................................................................................... 43 LIST OF FIGURES Figure 1: Annual GDP growth ................................................................................................................................................................................................................................. 2 Figure 2: Contribution by sector to GDP growth ........................................................................................................................................................................................ 2 Figure 3: Contribution to GDP growth by service sector........................................................................................................................................................................ 3 Figure 4: Agricultural growth year-on-year ..................................................................................................................................................................................................... 3 Figure 5: Leading Economic Indicators year-to-date growth rates ................................................................................................................................................. 4 Figure 6: Contribution to GDP growth by Industry ................................................................................................................................................................................... 4 Figure 7: After remaining within the target band for 2016, headline inflation breached it in 2017............................................................................ 4 Figure 8: Energy and food Inflation have been the main drivers of headline inflation in recent months .............................................................. 4 Figure 9: Central Bank Rate ....................................................................................................................................................................................................................................... 5 Figure 10: The Exchange rates has remained relatively stable since the beginning of 2016 ............................................................................................ 5 Figure 11: Current Account Balance improves ................................................................................................................................................................................................ 5 Figure 12: Capital Account (% of GDP) ................................................................................................................................................................................................................. 5 Figure 13: Fiscal Deficit (% of GDP) ......................................................................................................................................................................................................................... 6 Figure 14: Breakdown of Government Expenditure ..................................................................................................................................................................................... 6 Figure 15a: Revenue Targets Vs Actual (% of GDP).......................................................................................................................................................................................... 7 Figure 15b: Breakdown of Government Revenue (% of GDP) ................................................................................................................................................................. 7 Figure 16: External Debt Vs Domestic Debt (% of public debt as at Sept16) ............................................................................................................................... 9 Figure 17: Composition of External and Domestic Debt .......................................................................................................................................................................... 9 Figure 18: Government T-Bill rates .......................................................................................................................................................................................................................... 9 Figure 19: NSE 20 Share Index .................................................................................................................................................................................................................................... 9 Figure 20: Historical rainfall pattern over long rains (March-May) ....................................................................................................................................................... 11 Figure 21: Projected rainfall pattern for the upcoming long rains (March-May 2017) ........................................................................................................... 11 Figure 22: Fiscal Deficit (% of GDP) ......................................................................................................................................................................................................................... 12 Figure 23: Accumulated response of GDP to real oil price increase .................................................................................................................................................. 13 Figure 24: Accumulated response of inflation to real oil price increase .......................................................................................................................................... 13 Figure 25: GDP growth and Output gap ............................................................................................................................................................................................................. 14 Figure B.2: Annual Targets Vs. Actual Collections, Kshs. ............................................................................................................................................................................... 22 Figure B.4: Trends in remittances, ODA and FDI to Kenya ........................................................................................................................................................................ 24 Figure B.5a: Urban and Rural Population (millions) ........................................................................................................................................................................................ 26 Figure B.5b: Total Housing Needs (000s) ............................................................................................................................................................................................................... 26 Figure 26: Mortgage Loans Outstanding as % of GDP (2015/16) ........................................................................................................................................................ 28 Figure 27: Four Levers to Address Global Affordable Housing Challenges .................................................................................................................................... 30 Figure 28: Systematically Addressing Affordable Housing ....................................................................................................................................................................... 30 LIST OF TABLES Table 1.1: Medium Term Growth Outlook (percent, unless stated) ................................................................................................................................................... 14 Table 1.2: Affordability Calculator............................................................................................................................................................................................................................. 29 7 LIST OF BOXES Box B.1: Is Kenya Loosing Competitiveness in the East African Market? .................................................................................................................................... 20 Box B.2: Trends in County Level Fiscal Management ............................................................................................................................................................................. 22 Box B.3: M-Akiba: Another First For Kenya ..................................................................................................................................................................................................... 23 Box B.4: Diversifying Financing Sources Via Floating a Diaspora Bond ....................................................................................................................................... 24 Box B.5: Kenya’s Growing Population and its Housing Needs ........................................................................................................................................................... 26 Box B.6: Findings of the Kenya Mortgage Refinance Company (KMRC) feasibility............................................................................................................... 33 Box B.7: The Nigeria Mortgage Refinance Company ............................................................................................................................................................................. 34 Box B.8: The Moroccan Guarantee Scheme for Low Income Housing Finance .................................................................................................................... 34 Box B.9: Testing the Water: A PPP in Affordable Housing in Kenya................................................................................................................................................. 35 Box B.10: A SMART Demand Side Subsidy Mechanism: France - The Zero Percent Housing Loan .............................................................................. 35 Box B.11: India Lending Model for Informal Borrowers and Informal Property.......................................................................................................................... 36 ABBREVIATIONS CBK Central Bank of Kenya NEER Nominal Effective Exchange Rate CBR Central Bank Rate NEDI North and North-Eastern Development Initiative EAC East African Community NHB National Housing Bank EAP East Asian Pacific NMRC Nigeria Mortgage Refinance Company FY Financial Year NSSF National Social Security Fund FEWSNET Famine Early Warning System Network NIM Net Interest Margin FDI Foreign Direct Investment OCED Organization for Economic Cooperation and Development FOGARIM Moroccan Government Mortgage Program ODA Official Development Assistance GDP Gross Domestic Product OSR Own Source of Revenue H1, H2 First Half, Second Half O&M Operations and Maintenance HMF Housing Microfinance PAYE Pay As You Earn HS Harmonized System PPPs Public-Private Partnership HOFINET Housing Finance Information Network PFM Public Finance Management IMF International Monetary Fund Q1,2,3,4 Quarter One, Two, Three, Four KEU Kenya Economic Update REER Real Effective Exchange Rate KMRC Kenya Mortgage Refinance Company SACCOs Savings and Credit Cooperative Organizations KUSCCO Kenya Union of Saving & Credit Co-operatives SASRA SACCO Societies Regulatory Authority LAPSSET Lamu Port-South Sudan-Ethiopia-Transport SGR Standard Gauge Railway LOC Line of Credit T-Bill Treasury Bill LR Local Revenue TMRC Tanzania Mortgage Refinance Company MAD Moroccan Dirham UK United Kingdom MFIs Microfinance Institutions UN United Nations MRC Mortgage Refinance Companies USA United States of America MTP Medium Term Plan USD United States Dollar MNOs Mobile Network Operators US United States NACHU The National Cooperation Housing Union VAT Value Added Tax NBFIs Non-Bank Financial Institutions WBG World Bank Group April 2017 | Edition No. 15 i FOREWORD I t is my pleasure to present the fifteenth edition of the World Bank’s Kenya Economic Update, at a critical juncture for Kenya as it transitions from the completion of the Second Medium Term Plan (MTP-II, 2013-2017) to MTP-III (2018-2022), which is currently under preparation. The report has four main messages. First, Kenya’s economic growth continued to outperform its peers in 2016. In contrast to the slump in economic growth in Sub-Saharan Africa to 1.5 percent (a three decade low), growth in Kenya accelerated for the third consecutive year reaching 5.8 percent. Kenya’s robust growth performance was supported by lower oil prices, favorable agriculture output in the first half of 2016, a tourism sector rebound, strong inward remittances, a relatively stable macroeconomic environment and improvements in the steady easing of certain supply-side constraints due to earlier public investments. Secondly, due to emerging headwinds, economic activity in Kenya will encounter some speed bumps in the near to medium term which will likely impact MTP-II implementation and should inform the scope of the MTP-III. These headwinds include, the ongoing drought, depressed private sector credit growth, the rise in oil prices, and fiscal pressures. However, the completion of phase one of Standard Gauge Railway and a projected strengthening of the global economy is expected to provide some tailwind. The net effect of these changes in the economic landscape will likely cause near term growth to moderate to 5.5 percent in 2017 before picking up to 6.1 percent by 2019 as headwinds (e.g. drought) subside. Third, sustaining Kenya’s robust growth will require safeguarding its hard earned macroeconomic stability by continuing to implement prudent fiscal and monetary policies. The consolidation of the fiscal stance in line with the Medium Term Fiscal Framework should help anchor macroeconomic stability and create the fiscal space for a public investment drive supportive of the medium term plans. Further, given the systemic importance of the banking sector, addressing the unintended consequences of the interest rate caps should help strengthen financial intermediation in the Kenyan economy. Finally, while Kenya’s growth has been robust, there are latent opportunities to accelerate growth to levels necessary to achieve Vision 2030. This report identifies some of these growth and job-creation opportunities as well as the need to address a critical social need by supporting the development of the housing market for lower income households in Kenya. On the demand side, a key constraint to housing is finance. The report addresses policy measures that can be taken to alleviate the housing finance problem, including those that have worked well in other middle income countries. The World Bank remains committed to working with key Kenyan stakeholders to identify potential policy and structural issues that will enhance economic growth and keep Kenya on the path to upper middle income status in accordance with the aspirations of Vision 2030. The semi-annual Kenya Economic Update offers a forum to discuss these development trends. We hope that you too will join us in debating topical policy issues that can contribute to fostering growth, shared prosperity and poverty reduction in Kenya. Diariétou Gaye Country Director for Kenya World Bank ii April 2017 | Edition No. 15 ACKNOWLEDGEMENTS T his fifteenth edition of the Kenya Economic Update was prepared by a team led by Allen Dennis. The team included Mehnaz Safavian, Jane Kiringai, Simon Christopher Walley, Christine Awiti, Celina Mutie, Rajiv Daya, Uloaku Oyewole, and Patrick Nderitu. The team acknowledges contributions from Keziah Muthembwa, Vera Rosauer, Anne Khatimba, Charles Muiru, Robert Waiharo, Dasan Bobo and Sarah Farhat. The report benefitted from insights of several peer reviewers including Gerard Kambou and Loic Chiquier, as well as comments from Catherine Masinde and Sheila Kamunyori. The team also received overall guidance from Abebe Adugna Dadi (Practice Manager, Macroeconomic and Fiscal Management), James Seward (Practice Manager, Finance and Markets); Kevin Carey (Lead Economist, Macroeconomic and Fiscal Management), Johan Mistiaen (Program Leader for Kenya, Uganda, Rwanda and Eritrea) and Diarietou Gaye (Country Director for Kenya, Uganda, Rwanda and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of the report. On March 9, 2017, a draft report was presented at the 21st Economic Roundtable. The meeting was attended by senior officials from The Treasury, The Central Bank of Kenya, The Kenya Revenue Authority, The Kenya Institute for Public Policy Research and Analysis, The Ministry of Land, Housing and Urban Development and The International Monetary Fund. April 2017 | Edition No. 15 iii EXECUTIVE SUMMARY E conomic activity in Kenya remained robust in 2016. For the third consecutive year economic activity in Kenya picked-up, reaching an estimated of 5.8 percent implementation of prudent fiscal and monetary policies. On the fiscal front, given the elevated levels of the deficit as well as the lowering of margins for maneuver due to the in 2016, once again placing Kenya among the fastest rise in debt stocks, the implementation of the Medium Term growing economies in Sub-Saharan Africa. Kenya’s Fiscal Framework which seeks to bring the deficit down to growth momentum in 2016 was supported by a stable 4.3 percent by FY19/20 is a step in the right direction. Fiscal macroeconomic environment, low oil prices, favorable consolidation however, needs to be implemented in such harvest in the first half of 2016, rebound in tourism, a way as not to compromise public investments in critical strong remittance inflows, and an ambitious government infrastructure that will unlock the economy’s productive infrastructure drive to relieve supply side constraints. capacity. Secondly, given low private sector credit growth and the ongoing unintended adverse effects of interest rate Near term GDP growth is expected to dip on account of caps the Banking Amendment Act needs to be revisited. headwinds, however over the medium term GDP growth should pick-up. Given headwinds from the ongoing Further, structural reforms can accelerate the growth drought, weak credit growth, and the pick-up in oil prices, potential of the Kenyan economy. While Kenya’s growth GDP growth is expected to decelerate to 5.5 percent has been robust in recent years, it still falls short of the levels in 2017, a 0.5 percentage point mark down from earlier envisaged in the Medium Term Plan II and what is required forecasts. However, over the medium term, we expect to transform Kenya into an upper middle income economy these headwinds to ease (rains are expected to return to by 2030. Reaching the target higher level of growth is normal in 2017), and together with the projected steady possible, but will however require an acceleration in the strengthening of the global economy, rebound in tourism, pace of structural reforms. The report highlights select areas resolution of some of the underlying causes of slow credit that hold potential to accelerate Kenya’s growth potential. growth, and the easing of some supply-side constraints First, beyond changes to the Banking Amendment Act related to the completion of some major infrastructure access to credit by the private sector could be improved projects, GDP growth is expected to accelerate to 5.8 by strengthening credit reporting to the Credit Reference percent and 6.1 percent in 2018 and 2019 respectively, Bureaus; creating a central electronic collateral registry; consistent with the underlying growth potential of the developing a framework to promote property as collateral; Kenyan economy. completing the computerization of land registries; and implementing the National Payments System Act Downside risks to Kenya’s outlook remain broadly and regulations. Secondly, efforts to influence the unchanged. Identified risks include from domestic sources competiveness of agricultural input (seeds, fertilizer, leasing such as the potential for fiscal slippages, drought conditions machinery etc.) and output markets (including from tariff being prolonged beyond 2017, and security concerns. and non-tariff barriers) can help address low productivity External risks to Kenya’s growth prospects could emanate in the agricultural sector. Last but not least, new engines from weaker than expected growth among Kenya’s major for economic development need to be supported. One trading partners and uncertainties related to US interest such sector is in addressing the huge housing deficit, rate hikes that could lead to a strengthening of the dollar especially among lower income households. Unlocking the and destabilizing capital flows from emerging and frontier residential housing market through the development of markets including from Kenya. the housing finance market can provide a wide range of income opportunities through the construction sector and Going forward, prudent macroeconomic policies will related industries. help safeguard Kenya’s robust economic performance. Kenya’s relatively stable macroeconomic environment has The focus section of this report is dedicated to analyzing been supportive of its growth performance in recent years. Kenya’s housing market and the policies that can be put in Maintaining macroeconomic stability calls for continued place to make housing more affordable to many Kenyans. April 2017 | Edition No. 15 v Executive Summary Indeed, the Constitution of Kenya 2010 establishes the right integral to any meaningful financing solution. However, to housing as an enforceable socio-economic right. It states SACCOs have only one main source of liquidity, which are that ‘every person has the right to accessible and adequate member deposits. Without access to longer term sources of housing and to reasonable standards of sanitation’. This key finance, their loan portfolio will be unable to grow further. priority for the Government of Kenya has been reiterated in the country’s first medium term plan (MTP I, 2009-2012) Financing solutions can play a catalytic role in stimulating and second medium term plan (MTP for 2013-17) under both supply and demand of affordable housing, and can the Vision 2030 Strategy. These blueprints have targeted help create momentum for other underlying reforms the provision of 200,000 housing units annually for all outside the sector. On the supply side, such solutions that income levels. However, production of housing units — have been used in other emerging markets include the currently at less than 50,000 units annually — has been well creation of Mortgage Refinance Companies (MRCs), the below the targeted level, culminating in a housing deficit provision of Housing Finance Guarantees, and developing of over 2 million units, with nearly 61 percent of urban Public-Private Partnerships (PPPs) for Affordable Housing. households living in slums. This deficit continues to rise Focusing on affordability and the provision of products due to fundamental constraints on both the demand and aimed at informal income can increase the demand for supply side of housing provision and is exacerbated by an financial products for housing. Examples implemented urbanization rate of 4.4 percent, equivalent to 0.5 million in other emerging markets include Interest Rate/Down new city dwellers every year. Payment Buy Downs and a focus Housing Microfinance through microfinance institutions and SACCOs. Experiences Numerous benefits can be attributed to improving access from these other jurisdictions is that the creation or to housing finance, including economic growth, job focus by Government on such initiatives can also lead to creation, and deepening of the financial sector. There wide consultation and the creation of inter-ministerial are various global examples supporting the “housing committees dedicated to needed reforms for the affordable multiplier effect” as every dollar spent directly on a housing housing agenda. unit results in various indirect benefits to the country. Kenya has the right fundamentals in place to achieve Innovative financing instruments must also be results on a scale of significant magnitude. Collaborative accompanied by policy reforms to be effective. Such efforts between government and the private sector are reforms include the standardization of mortgage contracts, required, however it is imperative to create a supportive the establishment of appropriate mortgage foreclosure policy and regulatory environment so that the suggested regulations, a clear legal and regulatory framework for tools can be effectively leveraged. mortgage-backed securities and covered bonds and creation of a conducive environment to mobilize long- A crucial aspect of the problem lies in the ever growing term domestic capital. Underpinning these reforms is affordability gap in the housing market, and lack of the imperative inclusion of cooperatives and SACCOs in financing for both developers and end users. The affordable housing. inaccessibility of affordable housing finance is highlighted by the fact that there are fewer than 25,000 mortgages The Government of Kenya could rely on the private outstanding in Kenya. Mortgage debt in 2015 represented sector to provide financing for affordable housing, with 3.15 percent of GDP and this is substantially lower than government actively supporting the sector by creating developed countries. Banks have limited access to long- the right environment for lenders and developers. Such term funding and few institutions have accessed the capital support can come in the form of working with the private markets to fund mortgages. Of particular interest is the fact sector to attract financing through catalytic financing that less than 10 percent of all housing credit comes in the instruments, improving access to land, providing basic form of mortgages from the banking sector – the remainder infrastructure, improving the efficiency of processes (e.g. of housing finance comes from SACCOs and housing accelerating mortgage registration and title transfers) and cooperative networks. These institutions are therefore improving the credit and macroeconomic environment. vi April 2017 | Edition No. 15 RECENT ECONOMIC TRENDS GDP growth remained robust in 2016 …driven primarily by a pick-up in the services sector Annual GDP growth Contribution by sector to GDP growth 10 10 8.4 8 8 6.1 5.9 6 5.7 5.8 6 Percent 5.4 Percent 4.5 4 4 3.3 2 2 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 Agriculture Industry Services GDP Source: Kenya National Bureau of Statistics; Source: World Bank computation based on data from Kenya National Bureau of Note: 2016 is an estimate Statistics The stable macroeconomic environment supported Core inflation remains subdued, however the recent economic activity in 2016 drought and rise in oil prices have contributed Inflation to a surge in inflation 12 100 10 80 8 Upper bound 60 Percent Percent 6 40 4 Lower bound 2 20 0 0 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jun -15 Oct -15 Feb-16 Jun -16 Oct -16 Feb-17 Overall Upper bound Lower bound Food Energy Core Source: Kenya National Bureau of Statistics Source: World Bank computation based on data from Kenya National Bureau of Statistics The shilling was relatively stable in 2016 …and lower oil prices contributed to an improvement in current account balance Current account balance 20 10 Percent of GDP Index Jan 2016 = 100 100 0 -4.6 -5.9 -6.8 -6.0 -9.1 -8.3 -8.8 -9.8 -10 -20 85 -30 2009 2010 2011 2012 2013 2014 2015 2016 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 NEER REER USD Services Balance of trade Income Net Errors and Omissions Current Account Source: Central Bank of Kenya Source: Central Bank of Kenya viii April 2017 | Edition No. 15 ECONOMIC HEADWINDS AND GROWTH OUTLOOK Fiscal consolidation remains a challenge …however the Medium Term Fiscal Framework points Fiscal deficit (% of GDP) to a pathway of fiscal consolidation Fiscal deficit (% of GDP) 2012/13 2013/14 2014/15 2015/16 2016/17 2016/17 2017/18 2018/19 2019/20 0 0 -2 -2.0 -4 -4.0 -4.3 -5.4 -5.2 -6 -6.0 -5.9 -6.3 -8 -7.5 -8.0 -8.4 -8.9 -8.9 -10 -10.0 Source: The National Treasury Source: The National Treasury Rainfall projections suggest that the upcoming long rains ….and private sector credit growth remains well below (March-May 2017) will be depressed across the country the historical average Credit to Private Sector 5 30 4 30 45 25 3 25 2 10-year average 20 1 25 25 Percent 40 40 15 0 35 35 -1 10 -2 KEY Near-Normal (Average) -3 25 5 Rainfall 40 Near-Normal to Below- -4 Normal (Depressed) Rainfall 35 0 Below-Normal Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov (Highly Depressed) Rainfall 34 35 36 37 38 39 40 41 2014 2015 2016 Source: Kenya Meteorological Department Source: Central Bank of Kenya Near term growth is expected to dip on account of emerging Though Kenya’s growth remains robust, to attain its headwinds, but expected to rebound in the near term as aspiration of becoming an upper middle-income economy headwinds ease-off by 2030 will require even higher levels of growth 6.2 6.1 10 6.0 8.4 Vision 2030, MTP II Target 8 5.8 5.8 5.8 5.7 Percent Percent 6.1 6 5.9 5.7 5.8 5.4 5.6 5.5 4.5 5.4 4 5.4 5.2 2 5.0 0 2014 2015 2016e 2017f 2018f 2019f 2010 2011 2012 2013 2014 2015 2016 Source: World Bank Source: World Bank April 2017 | Edition No. 15 ix The State of Kenya’s Economy April 2017 | Edition No. 15 1 The State of Kenya’s Economy 1. Recent Economic Developments: 2016 in Retrospect 1.1 Economic Activity in Kenya Remained 1.1.3. Kenya’s growth is inching closer to the East Robust in 2016 African Community (EAC) high performers. While Kenya’s growth has lagged behind her EAC peers, with Tanzania 1.1.1. For the third consecutive year, economic activity and Rwanda averaging 7.1 and 7.3, respectively, between in Kenya picked-up. Kenya’s economy is estimated to have 2014 and 2016, Kenya’s growth is inching closer to the EAC expanded by 5.8 percent in 2016, 0.1 percentage points average. At an estimated 5.8 percent in 2016, Kenya’s growth higher than the previous year, and the fastest pace of is lower than the EAC average by 0.2 percentage points expansion since 2011 (Figure 1). Against a background of compared to 1.0 percentage points in 2014. Estimated at weaknesses in several emerging markets and Sub-Saharan 6.9 percent in 2016, Tanzania’s growth will be sustained economies where GDP growth decelerated, this economic at 6.8 percent in 2017 and is expected to pick up to 7.4 performance was even more remarkable. percent in 2018, supported mainly by strong growth in the industrial sector. On the other hand, the Ugandan economy 1.1.2. Tail winds from the global economy, exogenous slowed down in 2016 by 0.4 percentage points to 4.6, but factors and domestic developments supported is expected to pick up in 2017 to 5.6 percent driven by an economic activity in 2016. Unlike oil exporting countries industry sector that is set to pick up pace. whose economies have been battered by the slump in commodity prices (e.g. Nigeria and Angola), Kenya, being 1.2 Growth was Broad-based with the Service an oil importer, benefitted from the slump in oil prices, Sector Being the Most Dynamic particularly in the first half of 2016, and this provided further impetus to the Kenyan economy. Similarly, earlier good 1.2.1. The service sector sustained its vibrancy in 2016. rains supported favorable harvests in 2016, particularly The service sector, which accounts for some 50 percent in the first half of the year. Further the tourism sector, of GDP, contributed 3.2 percentage points to Kenya’s GDP which had slowed down since the 2013 terrorist attacks, growth for the first three quarters of 2016. In other words, rebounded in 2016, as key source countries lifted travel some 54 percent of Kenya’s growth in 2016 derived from the warnings on account of an improving security situation. strength of the service sector (Figure 2). Performance among Lastly, domestic developments such as the government’s various service sub-sectors was, however, mixed. Driven by infrastructure drive aimed at easing supply side constraints the rebound in the tourism sector, accommodation and and a stable macroeconomic environment, supported restaurant sub sector, whose contribution to GDP growth economic activity in 2016. Notwithstanding these favorable was negative in 2015, tourism grew by 6.9 percent for developments, the weakness in external demand and the the first three quarters of 2016, contributing some 0.41 sharp deceleration in credit growth to the private sector percentage points to GDP growth. Another service sub- weighed down on growth performance in 2016. sector whose growth accelerated in 2016 was transport and storage, which largely benefitted from lower fuel prices. Figure 1: Annual GDP growth Figure 2: Contribution by sector to GDP growth 10 10 8.4 8 8 6.1 6 5.9 5.7 5.8 6 Percent 5.4 Percent 4.5 4 4 3.3 2 2 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 Agriculture Industry Services GDP Source: Kenya National Bureau of Statistics; Source: World Bank computation based on data from Kenya National Bureau Note: 2016 is an estimate of Statistics 2 April 2017 | Edition No. 15 The State of Kenya’s Economy 1.2.2. However, the vibrancy previously witnessed in Having benefitted from earlier rains, harvests in the first half some service sectors dimmed in 2016. In contrast, while of 2016 were solid. However, given the delayed rains during Kenya’s real estate sector remained buoyant in 2016, it the long, rainy season (March-May), agricultural output expanded at a slower pace in 2016 (7.6 percent in the first growth weakened later in the year. three quarters of 2016 compared with 9.8 percent over the same period in 2015). The deceleration could be reflective 1.2.4. All key commodities were affected by weather of the slowing private sector credit growth. Similarly, in patterns in 2016. Tea production increased in Q1 2016 2016, the financial sector contributed 0.3 percentage compared to Q1 2015 (Figure 5). However, the bright spell points to GDP growth, a decline by half compared to its came to an end with tea production experiencing a drop contribution to GDP of some 0.6 percentage points in 2015 in subsequent quarters to 2015 levels, a development (Figure 3). The decline in the contribution of the financial attributable to changing weather conditions. Similarly, services is consistent with tougher environment faced by coffee and horticulture production saw an increase in Q1 Kenyan banks in 2016 — tighter regulatory conditions for of 2016, however, in Q2 and Q3 2016, it declined and is the provisioning of bad debts and lower interest margins expected to have been even lower in Q4 2016 due to the resulting from the Banking Amendment Act. However, on delayed and less than average rains. a positive note, innovations in mobile technology and its application in the banking sector have continued rapidly and 1.2.5. Weighed down by sluggish manufacturing and with it financial inclusion. For instance, notwithstanding the construction, industrial output growth decelerated in sluggishness of credit growth through traditional channels, 2016. For the first three quarters of 2016, Kenya’s industrial Equity Bank reported a spike in lending through its mobile sector expanded by 5.6 percent compared to the 7.3 banking platform to Ksh 30billion in the first three quarters percent recorded in 2015. As a result, its contribution to of 2016 from Ksh 1.5billion over the same period in 2015. GDP growth decelerated to 1.6 percentage points from 1.8 Data from the CBK also supports this general trend as both percentage points over the same period in 2015 (Figure 6). the number and value of transactions over the same period Much of this deceleration in growth can be attributed to for 2016 grew by some 36.4 and 19.5 percent, respectively. sluggish/below par growth in the manufacturing sector and lesser dynamism in the construction sector. At 9.5 percent, 1.2.3. The agriculture sector’s performance was the latter sector’s growth was still bristle, even if less than dependent on rains, leading to a year of two halves. the 13.5 percent recorded in 2015. Both sub-sectors growth Agricultural output grew at 4.9 percent in first three quarters performance was undermined by the sharp deceleration of 2016, which was higher than the 4.0 percent growth in credit growth. The sluggishness of the manufacturing, realized over the same period in 2015. As a result, the sector’s which grew at 2.4 percent in 2016, can be attributed to contribution to growth increased by 0.2 percentage points competitiveness challenges in the sector. This is reflected from that of the 2015 (Figure 4). However, reflecting the in the systematic loss of market share to their competitors rain-dependent nature of Kenya’s agriculture sector, 2016 both on the domestic market (e.g. in Cement production) witnessed two halves in terms of agricultural performance. as well as in key manufactured export markets in the EAC. Figure 3: Contribution to GDP growth by service sector Figure 4: Agricultural growth year-on-year 6 16 4 12 Percent 2 Percent 8 0 11.8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 4 5.5 5.1 5.5 2015 2016 2.9 4.0 3.9 -2 Accomodation and restaurant Transport and storage 0 Real estate Information and communication Q1 Q2 Q3 Q4 Q1 Q2 Q3 Financial and insurance Other 2015 2016 Service Source: Kenya National Bureau of Statistics Source: Kenya National Bureau of Statistics April 2017 | Edition No. 15 3 The State of Kenya’s Economy Figure 5: Leading Economic Indicators year-to-date growth rates Figure 6: Contribution to GDP growth by Industry 80 70 2 60 50 Percent 40 0.5 0.8 1 Percent 0.6 0.4 30 0.5 0.2 0.8 0.5 0.2 0.2 0.3 20 0.2 0.6 0.2 0.5 0.4 0.0 0.4 0.3 10 0.1 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -10 2015 2016 -20 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Mining and quarrying Manufacturing Industry Horticulture Co ee Tea Electricity and water supply Construction Source: Kenya National Bureau of Statistics Source: Kenya National Bureau of Statistics 1.3 The Macroeconomic Environment was a low of 6.6 percent in June 2016. However, adverse rainfall Stable in 2016 patterns in the second half of the year drove food inflation to a near year high of 11.2 percent at the end of 2016. This 1.3.1. Inflation moderated in 2016, however rise in food inflation has persisted in 2017, reaching 18.6 unfavorable weather has since led to a surge in food inflation in recent months. From an 18-month high of 8.0 percent in March 2017 and contributed some 76 percent percent at the end of 2015, headline inflation declined to of headline inflation (compared to 59 percent in May 2016, 6.4 percent in December 2016 (Figure 7). This was driven in when agricultural output was more favorable), thereby part by lower oil prices as reflected in lower energy inflation, showing that the rise in food prices has been the main which stood at a historical low of 0.1 percent in December driver of headline inflation (Figure 8). Along with the rise 2016 compared to 2.9 percent at the beginning of the year. in food prices, energy inflation is also on the rise, reflecting Reflecting underlying subdued demand pressures and the the pass-through of higher oil prices in global markets to waning pass-through effects from earlier volatility in the the domestic market. Notwithstanding subdued demand shilling, core inflation declined to 3.4 percent in December pressures, as reflected in low core inflation (a 5-year low 2016 from 5.4 percent at the beginning of the year. Trends of 3.3 percent in March 2017), the increase in both food in food price inflation reflected the effects of the changing and energy inflation led to the breaching of upper end of weather patterns. In the earlier half of the year when rainfall the inflation corridor (7.5 percent) in February and March patterns supported favorable harvests, food inflation 2017, with headline inflation rising to 9.0 and 10.3 percent sharply decelerated from 13.3 percent in December 2015 to respectively. Figure 7: After remaining within the target band for 2016, Figure 8: Energy and food Inflation have been the main headline inflation breached it in 2017 drivers of headline inflation in recent months 100 12 10 80 8 Upper bound 60 Percent Percent 6 40 4 Lower bound 20 2 0 0 Jun -15 Oct -15 Feb-16 Jun -16 Oct -16 Feb-17 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Food Energy Core Overall Upper bound Lower bound Source: Kenya National Bureau of Statistics Source: World Bank computation based on data from Kenya National Bureau of Statistics 4 April 2017 | Edition No. 15 The State of Kenya’s Economy 1.3.2. The benign inflationary environment enabled 1.3.3. Although depreciating towards the year’s end, the Central Bank to adopt a more accommodative the shilling remained generally stable in 2016. For the monetary stance in 2016. With inflation on a downward year 2016, the shilling depreciated by -1.5 and -1.2 percent trajectory (in particular core inflation), policy rates were on a nominal and real effective exchange rate basis (Figure twice cut by a total of 150 basis points in 2016, thereby 10). The decline in oil prices, strong remittance inflows and partially unraveling the 2015 interest rate hikes that were government borrowing in foreign currency, supported needed at the time to stabilize the macroeconomic an earlier moderate appreciation of the shilling. However, environment (Figure 9). However, despite the interest seasonal increase in import demand towards the end of rate cuts, the deceleration in private sector credit growth, the year and the commencement of a hiking cycle by the which commenced in 2014, continued unabated in 2016. US Federal Reserve which led to a strengthening dollar, By December 2016, credit growth to the private sector combined to see a slide in the shilling in the Q4 2016 and the had dropped to a worryingly 13-year low of 4.3 percent. beginning of 2017. Kenya was not alone in the end of year The ability of the CBK to influence credit growth through slide in the value of its currency. Indeed, the strengthening policy rates has however been compromised, given the of the dollar and the shifting market sentiment against direct linking of the CBR rate with the statutory interest emerging market assets impacted the currencies of several rate ceiling (under the Banking Amendment Act), frontier and emerging markets. At 4.6 months of import while yields on “risk free” government securities remain cover, Kenya has an adequate import cover ratio. In addition, unimpeded. In other words, given the risk premium above it has further buffers given the availability of the $1.5 billion government securities, policy rates set too close to risk- IMF Standby Arrangement and Credit Facility. free government securities does not incentivize banks to lend to the private sector. Figure 9: Central Bank Rate Figure 10: The Exchange rates has remained relatively stable since the beginning of 2016 14 12 10 Index Jan 2016 = 100 100 8 Percent 6 4 2 85 0 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 Jan-14 May-14 Sep -14 Jan-15 May-15 Sep -15 Jan-16 May-16 Sep -16 Jan -17 NEER REER USD Source: Central Bank of Kenya Source: Central Bank of Kenya Figure 11: Current Account Balance improves Figure 12: Capital Account (% of GDP) 20 16 10 12 Percent of GDP 8 0 -4.6 -5.9 -6.8 -6.0 -9.1 -8.3 -8.8 4 -9.8 -10 0 -20 -4 2009 2010 2011 2012 2013 2014 2015 2016 -30 2009 2010 2011 2012 2013 2014 2015 2016 Direct Investments Portfolio Investments General government Non nancial corporations, households, and NPISHs Other Investments Services Balance of trade Income Net Errors and Omissions Current Account Net Errors and Omissions Source: Central Bank of Kenya Source: Central Bank of Kenya April 2017 | Edition No. 15 5 The State of Kenya’s Economy Figure 13: Fiscal Deficit (% of GDP) Figure 14: Breakdown of Government Expenditure 2012/13 2013/14 2014/15 2015/16 2016/17 35 0 30 3.1 3.0 -2 25 3.3 3.8 3.9 Percent of GDP 4.0 20 4.9 5.1 4.7 -4 15 8.0 7.3 10 7.6 -5.4 -6 -5.9 9.8 8.8 5 7.4 -8 -7.5 0 -8.4 2014/15 2015/16 2016/17 -8.9 Development and net lending Other recurrent Wages and salaries -10 County allocation Interest payments Source: The National Treasury Source: The National Treasury 1.3.4. Overall, the current account position improved on an ambitious infrastructure drive (roads, railways, in 2016 to a 5-year low. The current account balance fell to ports and power projects) to help relieve supply-side a 67-month low of 5.5 percent of GDP in May 2016. However, constraints and crowd-in private investment. The ambitious increasing oil prices in the latter half of the year contributed infrastructure plan drove the share of development to a moderate expansion of the current account deficit to spending to 8.8 percent of GDP in FY14/15 from 6.3 percent 6.0 in December 2016 (Figure 11). Besides developments in a year earlier. However, in FY15/16 development spending oil prices, the current account balance has been supported was moderated, thereby supporting the commencement by increased diaspora remittances, which increased by 11.4 of the fiscal consolidation. In contrast to development percent in the first three quarters of 2016 (remittances are spending, recurrent spending has inched up by some 0.2 estimated at 2.3 percent of GDP). In addition, traditional percentage points to 15.6 percent of GDP in FY15/16 (and is exports such as tea, coffee and horticulture performed expected to rise to 16 percent in FY16/17). This reflects the well in H1 2016, driven by increasing commodity prices challenges in containing both the rising interest payments and good rainfall. However, overall export performance on public debt as well as spending on wages and salaries. was weak, on account of Kenya’s weakening exports to the EAC market (see Box B.1). On the financing of the current 1.4.2. The pathway towards fiscal consolidation is a account deficit, inflows to the financial account improved in step in the right direction. Fiscal consolidation should 2016 to about 11.0 percent of GDP compared to 8.0 percent help anchor Kenya’s macro stability, reduce crowding out in 2015. This was driven by increase in portfolio flows. pressures, contain the pace of debt accumulation (which However, there remains a large portion of the financial has implications for lowering future interest payments) flows that are unclassified as the net errors and omissions and contribute towards a more favorable sovereign remains sizeable at 5.0 percent of GDP. debt credit rating which should help reduce the cost of external borrowing. 1.4 Fiscal Consolidation Remains a Challenge 1.4.1. The fiscal deficit declined from 8.4 percent 1.4.3. However, the fiscal deficit is projected to of GDP in FY14/15 to 7.5 percent in FY15/16 (Figure rise in FY16/17 primarily on account of an increase in 13). Kenya’s medium-term fiscal policy is anchored by its development spending. In contrast to the consolidation commitment to achieve convergence with the East African that took place in FY15/16, the fiscal deficit is projected to Community Monetary Union protocols, including the rise to 8.9 percent of GDP in FY16/17. Given the projected attainment of a 3.0 percent of GDP (inclusive of grants) fiscal increase in revenues (as a share of GDP), the increase in deficit by FY2020/21. In FY15/16 fiscal consolidation was the deficit is being driven by an expansionary fiscal stance, driven by adjustments on the expenditure front (i.e. from with government expenditures increasing from 27.1 28.2 percent of GDP in FY14/15 to 27.1 percent in FY15/16), percent of GDP in FY15/16 to 30.0 percent in FY16/17. Of in particular from reductions in development spending the 2.9 percentage points of GDP increase in government (Figure 14). In recent years, the government has embarked expenditures in FY16/17, 83 percent of that was due to 6 April 2017 | Edition No. 15 The State of Kenya’s Economy an increase in development spending (from 7.4 percent 1.4.5. Recreating fiscal space will require improvements of GDP in FY15/16 to 9.8 percent in FY16/17), with the in revenue performance. In part, the challenge of remainder attributable to an increase in recurrent spending. fiscal consolidation has been the underperformance of Excluding, development spending and county allocations, government revenues. Over the past few years, revenue government expenditures are up by 0.4 percentage points targets have persistently been above the actuals (Figure of which 0.2 percentage point of GDP is due to an increase 15a). In the fiscal year ended 2016, preliminary revenue in wages and salaries. The significantly higher deficit, estimates suggest that at 18.8 percent of GDP, revenues however, assumes that there will be a full execution of the underperformed by some 1.4 percentage budgeted development budget in FY16/17. Given the track record revenues and were at their lowest level in a decade (Figure of 31 percent under-execution rate for development 15b). Thus far in FY 2016/17, the weak revenue performance spending, it is likely deficit outturns could be lower than appears to be continuing with monthly revenue collections current projections. Nonetheless, given the already elevated averaging Ksh 94.8 billion against a target of Ksh 111billion. deficit levels, any further increase is a cause for concern and With respect to taxes, the shortfalls in revenue vis-à-vis risks undoing Kenya’s hard earned macroeconomic stability. targets have come from weaknesses in import related tax sources (duties and VAT), reflecting the drop in imports 1.4.4. There is a need to recreate fiscal space to support on account of lower oil as well as capital imports. Pay as the public investment drive. Indeed, the projected You Earn (PAYE), the single largest revenue category, has rise in the fiscal deficit brings to the fore, the difficulty also underperformed. As a share of GDP, Kenya’s revenue authorities face in creating the necessary fiscal space performance compares favorably to most Sub-Saharan through reductions in the share of recurrent spending, and African countries, nonetheless it still remains below the expansion of the revenue base in order to carry out the optimal level and the previous collection high of 20.5 ambitious public investment drive without straining public percent in FY2010. Among challenges impacting on the finances. Recent wage agitations among public sector ability for the exchequer to receive/collect higher tax workers (doctors, lectures, nurses and teachers) continue revenues include administrative challenges, tax leakages, to put pressure on current and future wage bills. Further, challenges in income tax collection post devolution, and reflecting the rise in debt levels, interest payments are also ongoing adaptation to the new VAT and excise tax laws. taking a large share of expenditures (from 2.1 percent of Besides the weakness in revenues from tax-related sources, GDP in FY11/12 to a projected 3.2 percent in FY16/17). The there has been an even more significant underperformance challenges in constraining recurrent expenditures thereby of external grants with respect to targets. For the first three reduces fiscal space for the much needed capital spending, months of FY16/17, the deviation from target amounts is and makes it more challenging to pursue the pathway of about 91 percent. medium-term fiscal consolidation. Figure 15a: Revenue Targets Vs Actual (% of GDP) Figure 15b: Breakdown of Government Revenue (% of GDP) 25 25 5.8 5.5 5.1 20 20 1.2 2.1 3.3 2.5 2.5 18.7 19.2 19.2 19.0 18.6 15 15 4.5 4.6 4.4 2.0 2.1 2.4 10 10 1.3 1.2 1.2 8.8 8.6 8.9 5 5 0 0 FY11/12 FY12/13 FY13/14 FY14/15 FY15/16 2014/15 2015/16 2016/17 Actual Revenue Shortfall Target Income tax Import duty (net) Excise duty Value Added tax Other revenue Source: The National Treasury Source: The National Treasury April 2017 | Edition No. 15 7 The State of Kenya’s Economy 1.4.6. Some measures are being undertaken to leaving external debt repayment vulnerable to higher costs address the weaknesses in revenue performance. The of borrowing and exchange rate risks. On the domestic government has taken steps to improve tax administration front, commercial bank debt remains the most important with the main aim of capturing a larger share of the tax source of lending to the government at 52.0 percent of base and decreasing tax fraud through: (i) the integration total domestic lending. With changes to the regulatory of KRA IT systems with IFMIS; (ii) the rolling out of new environment inadvertently incentivizing banks to invest Customs Management System that will permit integration in government securities rather than intermediating of the various tax departments to provide additional and productive ventures in the private sector, there is a risk that more consistent information on importers; (iii) initiatives to this could compromise future growth prospects. strengthen revenue at the county level; (v) an improvement in valuation in benchmarking in order to address the 1.4.9. While there has been progress on county level undervaluation of importers. fiscal governance, more remains to be done. County governments have experienced remarkable progress after 1.4.7. There has been a shift towards external financing challenges faced in their first year of devolution. Budget of deficits in recent years. In FY14/15 domestic financing execution has moved from 64.9 percent in FY13/14 to accounted for some 53.7 percent of total financing of the 90.2 percent in FY15/16. Nevertheless, four key challenges deficit. However, in the fiscal year ending 2016 and thus far require urgent attention. These are: (i) the slow growth in FY16/17, there has been a trend shift toward financing in Own Source of Revenue (OSR), (ii) low execution rate of a greater share of the deficit through external sources. In of development spending which still falls short of the FY 15/16, external financing accounted for 54.7 percent of requirement, (iii) accumulating pending bills; and, (iv) the the deficit, while it is projected to account for 56.5 percent rising wage bill which constitutes a significant share of in FY16/17. Apart from the support to the exchange rate, county budgets (see Box B.2). the shift in foreign financing should help alleviate crowding out of the private sector in the domestic credit market. 1.4.10. The Government is seeking to raise funds to Nonetheless, the increased debt in foreign currency also finance infrastructure spending through the launch carries with it potential risks, which in recent years has of M-Akiba. On 23rd March, 2017 the National Treasury been heightened by the jitteriness of global financial launched a world first retail level mobile-phone based markets. This calls for a continued sustenance of the stable government bond auction platform – M-Akiba. The macroeconomic environment and the need to increase purpose of the M-Akiba bond is to mobilize domestic policy buffers (both fiscal, monetary and reserves) to be funds to support government infrastructure projects. Until able to have the policy space to adequately respond to M-Akiba, the minimum amount required to participate in external market events. the government bond market was Ksh 50,000, however, under M-Akiba the minimum investment required is Ksh 1.4.8. While public debt is sustainable, the margin for 3000, thereby making it more affordable to a wider cross further debt accumulation has narrowed. Net public debt section of Kenyan society. The March launch is a pilot and increased by 9.8 percentage points to 48.7 percent of GDP seeks to raise Ksh. 150 million. The main launch is expected in FY15/16. The joint IMF/World Bank Debt Sustainability in June, with a target amount of Ksh 4.85 billion to be raised. Analysis observes that debt in Kenya is still sustainable and Just six days after the launch of M-Akiba it is reported that is within the required margins. External financing as a share at least 61,000 Kenyans had registered on the M-Akiba of total financing has increased over the years to stand at platform and some Ksh75.2 million (50.2 percent of the 48.0 percent in FY15/16 (Figure 16 and Figure 17), with target amount) had been raised (see Box B.3). commercial borrowing becoming increasingly important, 8 April 2017 | Edition No. 15 The State of Kenya’s Economy Figure 16: External Debt Vs Domestic Debt (% of public debt Figure 17: Composition of External and Domestic Debt as at Sept 16) 60 50 52% 40 48% Percent 30 20 10 0 September 2015 September 2016 External debt Domestic debt External debt Domestic debt Source: The National Treasury Source: The National Treasury Figure 18: Government T-Bill rates Figure 19: NSE 20 Share Index Interest rate cap 6000 (24th Aug '16) 12 5500 5000 NSE 20 Share Index 10 4500 Percent 4000 3500 8 3000 2500 6 20-Jun-16 25-Jul-16 29-Aug-16 3-Oct-16 7-Nov-16 12-Dec-16 16-Jan-17 27-Feb-17 2000 364 - T Bill 182 - T Bill 91-T Bill rate Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Central Bank of Kenya Source: Financial Times 1.5 Financial Markets Faced a Tough provisioning of bad debts led to a spike in recorded non- Environment in 2016 performing loans by banks. Thirdly, the coming into effect of the Banking Amendment Act has reduced the Net Interest 1.5.1. The Banking sector remains fundamentally Margins (NIM) of the sector. sound, despite recent headwinds. Kenyan banks remain well capitalized, with capital adequacy ratios above the 1.5.2. Banks are adjusting to the new regulatory statutory requirements. As of September 2016, industry- wide regulatory capital to risk-weighted assets was 19 environment. The effects of changes to the rules of the game percent, return on equity was 27 percent and liquid on the banking industry are still evolving. However, there are assets to short-term liabilities was 42.9 percent. Further, some early preliminary patterns emerging. The legislation the banking industry remains the single largest industry on interest rates cap introduced in August 2016, which pegs contributor to corporate income taxes. Nonetheless, the the private sector lending rate to the CBR, inadvertently banking sector was rocked by a number of developments made yields on government securities relatively attractive, in 2016. First, following the wave of receiverships in 2015, hence banks have increased their holdings of government another lower tiered bank was placed under receivership T-Bills and bonds (Figure 18). This has contributed to the in April 2016, which resulted in flight to safety sentiments decline in yields of government securities since August among depositors as well as episodic tightening of liquidity 2016, as banks showed their preference for government in the interbank market with the lower tiered banks facing paper which is perceived to be “risk free” compared to greater challenges. However, the liquidity facility promptly lending to the private sector. Further, though it is still early put in place by the Central Bank of Kenya is helping to days, there is evidence of credit rationing as some banks mitigate the situation. Secondly, stricter guidelines on the have announced plans to curtail new unsecured consumer April 2017 | Edition No. 15 9 The State of Kenya’s Economy loans and loans for motor vehicle purchases. Last but 1.5.3. The stock market continued its bear run in 2016. not least, banks have indicated that they plan to contain The stock exchange index declined by 21.1 percent year on costs by laying-off workers (so far estimates are over 1000 year in December 2016. Among other factors, uncertainty workers) and adopting technological innovations to reduce due to Brexit, the introduction of the interest rates cap in costs. While all banks are affected by the regime change the August 2016, which saw listed commercial bank share lower tiered banks are likely to be the hardest hit since they values decline, contributed to the continued bearish run in had lowest margins (due to higher funding costs) prior to the second half of the year. On the contrary, on a year-to- the introduction of the caps in the interest rate. date basis through the first two months of 2017 there was an increase of 7.2 percent of the index (Figure 19 above). 2. The Changing Economic Landscape and Kenya’s Growth Prospects 2.1 Emerging Head and Tail Winds Influencing likely to be some 60-80 percent below average in the main the Economic Landscape agricultural zones. 2.1.1. Kenya’s economic prospects will be affected by 2.1.3. The drought will have spillovers to the rest of the the emerging economic winds of change. We identify four economy. Beyond the agriculture sector, the drought will main headwinds and two tailwinds, which are factored in have knock-on effects on the rest of the economy through the growth outlook as part of the baseline scenario. While higher electricity prices, as the shortfall in hydro-power will a number of them might have already commenced in be made-up with more expensive diesel powered plants. earlier years, we see the full force of these economic winds This is because hydroelectric power contributes over 40.0 of change becoming more prominent than earlier over percent of Kenya’s power mix and is also the cheapest the forecast horizon. Consequently, they are likely have a energy source, this is therefore likely to also lead to a rise in stronger influence on near and medium term economic energy inflation, which until recently has been decelerating. prospects in Kenya. Given both of these effects, it is not surprising that drought years in Kenya are generally associated with a deceleration in 2.1.2. The ongoing drought is set to dampen economic GDP growth by about 0.6 percentage points. Our estimates activity. Due to the prevailing La Nina conditions in the suggest that for every 100mm shortfall in rain, GDP declines Indian Ocean, Kenya is currently facing a severe drought. The Meteorological Department of Kenya reports that the rainfall by some 0.3 - 0.5 percentage points. Further, the drought during the October-December 2016 short rainy season was has fiscal and external balance implications given the need generally depressed throughout the country. The seasonal to import food staples. rainfall onset was late, and the distribution, both in time and space, was also poor throughout the country. Further, 2.1.4. The weakness in credit growth to the private most areas in the country received less than 75 percent sector will dampen economic activity. As noted earlier, of their historical rainfall averages. The weather outlook credit growth is hovering at a 13-year low of 4.3 percent, for March-May 2017 (long-rains) continues to look dire compared to the 10-year average of about 19 percent. over Eastern part of Kenya, however, few parts of Western Given that the underlying supply-side factors that are Kenya are likely to receive near-normal rainfall (Figure 20 weighing on bank lending to the private sector are likely and Figure 21). With most of Kenya’s agriculture being to prevail, we don’t expect credit growth to reach its long- rain-fed, the contribution of the agriculture is expected term average in the near term. As a consequence, we expect to be significantly lower. There have already been several economic activity in those sectors that have traditionally reports on failed crops, dying herds, and increased food been intensive in the use of bank loans to be hit the hardest. insecurity in the hardest hit places (Northeastern and This will impact on durable household purchases (e.g. cars, Northwestern). This is not limited to only the arid regions. houses) and firms in manufacturing, construction and real FEWSNET reports that there is likely to be a total maize estate industries, all of which will subdue domestic demand crop failure in the southeastern and coastal marginal and Kenya’s growth prospects. agricultural areas. Further the leguminous crop harvest is 10 April 2017 | Edition No. 15 The State of Kenya’s Economy Figure 20: Historical rainfall pattern over long rain Figure 21: Projected rainfall pattern for the upcoming long (March-May) rains (March-May 2017) 5N 5 4N 4 30 45 3N 700 3 25 650 2N 600 2 550 500 1 25 25 1N 450 40 40 400 0 35 EQ 35 350 300 -1 1S 250 200 -2 2S 150 KEY 100 Near-Normal (Average) 3S Rainfall -3 25 50 40 Near-Normal to Below- -4 4S Normal (Depressed) Rainfall 35 Below-Normal 5S (Highly Depressed) Rainfall 34 35 36 37 38 39 40 41 34E 35E 36E 37E 38E 39E 40E 41E 42E Source: Kenya Meteorological department Source: Kenya Meteorological department 2.1.5. Fiscal consolidation will be a headwind in 2.1.6. The terms of trade gains from declining oil the medium term. While the effect of the drought and prices are set to wane. With global oil prices set to rise the slowdown in credit growth are likely to be the two on recent agreements between major oil exporters, the dominant headwinds, economic activity will be impacted positive terms of trade effect that Kenya and several other by the post medium term fiscal consolidation plans. We oil importers have enjoyed will be curtailed. The World Bank expect the impact from fiscal consolidation to be modest projects prices to reach $60/barrel by 2019. This represents as the projected path to a lower deficit is gradual (Figure a steady increase in prices so should be able to be absorbed 22). Based on the projected government expenditure plans by the Kenyan economy as opposed to the destabilizing (both consumption and development spending) will still sharp hike in oil prices that occurred in 2011/2012. The rise expand in real terms in FY16/17. Further, the pathway to fiscal in oil prices is thereby expected to contribute to a pick-up in consolidation is also reliant on improvements in domestic the import bill with the deficit in current account expected revenue mobilization (revenue to GDP ratio expected to to be higher in 2017 than in 2016, though still below peak increase from 18.8 percent in FY15/16 to 21.5 percent in levels since the oil price increase is expected to be marginal. FY19/20) rather than full adjustment on the expenditure Further, we estimate that on an accumulated basis, an front. For FY17/18 we expect the fiscal consolidation to be increase in oil prices dampens GDP growth by some 0.35 lower than projected as historically, election years are often percentage points and increases inflation by 2.5 percent characterized by increased recurrent spending. Indeed, the over ten quarter period (Figure 23 and Figure 24). recent escalation in various public service worker strike actions, and the rising interest rate obligations will make 2.1.7. As the US Fed embarks on interest rate hikes, it difficult for the government to place a tight cap on its credit conditions to emerging and frontier markets, recurrent spending in the near term. Fiscal consolidation including Kenya, could become tighter. On the external will be supported by measures to boost domestic revenue front, with the US Federal reserve set to carry out further mobilization (revenue administration, new tax measures, re- hikes in interest rates, the US dollar is set to further introduction of withholding VAT and rationalization of tax strengthen. The slide in emerging market currencies that expenditures). On the expenditure front, the completion occurred following the rate hike in November 2016 could of the first phase of the Standard Gauge Railway— re-occur, including that of the shilling. Further, the cost the single most important driver of public investment of accessing funds from international capital markets spending—in recent years should be supportive of fiscal (syndicated lending, Eurobonds, etc.) is also likely to increase consolidation.1 Secondly, one-off election related expenses with higher US interest rates. On the other hand, these will no longer be repeated post-August 2017. Hence, we effects could be moderated by increased remittances given expect fiscal consolidation to pick-up pace in more earnest a global economy that is forecast to strengthen in 2017 (Box post-elections in FY18/19 and beyond. We expect the B.4). Hence, tapping into the savings of the diaspora could government’s fiscal consolidation plans to help anchor also help alleviate the anticipated tighter conditions. macroeconomic stability. 1 The second phase is projected to be less expensive than the first phase since most of the locomotives that will use the SGR were purchased during the first phase. April 2017 | Edition No. 15 11 The State of Kenya’s Economy Figure 22: Fiscal Deficit (% of GDP) in 2017, a 0.5 percentage point mark down from earlier 2016/17 2017/18 2018/19 2019/20 forecasts. However, over the medium term, we expect 0 these headwinds to ease and together with the projected steady strengthening of the global economy and the -2.0 benefits of completed major infrastructure projects, GDP growth is expected to accelerate to 5.8 percent and 6.1 -4.0 -4.3 percent in 2018 and 2019 respectively, consistent with the -6.0 -5.2 underlying growth potential of the Kenyan economy (Table -6.3 1.1 and Figure 25). Although the medium term prospects -8.0 for Kenya’s economy remains robust, the distribution of the benefits of this growth are not likely to be broadly shared -8.9 -10.0 unless policies are implemented to bridge high levels of Source: The National Treasury inequality of opportunities. 2.1.8. On the upside, economic activity in Kenya 2.2.2. Consumption will remain the main driver of will be lifted by the tailwinds of a strengthening global growth on the demand side in 2017, albeit at a slower economy and the soon-to-be-operational Mombasa- pace. The changing economic winds are set to impact Nairobi Standard Gauge Railway. The strengthening household consumption, the most important demand driver global economy and the completion of major infrastructural (about 70 - 80 percent of GDP). The drought is expected to projects should provide impetus/tail winds to economic reduce farmer incomes and increase the number of food activity. Tourism is already rebounding. With the expected insecure people there by weighing down on consumption, strengthening of the global economy, this should further notwithstanding fiscal injections by the government (both strengthen the recovery in that sector. Both remittances national and counties) to ameliorate/mitigate the worst (about 2.3 percent of GDP in 2016) and merchandise effects of it. The purchasing power of urban dwellers is likely exports are also expected to benefit from an expanding to be curtailed as both food and energy price inflation rise. global economy. Further the first phase of the SGR project In recent years, consumers have benefitted from successive is due to be completed with operations starting in 2017. years of oil price declines, however, given that oil prices This should provide further impetus to the economy via the are expected to rise (even if moderate) the earlier stimulus creation of new businesses along the path of the railway provided by the lower prices will not be there in the near and significantly contribute to the competitiveness of the term. Consumption spending by the rising middle-income economy as imported inputs for firms and exports are class is also likely to be dampened by the tightening of received faster at a lower transportation costs. Further, the credit conditions as evidenced in the deceleration of credit SGR should help relieve some congestion at the port as well growth. As a result, we expect the growth in demand for as along the Nairobi-Mombasa corridor. In addition to the consumer durables such as cars and houses to be weaker SGR, other infrastructure projects such as the Mombasa Port since they are more dependent on bank loans and also tend Development Project, LAPSSET and ongoing investments to be income elastic (unlike food staples). The extent of the in renewable energy (Geothermal Development) projects slowdown in consumption growth will, however, be partially should improve the investment climate and help relieve mitigated by recent announced widening of income tax some of the binding supply side constraints to growth. brackets and tax relief by 10 percent starting January 2017, since this effectively increases disposable income. Another 2.2 How Will These Emerging Head and Tail mitigating factor will be the expected rise in remittances, Winds Impact on Growth Prospects? given the strengthening of the global economy. 2.2.1. Near term growth is expected to dip on account of headwinds. However, over the medium term growth 2.2.3. Investment growth will slow down in 2017, should pick-up. Given the headwinds of the ongoing but pick-up thereafter. An expansionary fiscal stance, drought, weak credit growth, fiscal consolidation and the in particular public spending on infrastructure to relieve rise in oil prices adversely impacting on economic activity supply side constraints, has been an important driver of in 2017, we project GDP growth to decelerate to 5.5 percent economic growth in recent years. Under the proposed 12 April 2017 | Edition No. 15 The State of Kenya’s Economy Figure 23: Accumulated response of GDP to real oil price Figure 24: Accumulated response of inflation to real oil price increase increase 1.00 0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 1 2 3 4 5 6 7 8 9 10 Note: Quarterly accumulated impulse responses functions to a Cholesky one standard deviation innovation in oil prices by a VAR model including real oil prices, real effective exchange rate, GDP, inflation and yields on 91-day TBills yields. All data are quarterly, from 2005Q4 to 2016Q2 fiscal consolidation plans, the government envisions a share of oil imports for the second half of 2016 (when oil decline in development spending by some 2.6 percentage prices were higher) increased by 2.0 percentage points points of GDP in FY17/18. The removal of this stimulus to of GDP to 15.4 percent compared to the first half of the the economy is likely to dampen the contribution of public year. However, the effects from the rise in oil is expected investments to GDP growth in the short-run. However, to be partially counteracted by lower machinery imports in the long run, this should help anchor macroeconomic as a result of the coming to an end of some major public stability, with fiscal deficits and debt levels trending lower. infrastructure investments. Further, import growth will also Private business investment is also expected to be weaker be dampened by the ongoing slowdown in credit growth. on account of the tighter lending conditions, as evidences In addition, remittances, merchandise exports and tourism in the deceleration of credit growth (private sector credit receipts are expected to rise on account of a stronger global growth has steadily declined from 20.9 percent in July 2015 economy. Overall, unlike the marginal positive contribution to its current levels of below. On the external front, we of net exports to GDP observed in 2016, we expect the net expect foreign direct investment (FDI) and portfolio flows exports contribution to turn negative, consistent with its into the country to be weakened as investors typically adopt historical performance. a wait-and-see attitude during the run-up to elections. Given Kenya’s relative attractiveness in the sub-region, we 2.2.5. Although the medium term prospects for Kenya’s expect investment flows to pick-up after the elections. economy remains robust, the distribution of the benefits However, the banking sector which has attracted significant of this growth are not likely to be broadly shared unless investment flows in the past is likely to be less attractive there is more emphasis in policies aimed at lowering unless the provisions within the Banking Amendment Act inequality. Between 2006 and 2016, poverty incidence are revisited. (under the official national poverty line) dropped from 46 percent to 36 percent.2 The 10 percentage point decline 2.2.4. The contribution of net exports to GDP is likely reflects a consistent economic growth across most sectors to weaken on account of the expected pick-up in oil of the economy as well as an expansion of the social safety prices. Like many oil importers, Kenya has benefitted from nets targeting the poor. Nonetheless, the progress against a significant terms of trade gain as a result of low oil prices. poverty was slowed by uneven consumption growth In 2016 the share of fuel and lubricants as a share of GDP across socio-economic groups and spatial dimensions; with was 14.4 percent compared to an average of 21.6 percent in the vast, low-density North and North-eastern Counties 2014. Hence the rise in oil prices is expected to put upward lagging behind, a situation partly explained by high levels pressure on the current account deficit over the forecast of vulnerability to adverse climate shocks in these areas. horizon. Reflecting the commencement of this trend the 2 New poverty figures for Kenya will be updated by April 2017. April 2017 | Edition No. 15 13 The State of Kenya’s Economy Table 1.1: Medium term growth outlook (percent, unless stated) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP Growth 5.4 5.7 5.8 5.5 5.8 6.1 Private Consumption 4.6 5.3 5.9 5.7 5.8 5.9 Government Consumption 6.0 15.4 4.5 1.5 1.1 0.8 Gross Fixed Capital Investment 14.6 4.9 2.0 7.8 9.4 10.8 Exports, Goods and Services 5.3 -0.9 4.0 4.0 4.3 4.8 Imports, Goods and Services 10.6 -1.2 5.0 4.5 5.1 5.7 Agriculture 3.5 5.6 5.6 5.4 5.4 5.4 Industry 6.5 6.9 5.7 5.7 5.6 5.6 Services 5.7 5.4 5.3 5.5 6.0 6.6 Inflation (Consumer Price Index) 6.9 6.6 6.5 8.0 6.8 6.5 Current Account Balance (% of GDP) -10.3 -6.8 -6.0 -6.4 -7.2 -8.0 Fiscal Balance (% of GDP) -7.2 -8.4 -8.9 -6.3 -5.2 -4.3 Source: World Bank and the National Treasury; Fiscal Balance is sourced from National Treasury and presented as Fiscal Years Figure 25: GDP growth and Output gap 10 8 6 4 Percent 2 0 -2 -4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Output Gap Potential GDP GDP Source: World Bank 3. Downside Risks to the 2017 Growth Outlook 3.1 Domestic Risks 3.1.2. However, drought conditions could turn out to 3.1.1. Downside risks to Kenya’s outlook remain be worse than expected. While poor rains were considered broadly unchanged. The downsides risks identified in the a risk in the previous KEU, it is a current reality. Hence previous edition of the Kenya Economic Update continue the baseline forecasts already takes this into account. to remain valid. Those identified risks included external Nonetheless, given that our baseline forecasts assumes risks, such as a slowdown in the global economy and the effect from an average drought year, if outturns for uncertainties related to US interest rate hikes, and domestic the long rainy season (March April May) tend to be worse risks such as a potential for fiscal slippages, poor rains, than anticipated then this would represent a significant upcoming elections and security concerns. The downside downside risks to the current outlook. We also assume risks considered here differ from the headwinds earlier that in 2018 and beyond the rainfall situation will return noted in that the specific scenarios considered are not part to normalcy. If that does not materialize, GDP growth will of the baseline assumptions. likely be lower than the anticipated pick-up in growth that currently projected. 14 April 2017 | Edition No. 15 The State of Kenya’s Economy 3.1.3. Fiscal pressures could lead to a slippage from 3.2 External Risks medium term pathway of fiscal consolidation. As noted 3.2.1. On the external side, a slowdown in the earlier, the process of fiscal consolidation has commenced. global economy and market jitteriness related to the Given current fiscal deficit levels, this is a necessary step, lift-off of US interest rates could dent Kenya’s growth even if difficult. The National Treasury projects the deficit prospects. After several years of weak growth, the global to decline from 7.5 percent in FY15/16 to 4.3 percent economy is projected to strengthen in 2017 and beyond. in FY19/20. While commendable there remain risks and This strengthening of the global economy underpins challenges to the achievement of this medium term the anticipated pick-up in Kenya’s exports (in particular, fiscal consolidation pathway. Not the least among these horticulture products), remittance flows and tourist arrivals. are the building pressures on recurrent spending (both However, this is not guaranteed, as has been observed wage agitations as well as interest payments), demands recent years with the continuous downgrade in global from county governments and the resolve to deliver economic growth. The global economy continues to reel on an ambitious (though necessary) infrastructure under the burden of the legacy issues related to the global agenda in an environment. This is made all the more financial crisis that has bedeviled high-income countries, challenging in an environment where domestic revenue challenges in rebalancing of China’s economy, and the mobilization has been underperforming. The outlined adverse effects of the commodity price slump that has fiscal consolidation remains achievable, but will require weakened several commodity exporting low and middle disciplined fiscal management. income economies. 3.1.4. Other domestic developments represent tail 3.2.2. Risks from global financial markets. Further, risks. Based on the current strong institutional frameworks, uncertainties related to future U.S interest rate hikes our baseline scenario is that the elections will occur without could lead to volatilities in global financial markets and any significant disruption to economic activity. Further, destabilizing short-term capital outflows in emerging and given increased investment in the security apparatus, our frontier markets. With Kenya’s increased integration with baseline assumes that the improved security situation global capital markets, and dependence on a strong global currently prevailing will persist over the forecast horizon. economy for its exports, tourism industry and remittance However, in the unlikely event that future developments inflows a weaker than expected development in the global differed, this will adversely impact investor confidence, dent economy could be detrimental to Kenya’s future growth the ongoing rebound in the tourism sector, and thereby prospects. To the extent that this leads to “flight to safety reduce economic activity from projected levels. sentiments” and a strengthening dollar (and other safe haven currencies) this could weaken the shilling with implications for Kenya’s debt levels given the increasing share of foreign currency denominated debts. 4. Policies 4.1 Kenya Needs to Safeguard its Robust income country, it will need to pursue policies that will Performance and Accelerate Growth enable it safeguard the achievements of recent years Potential as well as accelerate the pace of economic activity to be Despite, the ongoing economic weakness observed in commensurate with other high performing sister East several Sub-Saharan African economies and elsewhere African economies such as Ethiopia and Tanzania. Higher among other frontier and emerging markets, Kenya’s growth growth rates, particularly, growth that benefits households performance has been remarkably robust in recent years and in lower income brackets will be important to reduce medium term prospects remain bright, notwithstanding relatively high levels of poverty (notwithstanding progress the projected near term dip in performance. Yet for Kenya made in recent years) and inequality. to achieve the Vision 2030 goal of becoming a high middle- April 2017 | Edition No. 15 15 The State of Kenya’s Economy 4.2 Prudent Fiscal and Monetary Policies will between inhabitants of a country is largely due to their be Critical to Safeguard Macro Stability productivity differentials. Policies play an important role in Fiscal and monetary policies have played an important explaining productivity differentials. Policies can influence role in sustaining the macroeconomic stability that the the allocation of resources in an optimal (e.g. towards the Kenyan economy has generally experienced in recent most productive use) or a sub-optimal way (when resources years. This calls for the continued implementation of are misallocated to lower productive activities). There are prudent fiscal and monetary policies going forward. On several policies that can influence a country’s productivity. the fiscal front, given the elevated levels of the deficit as We highlight 3 that are relevant for Kenya given recent well as the lowering of margins for maneuver due to the economic developments. rise in debt stocks, the implementation of the medium term fiscal framework which seeks to bring the deficit down to 4.3.2. Further, reducing the transactions cost 4.3 percent by FY19/20 is a step in the right direction. To environment in the delivery of credit could enhance safeguard the long-term growth potential of the economy, further access to credit. First, access to credit could be fiscal consolidation needs to be implemented in such a improved by strengthening credit reporting to the Credit way as not to compromise public investments in critical Reference Bureaus by including SACCOs, utilities and other infrastructure that unlocks the productive capacity of the issuers of credit facilities. This will allow lenders to use Kenyan economy. Secondly, given the effect the Banking positive credit information to offer lower rates to a wider Amendment Act is having on the muddling of monetary set of customers. Secondly, creating a central electronic policy and the historically low private sector credit growth collateral registry (for both moveable and immovable levels, it is important that the Act is reviewed with a view property) will reduce the cost of perfecting a security interest to eliminating it or making it significantly less restrictive. by banks. Thirdly, developing a framework to promote While this will not resolve all the issues related to credit property (both moveable and immovable) as collateral. For access and costs, it will be an important step given recent instance, the computerization of land registries will enable economic developments. the capture, management and analysis of geographically referenced land related data. Finally, the implementation 4.3 Structural Reforms will be Required to of the National Payments System Act and regulations will Unleash Further Productivity Gains operationalize infrastructure sharing by banks in order to 4.3.1. Productivity levels in Kenya remain relatively reduce operational costs as well as encourage banking low compared to its peers. However, research shows that innovations such as agency banking, currency centers and over the long run the differences in the standard of living mobile banking. Measures to improve the sector’s productivity could look at efforts to influence the competiveness of both agricultural input and output markets 16 April 2017 | Edition No. 15 The State of Kenya’s Economy 4.3.3. Improve agricultural sector productivity. Kenya’s include non-harmonized technical regulations, sanitary agriculture sector accounts for some 25 percent of GDP and and phytosanitary requirements, customs procedures and employs the bulk of the work force, hence developments in documentation, rules of origin, police roadblocks and that sector play (e.g. recent drought) are critical for Kenya’s high costs of cross-border communications and digital growth performance and progress in poverty reduction. transactions for the poorest citizens. A reduction in trade Yet productivity in that sector remains low. Measures to costs is expected to benefit all East African economies. In improve the sector’s productivity could look at efforts to Kenya, it will favor its capital-intensive sector. influence the competiveness of both agricultural input and output markets. First, this could include efforts to 4.3.5. Consider new engines of economic growth, approve and implement the seeds regulations and national such as unlocking the potential of housing delivery for performance trials so as to promote private investment middle to lower income households. Kenya is missing a in the seed sector and increase the availability of higher major opportunity for job creation, economic growth and productivity seed varieties to farmers. Secondly, policies addressing inequality by existence of a housing industry that crowd in the private sector in the sourcing and delivery that falls short of addressing the needs of low income of the subsidized and unsubsidized fertilizers to farmers households. In Kenya, there’s an estimated accumulated can improve upon the availability of this critical input to housing deficit of over 2 million units, and nearly 61 percent farmers at the time they most need it. Thirdly, developing of households live in slums. Addressing this housing deficit and implementing the leasing legal framework to promote will be good for economic growth, creating jobs, and agricultural mechanization (including value addition/agro- deepening the financial sector. Unlocking the residential processing) could help improve agricultural productivity. housing market through the development of the housing Fourthly, approving the warehouse receipts bill can help finance market can provide a wide range of income improve competitiveness in the grains sector. Last but opportunities through the construction sector and related not least, reducing the various tariffs and non-tariff import industries as evidenced in Columbia, India, and South barriers on food grains could reduce artificially inflated food Africa. In Colombia it is estimated that 5 additional jobs are grain prices on the local market. added for every US$10,000 spent on housing construction. In India, each housing unit creates 1.5 direct and 8 indirect 4.3.4. At the regional level, market access could be jobs; in South Africa, each housing unit creates 5.62 jobs for enhanced by eliminating the myriad non-trade barriers every housing unit. The next section focuses on affordable trade costs that impede on intra-regional trade. Kenya’s housing in Kenya and the policies that can be put in place exports to the EAC has been weak in recent years (see to make housing more affordable to more Kenyans. Box B.1). Non-tariff barriers affecting intra-EAC trade April 2017 | Edition No. 15 17 18 April 2017 | Edition No. 15 BOXES Box B.1: Is Kenya loosing competitiveness in the East African market? 1. Kenya’s merchandise trade performance has been dismal in recent years, in particular its exports to the East African Community. Kenya’s merchandise exports contracted by an estimated 23.3 percent in 2016. In part, this reflects weakness in global trade. In the aftermath of the global financial crisis, global trade has been subdued on account of weak demand and structural factors (Matoo et al, 2015). Nonetheless, the contraction in Kenya’s exports is not only due to weakness among its high- income trading partners. Worryingly, Kenya’s exports to the EAC saw a significant decline in 2016, a region where growth has remained relatively resilient. Of further concern is that longer term trends show that Kenya’s exports to the EAC have been on a decline for the past several years: export growth in value terms was some 29.5 percent in 2007 but has since contracted to a low of -8.9 percent in 2013. The decline in Kenya’s exports to the region in recent years has occurred despite overall growth in EAC intraregional trade, reflecting the stronger growth performance of its regional trading partners. This begs the question whether Kenya is becoming increasingly less competitive in the EAC region? 2. Decomposition of Kenya’s export performance show that both agricultural and manufactured products contributed to the decline. The loss in Kenya’s exports to the region is particularly reflected in its trade with the region’s two other large economies. While Ugandan and Tanzanian imports grew at 12.4 and 16.0 percent respectively over the 2000-2015 period, their imports from Kenya only increased by 4.3 percent and 6.3 percent. Agricultural products whose exports to the EAC has weakened the most over the past 10 years include: cereals (HS10), Products of milling industry; malt and starches (HS11), lac; gums, resins & other vegetable (HS13), animal or vegetable oils (HS15), sugar and sugar confectionery (HS17). For instance, in Uganda, Kenya’s largest EAC market, the growth rate of (HS11) and (HS13) imports from Kenya declined by 25.3 percent and 11.6 percent respectively over the (2000 to 2015). Similarly, manufactured goods whose exports to the EAC has weakened the most over the past 15 years include: Chemical products (HS38), Plastics (HS39), Photographic or cinematographic (HS37), Raw hides and skins (HS41), Paper and paper boards (HS48), Glass and glassware (HS70) Iron & steel products (HS72) Electrical machinery & equipment (HS85), Motor vehicles (HS87) and Musical instruments; parts and ace (HS92). Further, in Tanzania, Kenya’s second largest EAC market, the manufacturing imports growth from Kenya has declined by 6.2 percent over the compounded annual growth of fifteen years compared to 16.8 percent of its manufacturing imports to the World over the same period. The products that contributed to this growth include: (HS 37), (HS41) and (HS92). However, it needs to be mentioned that Kenya has also gained market share in a few select dynamic export markets including European Union, Asia and America. Nonetheless, the losses far outweigh these gains, thus leading to the overall declining trend. Given the importance of manufactured exports in supporting the diversification of Kenya’s economy, the loss of market share in these products has implications for diversification of the Kenyan economy. 3. How does Kenya regain its competitiveness in its backyard? Kenya has become less competitive in the EAC due mostly to cheaper products to EAC markets from elsewhere, in particular East Asia (including China). For instance, in both Tanzania and Uganda, the share of East Asia (including China) exports has increased from some 45 percent to 60 percent over the past decade. This has not only driven down market shares of Kenya’s exports but also that of other countries. However, for Kenya, the EAC market remains an important market, and provides a good platform to be able to compete globally. Reversing the decline in Kenya’s competitiveness is of paramount importance and will require both domestic policy actions to improve the competitiveness of Kenyan firms as well as efforts on a regional level to improve market access for Kenyan products and a much freer flow of goods within the EAC. 4. At the domestic level, this will require policy actions to address the very low levels of labor productivity in Kenya (even compared to the Sub-Saharan African average). Labor costs in Kenya remain high relative to output and regional peers. While Kenya has invested in broadening access to education, the pay-off to educational investment has been low. Many educational assets sit idle because of mismatches, reinforcing the impression that Kenya is not making productive use of its available labor force. Several measures are needed to promote productivity. These include: (i) helping firm access skills, technology and information through, for example, technology extension or technology transfer programs; (ii) ensuring level playing field between informal and formal sector, by streamlining and reducing regulation and ensuring fair enforcement; (iii) decreasing the cost of doing business by addressing critical infrastructure gaps, especially in electricity, developing key financial infrastructure and special 20 April 2017 | Edition No. 15 programs to help enterprises access financing, and accelerate and facilitate international trade; (iv) supporting firm entry and exit, which is low in Kenya, by facilitating the starting up of a business, and simplifying the insolvency framework; (v) and, streamlining revenue raising schemes that are increasing the cost of doing business unduly in Kenya. 5. At the regional level, market access could be enhanced by eliminating the myriad non-trade barriers trade costs that impede on intra-regional trade. NTBs affecting intra-EAC trade include non-harmonized technical regulations, sanitary and phytosanitary requirements, customs procedures and documentation, rules of origin, police roadblocks and high costs of cross- border communications and digital transactions for the poorest citizens. A reduction in trade costs is expected to benefit all East African economies. In Kenya, it will favor its capital-intensive sector. Further, a reduction in non-tariff barriers is estimated to increase consumption of 0.16 percent in Kenya and 0.22percent in Tanzania. Without such action, Kenya will continue to lose out on market share in EAC, and this will be particularly important for not just its exports but the diversification of its economy since, compared to its exports to advanced economies, Kenya’s exports are more diversified and include several non-agricultural or have more manufactured goods. April 2017 | Edition No. 15 21 The State of Kenya’s Economy Box B.2: Trends in county level fiscal management County governments have experienced remarkable progress after challenges faced in their first year of devolution, notably, budget execution has moved from 64.9 percent in 2013/14 to 90.2 percent in 2015/16. Nevertheless, four key challenges require urgent attention: (i) the slow growth in Own source of revenue (OSR); (ii) low execution rate of development spending which still falls short of the requirement; (iii) accumulating pending bills; (iv) and, the rising wage bill which constitutes a significant share of county budgets. 1. County Governments’ budget allocations grew by 12 percent in FY 2015/16. The total budget amounted to Ksh. 367.4 billion in FY 2015/16 and Ksh. 326.4 and Ksh.228.6 in FY 2014/15 and FY 2013/14 respectively. The overall actual expenditure amounted to Ksh. 295.3 billion and Ksh.258.2 billion representing an 80 percent absorption rate of the budget. Development spending also witnessed a 14.5 percent improvement in absorption between FY2014/15 and FY 2015/16. 2. County governments complied with the Public Finance Management Act, 2012, requirement that recurrent expenditure should not exceed total revenue. The share of the Counties’ aggregate recurrent expenditure for personnel and operations and maintenance (O&M) to total revenue (transfers from the National Government and own-source revenue) for FY 2015/16 was 56 percent 55 and 58 percent for FY 2014/15 and 2013/14 respectively. 3. However, counties recorded a significantly slow growth Figure B.2: Annual Targets Vs. Actual Collections, Kshs. in Own-Source Revenue (OSR). Own Source Revenue grew by 28.9 percent from Ksh 26.3 billion in the FY 2013/14 to Ksh 33.9 billion in the FY 2014/15. However, the growth was significantly slower between FY 2014/15 and FY 2015/16 at 3.3 percent. The slow growth suggests that there is need for 41.1% shortfall 33% shortfall 31% shortfall counties to apply fiscal effort and improve efficiency in own revenue collection. 4. County revenue forecasts seem more credible but there is still a significant shortfall between targets and actual collections. Even after revising down the FY 2014/15 targets due to poor performance, the collections in FY Source: Controller of Budget 2015/16 remained below it. The report on county Own Source Revenue by National Treasury for eight County Governments highlights lack of credible forecasting methodology, lack of in-year monitoring and ambiguity of roles within County Governments in the revenue forecasting process as the main challenges facing the county governments. Recent audits also suggest there are gaps in tax administration leading to leakages. 5. Forty-five (45) counties complied with the requirement in the PFM Act, 2012, that at least 30 percent of their budgets are allocated to development expenditure in FY 2015/16. However, only 33 counties managed to achieve the 30 percent in actual development spending in FY 2015/16. This is a marginal improvement from FY 2014/15 where 31 counties met the required threshold in actual spending. With a few exceptions, counties that didn’t meet this requirement are predominantly urban. Nairobi, Nakuru, Embu, Nyeri and Kiambu counties were below the 30 percent actual development spending marginally. Policies to improve fiscal management at the County level 6. There is need to enhance county own sources of revenue and ensuring their predictability. Own source of revenue (OSR) forecasting has improved but growth has slowed down. To address this challenge, the government should ensure that loopholes and leakages in counties’ revenue collection are sealed and also develop a policy through which local revenue raising activities will be better supported and coordinated. 22 April 2017 | Edition No. 15 The State of Kenya’s Economy 7. Budget execution can be improved. Counties have shown a positive trend in compliance with fiscal responsibility principles in recurrent and development budget allocations. However, Cash shortages and slow procurement procedures have led to low development budget execution and an accumulation of pending bills. Counties have been constrained in their service delivery by an increasing wage bill and the need to meet various operational and maintenance expenditures. Consequently, there is therefore an urgent need for counties to contain their wage bill and align their procurement plans to cash flow plans. Streamline the re-allocation of funds. Section 154(2) of the PFM Act 2012 provides limited power to accounting officer to reallocate approved fund. However, the county sector expenditure data shows a huge discrepancy between the final approved budget figures and the actual spending per sector. Therefore, there is a need to ensure that these shifts in sector priorities leading to reallocation of funds are regularized through a Supplementary Budget. Box B.3: M-Akiba: Another First For Kenya What is M-Akiba? On 23rd March, 2017 the National Treasury launched a world first retail level mobile-phone based government bond auction platform – M-Akiba (“Akiba” is the Swahili word for savings). The purpose of the M-Akiba bond is to mobilize domestic funds to support government infrastructure projects. Until M-Akiba, the minimum amount required to participate in the government bond market was Ksh 50,000, however, under M-Akiba the minimum investment required is Ksh 3000, thereby making it more affordable to a wider cross section of Kenyan society. The coupon rate for the three-year M-Akiba bond is fixed at a tax free rate of 10 percent per annum. Interest payments will be made every six months. The bond will be listed on the Nairobi Securities Exchange and tradeable by mobile phone. The M-Akiba bond market is expected to be liquid as there is expected to be a guaranteed buyer. Safaricom and Airtel are the participating Mobile Network Operators (MNOs). The March launch is a pilot and seeks to raise Ksh. 150 million. This pilot launch should help test the platform and address any implementation challenges before the main launch, which is expected in June, with a target amount of Ksh 4.85 billion to be raised. What has been the result so far? M-Akiba bond builds on Kenya’s success story of integrating technology and financial services in order to increase financial inclusion for Kenyans, and develop a savings and investment culture among ordinary Kenyans. Just six days after the launch of the M-Akiba it is reported that at least 61,000 Kenyans had registered on the M-Akiba platform and some Ksh75.2 million (50.2 percent of the target amount) had been raised. With 31 million Kenyans (64.4 percent of the population) having mobile money subscriptions, and with deposit rates at banks lower than the M-Akiba coupon rate there exist further potential for the government to raise funds, while supporting a savings culture. Notwithstanding the expected success of M-Akiba, participation in the government bond market will continue to be dominated by larger investors, pension fund managers, high net wealth individuals, and banks, as transactions through M-Akiba will be limited by maximum daily limits on what can be transferred through the MNOs and the fact that the likely participants of the M-Akiba bonds will be on the lower end of the income scale, most of whom are net borrowers. April 2017 | Edition No. 15 23 Box B.4: Diversifying financing sources via floating a diaspora bond 1. Role of migration and remittances in the Kenyan economy Kenyans have been migrating since the 1960s, with the main driver for migration being the search for better living conditions. Today, more than three (3) million Kenyans live abroad (Government of Kenya, 2014). In 2015, about 455,889 Kenyans migrated abroad and more than 75% went to developed countries especially the UK (33%), the USA (23%), Canada (6%), Australia (4%), and Germany (2%). Migrant remittance inflows have steadily increased since 2000 (Figure 1). In 2016, remittance inflows amounted to US$1.6 billion, representing 3.4% of the country’s GDP, and projections indicate an upward trend for the coming years. The UK and the USA are the major remittance sending countries accounting for about 2/3 of total remittances in 2015. From 2001-2014, the amount of money sent annually by the Kenyan diaspora was on average six (6) times higher than what foreign direct investors sent and projections show the gap is likely to continue (Figure 1). In addition to remittances, Kenyans abroad have huge untapped potential especially regarding their skills, knowledge, networks, and savings. It is estimated that overseas Kenyans save over $2 billion annually (Source: The WBG’s Migration and remittances Team). 2. An opportunity to tap into the Kenyan diaspora savings through diaspora bonds The Government of Kenya has recognized the diaspora plays a key role in the nation’s economic development and it could support its Vision 2030. A Diaspora Policy was identified in 2014 and it recommends pursuit of a comprehensive remittance strategy and formulation of a policy to issue benchmark sovereign bonds that will finance the country’s huge infrastructure gap. Because traditional development financing is difficult to obtain, Kenya has the opportunity to tap into its diaspora savings by issuing a diaspora bond ― a retailed saving instrument marketed only to the diaspora, or friends of Kenya. This instrument could be used to finance infrastructure projects (i.e.: housing, schooling, hospitals, roads, etc.) with direct impact on the diaspora relatives or communities back home (Gnozi and Ratha, 2011). In the past, the country has dealt with its diaspora in this regard, with the issuance in 2011 of infrastructure bonds targeting the diaspora in particular. Diaspora generally has a lower country risk perception, which could allow them to accept lower interest costs. A few governments have used Diaspora bond across the world including Israel (since 1951), India (1991, 1998, 2000), Nepal (2010, 2011), the Philippines (2010), and Ethiopia (2011). 3. Not all diaspora bond initiatives have succeeded and key prior conditions are required However, not all diaspora bond initiatives succeed. For instance, the government of Ethiopia issued diaspora Figure B.4: Trends in remittances, ODA and FDI to Kenya bonds in 2011 to raise US$4.8 billion. However, these bonds 3,500 were massively undersubscribed and in June 2016, the US 3,000 Exchange Commission announced that the Government of 2,500 Ethiopia violated securities laws and has to pay back US$6.5 Millions 2,000 million to more than 3,100 Ethiopian diaspora who are US 1,500 citizens. Therefore, it is crucial for the government, before issuing the bonds, to insure that key prior conditions are met 1,000 to guarantee its success. Special care needs to be taken with 500 regard to the legal jurisdiction of issue, tenor and market size. 0 Other important considerations include: the need to conduct FDI net in ows (BoP, current US$) Remittances diaspora surveys or surveys on focus groups to understand Net ODA (current US$) Linear (Remittances) diaspora’s characteristics, their saving profile, and attitude Source: World Bank towards investing in their origin country, and designing the structure of the bond accordingly. Hiring legal and financial advisers would be crucial in order to insure proper registration and marketing of the bonds in the US, UK, and other investor destination countries. 24 April 2017 | Edition No. 15 Special Focus: Affordable Housing and Housing Finance April 2017 | Edition No. 15 25 Special Focus 5. Affordable Housing and Housing Finance 5.1 Housing and Housing Finance in Kenya – Many Kenyans are unnecessarily living in slum dwellings, Unaffordable and Unavailable because of limited supply and lack of affordability. So there 5.1.1. Kenya is missing a major opportunity for job is a critical need to deliver housing at the lower end of the creation and economic growth to formalize the housing income spectrum.4 Given Kenya’s growth and urbanization industry and encourage it to better serve low income rates, the problem will only become more acute over the households. National and county governments could next decades without a serious focus on housing and the collaborate to create a productive cycle of savings and finance of housing for the average Kenyan (Box B.5). growth by fostering increased construction and financing of affordable housing. 5.1.3. To date, the government’s goal of increasing the formal supply of affordable housing is not being 5.1.2. In Kenya, there’s an estimated accumulated met. Kenya’s first medium term plan (MTP I, 2009-2012) of housing deficit of over 2 million units, and nearly 61 the Vision 2030 strategy had an initial target of providing percent of urban households live in slums.3 This is because 200,000 housing units annually for all income levels by 244,000 housing units in different market segments are 2012, but fell significantly short of this projection (only needed annually to keep up with demand, while current 3,000 units were provided between 2009 and 2012).5 A production is less than 50,000 units. As the supply of second medium term plan for 2013-17 has a similar target housing falls more and more behind the demand for of housing units, particularly focused on lower income housing, there’s been an upward push against affordability. households.6 Box B.5: Kenya’s Growing Population and its Housing Needs Urban and Rural Population (millions) Total Housing Needs (000s) Urban & Rural Urban & Rural Kenya’s urban population is growing at a rate of 4.4 Total cumulative housing needs continue to grow percent per year, compared to 3.6 percent across sub- steadily up to 2050 where they begin to level. Housing Saharan Africa. This urban growth is the equivalent of 0.5 needs are slightly higher in rural areas currently but million new city dwellers every year, compared to a 2.7 from 2018 onwards, the majority of new housing will be percent growth rate in the rural population, which still required in urban areas and will grow rapidly. represents 0.7 million new rural inhabitants given the much larger starting size. Figure B.5a: Urban and Rural Population (millions) Figure B.5b: Total Housing Needs (000s) 120 300 100 250 80 200 60 150 40 100 20 50 0 0 Urban Rural Urban housing Rural housing Source: World Bank calculations (2016) using UN Population data Source: Walley calculations (2016) using UN Population data 3 Source: Habitat for Humanity, KUR, MDG definition of a slum. 4 According to the World Bank’s Kenya Urbanization Review (2016), about 60 percent of Kenya’s urban households live in housing that would be described as slum under the Millennium Development Goals. 5 Kenya Urbanization Review 2016. 6 Second Medium Term Plan 2013-2017, Transforming Kenya: Pathway to devolution, socio-economic development and national unity. 26 April 2017 | Edition No. 15 Special Focus 5.1.4. While government’s investments in housing are industries as evidenced in Colombia, India, and South falling short, so are those of the private sector. Nairobi, Africa. In Colombia it is estimated that 5 additional jobs are for example, has a public target of developing 150,000- added for every US$10,000 spent on housing construction. 200,000 properties per year, but planning applications in In India, each housing unit creates 1.5 direct and 8 indirect 2013 were only 15,000 units. Furthermore, more than 80 jobs; in South Africa, each housing unit creates 5.62 jobs for percent of supply is for upper middle income (48 percent) every housing unit.8 This is a central argument in favor of and high income (35 percent), and only 2 percent for the housing investment. The premise is that every unit spent on lower income segments of the population. housing will generate a multiple amount of benefit for the economy, as it creates jobs through horizontal and vertical 5.1.5. Property prices in the formal market have been supply chains. This includes jobs in areas such as raw increasing, with Nairobi ranked as the highest priced city material production, mining, cement production, timber, in Africa, creating an even greater affordability gap.7 Prices and aggregates. In addition, there is also an impact on local in 2013 were nearly three times those in 2000, creating economies where the construction jobs are created, and in fewer opportunities for low and middle income families. the service industries linked to housing, such a mortgage The lowest price house formally built by a developer cost lending, real estate agents, and retailers of home goods Ksh 1,342,106 ($15,300) in December 2012. But there is such as furniture or white goods. almost no supply on the market for less than Ksh 4 million ($43,956), especially in Nairobi. 5.3 What is Holding Back Affordable Housing? 5.3.1. A key constraint for low and middle income 5.2 Investing in Affordable Housing Pays Off buyers comes down to limited supply of financing. Kenya 5.2.1. Addressing Kenya’s housing shortage and has a dynamic mortgage industry, which is becoming housing affordability is not just about shoring up basic increasingly competitive. A number of institutions are now needs for the majority of the population, but will also be in this sector, including banks, microfinance banks and good for economic growth, creating jobs, and deepening Savings and Credit Cooperative Organizations (SACCOs). the financial sector. Numerous benefits can be ascribed The mortgage market has grown at around 30 percent to improving access to housing finance and thereby annually, based on data from the Central Bank of Kenya; housing. Homeownership has long been promoted as a however, the overall mortgage portfolio remains modest. way of giving individuals a stake in society and a stake in the economy. By having a stake that can increase in value, it 5.3.2. There are fewer than 25,000 mortgages provides an incentive for the homeowner to look after the outstanding in Kenya, with an average size of Ksh 8.3 property and also to maintain the neighborhood in which million (US$80,000 at a current Ksh/USD rate of 103.7), up the house is situated. This theoretically results in lower crime from Ksh 4.1 million in 2010, primarily as a result of higher levels and improved quality of life. Another social benefit property prices.9 Mortgage debt in 2015 represented 3.15 that has been observed as arising from homeownership is percent of GDP and, as of December 31, 2015, the total lower fertility rates. This is a less intuitive benefit, but if the mortgage book issued by commercial banks stood at Ksh house is fully owned, parents in emerging markets (where 203 billion (about USD 2.1 billion) showing a growth of 24 there is no pension system) no longer have to rely on their percent over 2014. In comparison, mortgage debt to GDP children in their old age for somewhere to live. Further ratios in other African countries outside of South Africa are benefits include improved health, through better and safer relatively low (see Figure 26), particularly when contrasted construction, and improved sanitation. to the more developed countries (for example, the USA has a mortgage debt to GDP ratio of 56 percent). 5.2.2. The housing multiplier effect creates jobs for every house or housing unit constructed. Unlocking the 5.3.3. Currently, mortgage lending is funded almost residential housing market through the development of the entirely by short-term retail and institutional deposits housing finance market can provide a wide range of income and only a few financial institutions have accessed the opportunities through the construction sector and related capital markets. The appeal of Capital Markets is that they 7 Knight Frank Prime Global Cities Index. 8 Source: Viruly (2012), Tibaijuka, Anne. 2009. Building Prosperity: Housing and Economic Development. UN HABITIAT. 9 Central Bank of Kenya. Mortgages, for the purposes of these statistics, relate to those mortgages extended by commercial banks under CBK regulation as at December 2015. April 2017 | Edition No. 15 27 Special Focus provide the possibility of long-term funding for housing 5.3.6. The share of SACCO-financed housing is and reduce the liquidity risk. The potential to harness large estimated to be as high as <90 percent with banks pools of long-term funds (like pensions and insurance) for providing the remainder of the finance. SACCOs offer housing finance is very attractive and will deal with this smaller formal mortgage loans through the KUSCCO asset-liability mismatch, lengthen the maturity of loans and Housing Fund and provide large amounts of unsecured improve affordability.10 loans used for self-construction. Some SACCOs are able to offer shorter medium term loans of as little as 1.05 percent Figure 26: Mortgage Loans Outstanding as % of GDP (2015/16) per month interest (12.6 percent annually) for an amount of up to three times the savings balance held with the Tanzania SACCO. Terms of loans can be for as many as seven years. Loans are typically unsecured, or at least not secured with South Africa a mortgage lien over a property. Despite limits on the amount and the shorter term, this type of credit is more Rwanda easily accessible and is provided at a cheaper rate than Nigeria many of the main banks can offer. Kenya 5.3.7. Housing Cooperatives also play an equally important role in financing houses. On one hand, they 0 5 10 15 20 25 30 35 purchase land and resell to members with some financing Source: HOFINET and the Centre for Affordable Housing Finance 2016 yearbook support for self- building. Alternatively, they act as a full developer, with projects ranging from 10 houses to several 5.3.4. In addition, there is little efficiency in the way hundred. In interviews with housing cooperatives it was banks originate loans or enforce loans. For example, there found that they provide a good range of housing options is little standardization of mortgage market documentation, with prices varying from as low as KSH600k up to KSH14 including loan underwriting, documentation or servicing million. Location is a big factor in terms of determining procedures. Foreclosure law can be a source of delay and the overall housing cost and the cost of infrastructure is a frustration due to frivolous and repeated appeals. major determinant in the type of housing that is built. The cooperative housing provider has to break even and often 5.3.5. Yet, less than 10 percent of all housing credit the only way is to also build upper end housing where a comes in the form of mortgages from the banking larger premium can be charged. sector—the remainder of housing finance comes from SACCOs and housing cooperative networks. The 5.3.8. SACCOs and cooperatives are filling in the gap constraints for banks are mainly in terms of risk-return for financing houses, but themselves are held back by decisions, but housing finance is also considered to be lack of finance. Both SACCOs and housing cooperatives relatively unattractive compared with investment in T-bills. together are the main providers of housing finance in The administrative burden of complex land transfer and Kenya. While official statistics are not available, industry mortgage registration is a further disincentive to increase estimates suggest that the SACCO and cooperative sector the amount of mortgage finance. Moreover, reaching down- are providing over 100,000 housing loans, with 10% being market requires assessing the credit risk of informal sector actual registered mortgages. The sector also provides borrowers, which is problematic. The majority of informal these loans at more affordable rates, rarely exceeding 14% sector borrowers are more interested in incremental interest p.a. However, SACCOs have only one main source financing and self-construction loans. The main providers of of liquidity, which are member deposits. Without access to housing finance for this sector are the cooperative networks longer term sources of finance, their loan portfolio will be or the SACCOs. unable to grow further. 7 Knight Frank Prime Global Cities Index. 8 Source: Viruly (2012), Tibaijuka, Anne. 2009. Building Prosperity: Housing and Economic Development. UN HABITIAT. McKinsey (2012). 9 Central Bank of Kenya. 10 Walley, Simon. Developing Kenya’s Mortgage Market, 2011. 28 April 2017 | Edition No. 15 Special Focus Only about 10.2% of urban households could afford the cheapest newly built house in 2015, estimated to cost about Ksh 1.7 million / US$17,000. 5.3.9. Low or informal incomes, combined with high Table 1.2: Affordability calculator financing costs, are also holding back the demand for Ksh USD housing finance. Mortgage loans remain unaffordable for Maximum Payment to Income 13 40% most households. Prudent lending standards suggest that Cost of cheapest formally built KSh1.8 $17,315 households should not allocate more than 33 percent of property million net monthly income towards their housing costs on an Maximum Loan to Value 90% ongoing basis. The actual cost of the property includes 11 Cost to register a mortgage and 4.35% title transfer the cost of the land, be it for purchase or construction. The Interest Rate 14% costs associated with the financing include the quantum Loan Duration 15 years of down payment and transaction costs (including charges, Amortization Declining Balance legal fees, and taxes). Other factors include loan duration, Monthly payment amount KSH 21,168 $208 the maximum loan to value, the type of amortization, and Implied annual income KSH 635,048 $6,225 the interest rate on the loan. Required cash savings KSH 253,440 $2,485 5.3.10. Lack of affordability continues to keep high a minority of the population. Only about 10.2% of urban potential buyers out of the market. (Table 1.2) shows that households could afford the cheapest newly built house in for the cheapest available property, an annual income of 2015, estimated to cost about Ksh 1.7 million / US$17,000. Ksh 635,000 ($6,200) is required, together with a substantial This price represents a drop in the minimum cost of a cash savings component of almost Ksh 250,000 ($2,500) to mortgageable property, which was previously set at Ksh 4 cover mortgage registration costs, down payment on the million (in 2011). The reason for this drop reflects the greater property, and title registration.12 availability of lower priced housing offered by developers. There is no detailed data on supply, and there is certainly 5.3.11. The majority of Kenyans have informal incomes evidence that house prices generally are increasing but and few can afford homes built by formal developers, there has also been a move towards provision of more resulting in mortgage lending being accessible to only affordable housing by developers who may be feeling 11 However, mean rents are 40.8% of income in Nairobi (Kenya National Housing Survey, 2012/2013). This suggests that many households will be willing to spend 40% of monthly income in the case of house purchase. 12 The average loan is a15-year variable rate loan (maturities typically range between 15 to 20 years) with interest rates varying between 13-18 percent. The analysis assumes an interest rate of 14% in keeping with the recently instituted interest rate caps in Kenya (see below). Even if banks propose higher Loan to Values (LTVs) in locations where the prices of real estate collateral have been appreciating, these loans still remain out of reach for most borrowers. In August 2016, the Banking (Amendment) Act was signed into law. The new law caps lending and deposit rates at 400 bps above and 70 percent of the base rate set and published by the Central Bank of Kenya. There are some concerns that this may have an impact on all long-term financing but it remains to be seen how implementation plays out and how banks adjust to this new reality. Margins are high but differ between the largest banks, which dispose of a cheap retail deposit base (cost of funds around 4 percent), and other banks that depend on more expensive and volatile corporate deposits (around 12-13 percent). The former group has more room to further reduce margins if the competition drives them in that direction. 13 See footnote 8 above. April 2017 | Edition No. 15 29 Special Focus that the top end luxury housing market is beginning to be property (McKinsey, 2014). The demand side factors are saturated. It is worth noting that this does not represent a more closely related to how the property is acquired and major shift, and the majority of formal housing is still at the particularly the cost of financing. The modalities of the top end, but there is some availability for housing closer to financing, such as the term of the loan and interest rates, Ksh2 million that simply did not exist a few years ago. will be the main factors determining whether a household is able to afford a property or not. 5.4 It’s More Than Finance Constraining Affordable Housing Figure 28 shows in a bit more detail the proposed dynamics 5.4.1. A lack of affordable finance is only one of the in the McKinsey model. This provides a good system for barriers to greater supply of affordable housing, and application in Kenya. The Government, through a process of making financing more available for home purchase or consultation with stakeholders, could consider each stage construction is also only one of the solutions. A recent of the process, starting with target setting. In particular, McKinsey Global Institute report discusses the main ‘levers’ the government could be clear about what it expects the to reducing the cost of housing (see Figure 27).14 In addition market to do and at which point it is prepared to intervene to financing, factors that impact overall affordability includes to enhance access. Costs can then be assigned and benefits such factors as the overall construction costs; the cost of assessed to ensure best use of limited fiscal resources. land; ancillary costs such as those associated with putting in utilities or access roads; and the costs of maintaining 5.4.2. Cumbersome property titling/registration processes have often been one of the main constraints to Figure 27: Four Levers to Address Global Affordable Housing providing urban land for housing. Difficulties or delays in Challenges obtaining clean titles leads to a decrease in investor appetite and also prevents households from being able to secure 100 Annualized cost of a standard housing unit financing from banks.15 The mapping and transparency of Land 23 Unlocking land supply land ownership is also deficient, often making it difficult to have a clear sight of land right holders, even in the case 18 Development Deploying an industrial approach of public land, which is said to be seldomly registered. Operations and maintenance However, in the Doing Business 2016 report, Kenya 2 Achieving scale e ciency was recognized for its reforms in property registration, 7 Financing particularly for increasing the pace of property transfers by Reducing cost, expanding access fully digitizing its records, improving electronic document 52 Optimized cost management at the land registry and introducing a unified form for registration.16 It is worth noting that despite all of Source: McKinsey Global Institute Figure 28: Systematically Addressing Affordable Housing • Define income and affordability thresholds • Set standard unit zones along the housing ladder Aspiration • Set targets for volumes and gaps to bridge and targets Land Development Operations and Financing Unlock land for Improve capital maintenance Reduce borrowing costs Cost a ordable measures productivity via lean Improve energy e ciency, to buyers: assist in reduction such as transit oriented coordination, value gain scale in maintenance, developer nancing levers development, idle-land engineering, procurement and set standards to policies, release of excellence, and industrial avoid dilapidation public land, and construction inclusionary zoning Housing Community engagement Delivery model delivery Management stakeholders and rigorously Choose a combination of delivery platform quality bene ciaries models that t the local context. Funding Governance Create mechanisms to pursue all Build local governance with dedicated possible funding options delivery units, sreamlined processes Source: McKinsey Global Institute 14 McKinsey Global Institute. A blueprint for addressing the global affordable housing challenge. October 2014. 15 World Bank. 2016a. Kenya Urbanization Review. 16 World Bank. 2016b. Doing Business Report. 30 April 2017 | Edition No. 15 Special Focus the reforms and new laws, operational difficulties remain in 5.4.4. The cost of construction impacts developer achieving the desired efficiency in registration. Some of the financing and their appetite to move further down costs of difficulties associated with two types of registration market. The National Housing Survey of 2012 notes that are as follows: i) Registered Titles Act—cumbersome, slow, building materials account for 40 percent of housing and uses voluminous documents. On average it takes four costs.17 Construction in Kenya is heavily dependent on months to register a cash buyer and nine months to register the use of stone and cement, which means that any price a mortgage buyer, which is entirely too long – as opposed movements or increase in taxation on these traditional to the few days it should ideally take. These kinds of delays materials will have a significant impact on the provision reduce the attraction of affordable housing as a business of affordable housing. There are also related construction for developments and lenders. ii) Sectional Properties Act— costs in terms of permit fees that are constraining factors. supposed to be the easier registration system but the reality The small scale of most developments also affects housing is that it is only used by tenant purchase schemes because affordability. This is due to several factors, including the they still own the Mother Title and the developed unit. scattered developer industry comprising of many individual, unregistered developers,18 insufficient equity capital of 5.4.3. Land is very expensive in urban Kenya, and many developers more generally, and the challenge for the it does not help that speculators are driving prices land administration to quickly deliver large volumes of titles. upward further. Speculative behaviors have triggered In addition, the possibility of granting a VAT exemption to rapid price increases since 2009, and the absence of tools affordable housing developments over 20 units, approved to limit their impact has made this a major problem for land in principle by the government, has not been applied yet. markets. There is also the limited supply of serviced land - insufficient capacity to develop infrastructure in parallel 5.4.5. Kenya’s devolved system of government means with urban expansion and land allocation or conversion. that county governments are now responsible for The responsibility for providing this infrastructure is then delivering affordable housing at the county level. County transferred to developers who in turn pass the related cost Governments can work with private sector developers and on to buyers through higher prices. Reliance on private financiers to deliver affordable housing, including through developers to provide infrastructure results in inefficient Public-Private Partnerships and Joint Ventures. However, and more costly solutions. there are still growing pains with this system leading to Lack of affordable finance is only one of the barriers to greater supply of affordable housing, and making financing more available for home purchase or construction is also only one of the solutions 17 Kenya National Housing Survey 2012/2013. 18 2012/2013 Kenya National Housing Survey. April 2017 | Edition No. 15 31 Special Focus deficiencies in urban planning and stable land use rules.19 medium- or smaller-sized institutions are able to access Some developers have voiced concerns over lack of clarity funds on the same terms as larger ones. A second approach on the scope of county functions, as well as the variances could be for MRC to be established as an off-balance-sheet in approval/procurement processes across counties. funding provider where mortgages are bought and taken These challenges will need to be addressed and trust built off the balance sheet of lenders and packaged for purchase between the counties and the financiers and developers. by investors. The benefit of this approach is that it frees up capital for lenders and may enable them to expand 5.5 Innovative Instruments to Address at a faster rate. Whichever approach or combination of Financing Can Be Catalytic approaches is used, an MRC must be created as a private 5.5.1. While not sufficient on their own, financing sector institution with private sector equity. solutions can play a catalytic role in stimulating both supply and demand of affordable housing, and can 5.5.4. Nigeria and Tanzania provide good examples of help create momentum for other underlying reforms how the overall MRC projects created momentum, focus outside the sector. On the supply side, such solutions that and pressure towards the resolution of issues outside of the World Bank has employed in other emerging markets the immediate long term funding question. In Nigeria, include the creation of Mortgage Refinance Companies several linked actions have been undertaken with NMRC as (MRCs), the provision of Housing Finance Guarantees, and a champion, helping to organize the sector and provide the developing Public-Private Partnerships (PPPs) for Affordable necessary support to get the changes organized (see Box Housing. Focusing on affordability and the provision B.7). Specifically, this includes an industry wide agreement on of products aimed at informal income can increase the Mortgage Underwriting Standards. This sets out a common demand for financial products for housing. Examples set of criteria covering a broad range of points such as implemented in other emerging markets include Interest documentation, security, consumer information, minimum Rate/Down Payment Buy Downs and a focus on Housing prudential standards, insurance and others. Further steps Microfinance through microfinance institutions and are now being worked on such as minimum underwriting SACCOs. Experiences from these other jurisdictions is that standards for informal sector lending and minimum the creation or focus by Government on such initiatives underwriting standards for Sharia compliant loans. can also lead to wide consultation and the creation of inter- ministerial committees dedicated to needed reforms for the 5.5.5. In Tanzania, a very good practical example was affordable housing agenda. the focus on one of the key bottlenecks to mortgage lending faced by developers. As they try to sell off 5.5.2. A mortgage liquidity facility, or mortgage completed housing to end users financed by mortgages, refinance company (MRC), can be an effective, low-cost the developers experienced big backlogs in obtaining institution with the main purpose of providing long ‘unit titles’ i.e. the subdivision of their large developer land term funding to lenders. There are several reasons why a plot into individual units. This created a knock on effect mortgage lender would look to a liquidity facility and the on access to finance and meant that developers had to capital markets for funding, including: i) the lender may be sit on their loans for longer periods, or provide additional capital-constrained (at least on the margin); ii) the lender forms of guarantee for the financing to flow. This made may be liquidity constrained, and; iii) the lender may have the whole process uneconomic, riskier and detrimental to cash flow risk management needs. An initial feasibility overall growth and investment into the sector. The Tanzania assessment of a Kenya Mortgage Refinance Company Mortgage Refinance Company (TMRC) together with key (KMRC) has been conducted by the World Bank and stakeholders was able to mobilize all concerned parties and preliminary results are presented in Box B.6. work through an approach to resolve this issue. This will take time, but would not have happened or been a point of 5.5.3. The nature of an MRC is that it provides an focus had TMRC not been in existence. institutional intermediary between mortgage lenders and capital markets. In developing financial systems, it 5.5.6. A housing guarantee mechanism for those with allows lenders to aggregate their funding needs through low incomes or employed in the informal sector could a single bond issuer. A key advantage is, therefore, that help expand access to housing finance. Private Mortgage 19 A revision of the 1996 Physical Planning Act is under way. 32 April 2017 | Edition No. 15 Special Focus Insurance already exists in the Kenyan market, which attests 5.5.7. PPPs for the provision and delivery of affordable to the level of market development; however, it remains housing as well as the attendant infrastructure is critical a limited product. A larger scheme potentially supported in reaching the scale of investment necessary. There are by a public sector institution could assist in taking some of numerous models on how public and private sectors work the credit risk associated with lending to those with lower together both in the provisions of affordable housing and incomes and expand access. Equally a large proportion of of urban infrastructure (see Box B.9). Having a clear set creditworthy potential borrowers are currently not able of guidelines and rules is very important. Transparency to access loans because they do not have a formal salary. in the process will make it easier to attract and structure A guarantee product that protects lenders against some transactions. A typical PPP allows a private consortium to potential losses incurred when lending to those in the assume the financing risk and two or more phases of a informal sector could significantly expand access. Such a housing project’s lifecycle. This may include the design and scheme currently operates in Morocco and has proven to be construction phases of the project and the subsequent very successful (see Box B.8). A similar scheme has also just maintenance and operation of the government facility been initiated in India with the same premise of providing under a carefully contrived long-term lease. This is in contrast some credit protection for lenders reaching down to those to the private sector’s traditional role in urban infrastructure on lower incomes or on informal incomes. development where its involvement is limited to providing Box B.6: Findings of the Kenya Mortgage Refinance Company (KMRC) feasibility20 The purpose of establishing KMRC would be to offer the housing finance market in Kenya a credible, professional and high quality large scale medium- to long-term refinance/liquidity provider. KMRC would serve as a secure source of long term funding at attractive rates while ensuring sound lending habits among primary mortgage lenders (PMLs), resulting in greater availability of fixed rate mortgages and longer available loan terms. This would, in turn, help improve the affordability of mortgages, increase the number of qualifying borrowers, and result in the expansion of the primary mortgage market and home ownership in Kenya while deepening the capital markets. The preliminary analysis shows that after five years of operation, KMRC could double the number of mortgages that would have been outstanding in Kenya if the market had grown organically. This would mean a projected number of 140,000 mortgages outstanding compared to 70,000 (including SACCOs) by 2022, in the absence of the KMRC, with close to one third of the borrowers being of either lower or informal income (for a Ksh 3 million dwelling). The facility would also increase the number of fixed rate mortgages and extend the term of such mortgages. In order to reach these potential targets, the facility would require Ksh 1.5 billion in equity capital (primarily from market participants and other investors); it would also require an additional tier 2 capital investment and capital to finance an interest rate buy-down program and/or direct line of credit (LOC) to SACCOs, with a combined value of US$250 million. With access to refinance over the next five years, banks could originate an additional 60,000 mortgages for a total mortgage debt outstanding of Ksh 635 billion, more than three times the value of Ksh 203 billion today. KMRC could also offer both refinancing and ‘pre-financing’ to SACCOs, reaching an additional 25,000 SACCO borrowers over a five-year period. The facility would be able to refinance only SACCO loans that are registered formal mortgages on titled properties, since KMRC bond investors would most likely accept only collateralized loans for refinance. It is estimated that there are approximately 10,000 formal mortgages totaling Ksh 40 billion at SACCOs and that with access to KMRC this number would increase to 25,000 and Ksh 81 billion over the next five years. It is important to note that many of the essential preconditions for the development of housing finance are currently present in Kenya or are under discussion and the presence of KMRC can catalyze further reforms and improve the environment for affordable housing as evidenced in other countries. 20 It is important to recognize that the initial analysis was completed in the midst of implementation of the Banking (Amendment) Act of 2016 that capped lending and deposit rates at 400 bps above and 70 percent of the base rate set and published by the Central Bank of Kenya. The analysis suggests that benefits still accrue in terms of increased mortgage volumes and lower rates, irrespective of the prevailing regulatory environment. However, considerable uncertainty remains as to how the interest rate cap, as well as the floor on deposits will impact long-term lending and the funding of long-term lending April 2017 | Edition No. 15 33 Special Focus Box B.7: The Nigeria Mortgage Refinance Company The NMRC is a private sector company with a public sector purpose of developing the primary and secondary mortgage markets by raising long-term funds from the domestic capital market as well as foreign markets and thereby provide accessible and affordable housing in Nigeria. NMRC was incorporated on 24th of June 2013 as Nigeria Mortgage Refinance Company Plc. It was developed as part of a wider Housing Finance Project supported by the World Bank through a US$300 million loan to the Federal Government of Nigeria. The program has three main components: i) development of a mortgage liquidity facility; ii) development of a housing finance guarantee product; and iii) development of housing microfinance pilot schemes. The bulk of the funding was allocated to support NMRC’s balance sheet and future growth. This was done by releasing up to US$250 million in tranches of Tier 2 equity. The release of the funds is dependent on performance and issuance of bonds. This differs from previous schemes where funding was provided as a straightforward credit line. The structure used in Nigeria allows the funds to be leveraged in the market, supports sustainable growth of the company and does not create misaligned incentives in terms of pricing of concessional funds versus cost-of-market funds. NMRC completed its first bond issue in July 2015 for an amount of NGN 8 billion (US$40 million), as part of a NGN 140 billion (US$700 million) Medium-Term Note Program. The issuance was supported with a Federal Government Guarantee in recognition of the support that a new institution will need to go to market. As NMRC establishes itself, the objective is for it to go to the bond market on its own. A key step, which NMRC has already completed in developing the market, is the creation of standard underwriting criteria. These detail the minimum quality standards that a mortgage loan must meet to be eligible for refinancing with NMRC. This effectively creates an industry minimum quality standard and helps with standardization and improved efficiency. Pension funds in Nigeria have been eager for alternative investments to Government bonds and the bond issuance was well received and over-subscribed. As the mortgage market grows, it is expected that NMRC will be the leading private issuer in the country. Box B.8: The Moroccan Guarantee Scheme for Low Income Housing Finance Created in 2004, FOGARIM primarily targets low-income households with irregular earnings. It provides guarantees covering 70 percent of losses on mortgage loans. Given the type of income, the main selection criteria are prices (limited to US$25,000) and the level of monthly installments, capped at about the equivalent to US$200 (upper income threshold) and 40 percent of the households’ income (lower threshold). Guarantees can be enforced after nine-month arrears, and once the foreclosure process has been initiated. After an initial phase where guarantees were granted for free, FOGARIM switched to a risk-linked premium system, where the amount of premiums is inversely linked to the size of the down payment. In 2009, FOGARIM was merged with another guarantee fund that targets moderate-income civil servants, middle class independent workers and non-resident Moroccans buying or building houses up to US $100,000 in value. The consolidated fund, Damane Assakane, was guaranteeing MAD 9.3 billion at the end of 2010 (US$1.2 billion), while its own funds amounted to MAD 0.95 billion. A reform of the guarantees was underway in 2011. In the “social housing” compartment, the price ceiling has been raised to US$100,000, and the maximum monthly installment to US$300. For other categories, the price ceiling should be removed but the guaranteed amount capped at US$50,000. Claim processing will be overhauled, with payment first and validity checks afterwards. 34 April 2017 | Edition No. 15 Special Focus Box B.9: Testing the Water: A PPP in Affordable Housing in Kenya In order to encourage increased private development of affordable housing the Bank is supporting a project proposed by Nakuru County Council in Naivasha in October 2016. The project consists of the public sector providing land, providing a detailed feasibility study (in the initial phases funded and managed by the Bank), and inviting private developers to build housing serving lower income groups. The units will be for sale at the commercial risk of the developer. Emphasis is being placed on preparing a feasibility study that provides highly detailed data on site conditions, available infrastructure, market demand and regulatory issues so as to minimize the risks for the private developer. Costs are being kept low (consultants costing a total of about $65,000), so as to establish a replicable methodology. Sketch designs are currently being prepared, and the RFP is scheduled to be completed by the end of March. skilled labor under short-term contracts, with the delivery of the benefit is the leverage that can be obtained, because the services being solely provided by the public authority. the subsidy only provides the affordability enhancement It is also important not to confuse PPPs with privatization, without the need to fully fund the whole mortgage loan. a situation where responsibility over the delivery of the SMART subsidies can be used to obtain maximum leverage public service is fully transferred to the private partner with and use of fiscal resources. little or no government oversight. 5.5.9. Housing Microfinance (HMF) is an adaptation 5.5.8. Housing finance subsidies can be used as an of traditional microfinance loans that target small loans incentive for low or informal income borrowers. It is for self-help housing or progressive building, including important, though, that any form of housing finance subsidy land purchase or access, provision of or improvement to is transparent and can be carefully targeted. A mortgage services, as well as full or incremental house construction, subsidy program, for instance, could operate on the basis renovation, or maintenance. Microfinance clients often of a buy down of the monthly payment, so in effect part of make the economically rational choice to use business loans the mortgage loan would be paid for by the borrower and for housing needs in response to the lack of widespread another part by the mortgage subsidy (see Box B.10). The access to housing finance. Despite having one of the most benefit of such a mechanism is that from the lenders point developed microfinance sectors in Sub-Saharan Africa, of view this is a regular mortgage loan at a regular price, so is there is only limited penetration in the Kenyan market for entirely sustainable. From the fiscal authority point of view, housing microfinance lending. Box B.10: A SMART Demand Side Subsidy Mechanism: France - The Zero Percent Housing Loan Contrary to what its name could imply, the PTZ is a direct demand subsidy that lowers borrowing costs to households meeting certain income criteria. Main features: • The PTZ is a loan. It can be extended by any credit institution that has entered an agreement with the State for that purpose • It carries a 0% interest for maturities up to 25 years that vary depending on the family income • The subsidy covers the difference between the Net Present Value of a PTZ and a housing loan at market conditions. It is allocated to the lender, initially through an up-front payment, now in the form of a tax reduction • Eligibility criteria: income ceilings, fairly high (ex. 5,000€ per month for a 3 person household), and price ceilings. Both parameters vary with the household size and the location. Additional criteria include environmental standards. Overall, a non-distortive mechanism (open to any credit institution, no impact on the lender’s interest rate policy) that aims at ensuring fixed debt servicing-to-income ratio, a better approach than lump-sums with possible negative redistribution impact. One of the issues: discrepancy between the very large potential coverage (about 2/3 of households) and the public finance capacities. April 2017 | Edition No. 15 35 Special Focus 5.5.10. HMF loans are generally unsecured, and would not produce a return through an investment into a granted to individual borrowers, rather than to groups of business. This last point is an important one as it materially borrowers (as is sometimes the case with microenterprise changes the lender’s approach to selecting customers and loans). Housing‐related microloans are on average larger assessing risk. Herein lies the greatest difficulty in adding than general microloans but seldom exceed the size of the housing microfinance to the product range of traditional lowest‐level of readily available mortgage finance products. microfinance lenders, as they do not have the skills or In certain cases, HMF products include additional financial experience necessary to underwrite longer-term loans and and non‐financial service elements, including: on occasions take collateral. • Savings schemes that establish the creditworthiness of 5.5.12. When it comes to funding HMF, institutions that a borrower prior to extension of a housing microloan are registered as banks can rely on demand deposits, and automatic re‐extension of subsequent loans; while Non-Bank Financial Institutions (NBFIs) seek • Non‐financial services such as housing‐related savings accounts. Another distinction can be made among information, design and building advice, and technical institutions offering HMF: (1) microfinance institutions that assistance for homebuilders linked to HMF; and fund themselves on strictly commercial terms at market • In certain cases, housing microlenders institute systems rates, and; (2) those that are also subsidized through and procedures to assist with procuring materials, in part various combinations of grants, donor, and government to ensure that the loan is used for housing purposes. funds. Commercial borrowing may be facilitated by credit enhancements. Subsidy funding may take the form of 5.5.11. HMF loans are also larger and for longer terms infusions of capital or funds to increase liquidity. Box B.11 than traditional microfinance loans, and the loan proceeds provides a current example of an initiative aiming to bridge Box B.11: India Lending Model for Informal Borrowers and Informal Property In May 2015, the National Housing Bank launched a “Special Urban Housing Refinance Scheme for Low Income Housing,” which, for the first time, provides refinance for “loans secured either by collateral of property financed or alternatively secured.” Until this point, most housing finance companies engaged only in mortgage-backed lending, although some innovative lenders had developed alternative security strategies such as the Self Help Group or Joint Liability Group Guarantee. However, these were being used in addition to, and not instead of, conventional property based security (albeit sometimes a quasi-mortgage). Indian law and banking regulations did not specifically prohibit housing finance operations that were not mortgage-backed, but seemed overwhelmingly to address only mortgage-backed lending, and there were no guidelines or directions relating to alternative security. This is perhaps one of the reasons for lack of innovation and expertise in alternative security in the housing finance sector. In this respect, the “Special Urban Housing Refinance Scheme for Low Income Housing” is an important first step, as it clarifies to all concerned that NHB can also cater to alternatively secured lending. Subsequent steps in this direction, which can help mainstream alternatively secured lending, could include the issuance of guidelines for alternatively secured lending. For lenders who seek to provide credit in this sector, the scheme, for the first time, also provides clarity on the building regulation requirement for informal and incremental housing in areas where formal approval systems may not be in place. Recognizing that urban low-income housing has very specific conditions and risks, the scheme provides environmental and social due diligence framework for primary lending institutions who seek refinance. The framework for environmental due diligence requires lenders to carry out technical assessments to ensure: i) housing in hazard prone locations, or in locations where it can have adverse environmental impact are avoided; ii) sites for housing have access to potable water and basic sanitation facilities (or explore options for additional funding to address these concerns); iii) screening of household occupations for hazardous or illegal trades and activities; and iv) the structural safety of the physical dwelling including compliance with safety standards and building regulations (in case of formal housing), and direct assessment of structural safety and load bearing capacity in case of informal/ incremental housing where formal approval systems are not in place. The framework for due diligence explicitly recognizes that formal building plan approval systems may not be available for potential low-income borrowers, and provides that this requirement may be replaced by technical assessment by the lender itself. Source: Arkaja Singh, adapted from Case Study of Swarna Pragati Housing Microfinance in Rural Areas, November 2015 36 April 2017 | Edition No. 15 Special Focus the gap between microfinance and mortgage finance by for a secure and transparent instrument, so efforts should providing dedicated funding resources for the purpose of be made toward drafting and implementing a legal and lending to the informal sector. regulatory framework to support the development of this market. 5.6 Regulatory Reforms for Unleashing Housing Finance Supply and Demand 5.6.5. Create a conducive environment to mobilize long- 5.6.1. Standardize mortgage contracts. Standardized term domestic capital and bridge the funding gap. Kenya’s forms and documentation have many benefits, including pension and insurance markets are well developed; with making mortgages comparable across financial institutions, over Ksh 1 trillion in long-term investment funds, there and making it easier to package these mortgages for sale in is strong demand for high quality investments such as the secondary market. An ancillary benefit of establishing mortgage-related bonds. A supportive policy framework, a Mortgage Liquidity Facility is that its operations would improved regulatory environment, reliable indices etc. are contribute to the improvement of lending practices all incentives that can be used to encourage the active in Kenya and incentivize standardization of terms and participation of institutional investors in the market. conditions among lenders. The banking sector in Kenya remains largely liquid with substantial lending headroom in the mortgage sector 5.6.2. Ensure a conducive regulatory environment before it hits liquidity constraints. Some market practitioners for housing finance products. For instance, a Mortgage estimated that banks could double their mortgage portfolio Liquidity Facility that issues bonds as infrastructure bonds through further deposit transformation. Only beyond that should not be subject to withholding tax and would be would they need to issue long-term mortgage securities effectively tax exempt. This should not, however, prevent an among pension funds or insurance companies. Even the assessment of the efficiency of the income tax exemption most active lenders do not see any urgency to issue, given of infrastructure bonds, which can deter, through resulting the currently expensive conditions through capital markets. high prices, non-taxable pension funds to buy them. Nevertheless, the matching of assets and liabilities maturity should receive more consideration by the lenders and the 5.6.3. Establish appropriate mortgage foreclosure regulators (including SACCO Societies Regulatory Authority regulations. The current Foreclosure Law process works (SASRA), charged with regulating SACCOs). Several structural relatively well in most cases, but the potential is there for challenges need to be addressed to realize the potential of long drawn out cases through the use of repeated appeals. the capital markets as a funding source over the coming The recent amendment to the mortgage law provided a years. There must also be a class of investors with the appetite legitimate increase of the protection to borrowers. It would and capacity for securities backed by mortgages (most likely be useful however to keep the balance with creditors’ rights insurance companies or pension funds). to limit possible abuses of the process by willful defaulters. 5.6.6. Enhance the role of cooperatives and SACCOs in 5.6.4. Clarify and implement the legal and regulatory affordable housing. A deeper analysis, potentially backed framework for mortgage-backed securities and covered up with a lender survey of the SACCO sector, together with bonds. The development of fixed rate options, which only the Housing Cooperative movement should explore the capital markets can hedge, would be highly beneficial for size and reach of housing finance through this channel. the market since there is a high reluctance on the demand The potential for expanding access is much larger in this side to contract long-term debt on a floating rate basis. The sector, given that the customer base is often made of Capital Markets Authority first needs to complete the legal those on lower incomes or working in the informal sector, and regulatory framework for securitization, which includes which represents the majority of Kenyans. Such a study drafting amendments for the tax neutrality of the SPV/trust should explore: i) basic size, data, and products on offer and changes to company law and insolvency law. More by SACCOs and MFIs (which do not seem to have a well- work is also needed specifically with respect to using developed offering for housing); ii) regulatory framework; clawback mechanisms to manage risk. In terms of covered iii) governance standards; iv) funding sources for longer- bonds, the appetite exists among institutional investors term credits; and v) potential linkages to affordable April 2017 | Edition No. 15 37 Special Focus housing supply solutions, for instance around the Ksh.1 b. Institutional Integration million mark. In terms of regulation, neither housing Repurpose NHC and NSSF to play more targeted roles in cooperatives nor KUSCCO are directly regulated, unlike extending its reach down market. NHC could take on a role other financial institutions. At a minimum there should as a land development agency specialized in the purchase be a common and level playing field for all operators in of land, its improvement, and its resale to developers or the housing finance sector. to end–users after sub-division in clearly titled individual plots. NHC has a comfortable equity base provided by the 5.7 Accompanying Housing Finance Reforms government (to which can be added the latent capital gains 5.7.1. Housing finance initiatives will be much more on its land banks), which is not put to use for low-income effective and yield better results if the overall housing housing today as it should. NHC could issue infrastructure and housing finance framework is operating efficiently. bonds to leverage its equity, a fairly successful instrument in Key actors will only be able to produce results if the Kenya, although probably little used for urban infrastructure. enabling environment is supportive of affordable housing The conditions of a partnership with the cooperatives that delivery models. The enabling environment covers all the buy tracks of land for their members could also be explored. processes and steps that have to be taken in the value chain. It also covers how effectively stakeholders are able The NSSF disposes of long-term funds that can be used for to interact together towards a common aim. Is the legal long-term investments. Typically, the housing investments framework appropriate? Is the cost of business acting as a made by the NSSF have been accessible only to formal deterrent? What are the bottlenecks in the system creating middle to high income earners; however, the NSSF’s law delays and adding costs? Do investors currently feel that amendment in 2013 opened the system to independent affordable housing is an opportunity with realistic long- and informal workers. An increase of NSSF contribution term returns? No single action will resolve the affordable is considered, and a small voluntary savings-for pension housing challenge, but rather a series of small progressive scheme targeting the informal sector was introduced in steps across the housing value chain, which together can 2011. A recent move by the National Treasury to permit help bring housing into the reach of a larger proportion of the NSSF to place a percentage of its assets in financial the population. institutions for onward lending could also be a means of opening up mortgages to more low-income borrowers. a. Harmonization of Government Roles NSSF members can borrow at more favorable terms and at Clearly define roles of national and county governments. less than market interest rates. With devolution, county governments have been given the responsibilities and functions for delivering public c. Legal and Regulatory Policies services at the county level, including housing delivery. The Large scale investment in the upgrading of land registries. central government still plays a role though the Ministry of There is an immediate need to align their operations with Transport, Infrastructure, Housing and Urban Development the new land laws; re-issue validated titles replacing those in terms of overall policy formulation and, in turn, the that are not recognized under the latter; and to speed up counties are responsible for implementation. However, in the correction of invalid records that deeply affect the practice, there is still insufficient clarity on who is responsible reliability and credibility of land registries today. There for what. There needs to be a clear definition of roles and are also capacity constraints that need to be addressed, responsibilities in order to advance this agenda. At the in terms of quantitative and qualitative staffing as well national level, there also needs to be better coordination and as administrative resources. The recording of large-scale enhanced communication between the National Treasury development or subdivision face bottlenecks due to and the Ministry of Transport, Infrastructure, Housing and limited processing capacity of land administration. These Urban Development. There is some level of communication upgrades need to be carried out alongside the digitization in the form of a working group, but the flow of information of records. The expectation is that the regained reliability of needs to be formalized and operationalized to eliminate registries will at once eliminate an important component of information gaps and design effective policy interventions. the current transaction costs—the intervention of several lawyers conducting due diligence checks. 38 April 2017 | Edition No. 15 Special Focus A smarter approach to the role of government is one of actively supporting the sector by creating the right environment for lenders and developers to thrive ©Karibu Homes d. Access to Serviced Land to developers which results in inefficient solutions and more Develop a PPP framework not just for housing but also for costly options. Provision of urban infrastructure could also urban land and infrastructure that will set clear rules for be addressed through PPP transactions or joint ventures the sharing of cost and profits between public and private driven by county governments. entities. It could provide a tool for capturing part of the land value appreciation to contribute to the financing Provide incentives for housing construction. This includes of infrastructure. Such a framework would be especially fast-tracking approvals for housing construction permits useful to guide the counties newly entrusted with land and possible waivers or reduction in fees and taxes management responsibilities, and contribute to build their associated with housing construction. For instance, it may capacities in this area. It would help scale up an approach be useful to offset the corporate tax when a developer has that, prior to this, has been experimental through limited to provide the trunk infrastructure for new construction. sporadic projects. Each of these policy options directly affects the overall Establish a clear and transparent pricing methodology affordability measures, whether it is by reducing overall for the land and allocation process. Given the history of construction costs, by reducing the cost of end user corruption in allocation of public land, it is necessary to financing, or by extending the term of end user financing to revamp the system and improve data and information make it more affordable. The specific recommendations are availability particularly around land management and by no means exhaustive and also do not necessarily need administration. Several policy initiatives are currently to be implemented together; however, they each touch on underway to address some of these issues, one of note is a different affordability challenge and could work in unison the National Land Information Management System (to to bring down overall costs. be established both at the national and county level) that will provide access to a range of online services from land 5.8 What Role can the Government Play? searches to online payment of fees/land rent. 5.8.1. Increasingly governments are recognizing their responsibilities with regards to providing shelter for Provide basic infrastructure and services on the land. When their citizens, beyond just political campaign pledges. infrastructure (water, transport networks, power, sanitation In the past, such pledges would have been to build an etc.) is not developed in parallel with urban expansion and extraordinary number of houses in an unrealistically short land allocation or conversion, this responsibility is transferred space of time. Inevitably those campaign pledges rarely April 2017 | Edition No. 15 39 Special Focus succeeded. A smarter approach to the role of government currently stands at just 6.68 per cent which is a promising is one of actively supporting the sector by creating the position to help bring rates down to single digits. It is only right environment for lenders and developers to thrive. then that it makes sense to do loans for over 15 years which Where needed and if fiscal space permits, government offer significantly lower monthly payment rates. intervention can also help provide for social housing in cases where the cost of shelter is too much for individual 5.8.4. A second area for government intervention is on households to bear. the overall policy environment. This can cover many things in the case of Kenya, but in particular the bottlenecks and 5.8.2. In looking at the government’s role, the target costs for housing finance and housing supply. Providing of any housing policy should be to meet the country’s access to land titles and a secure creditor rights framework present and future housing needs. This can include a for secured lending is the foundation of any mortgage range of tenure types from full market based housing, to system. Policies to facilitate provision of long term financing rental housing to social housing (rental or to own). A key instruments, such as those highlighted above, can have consideration though is the sustainability of any proposal significant leverage effects that expand lending. Other areas in terms of how government resources are allocated. of policy are also critical around urban planning, provision of There are numerous examples of misplaced government infrastructure, tax policy and housing subsidies. housing developments, failed government housing banks and ineffective housing subsidy mechanisms. Too often 5.8.5. A third area for government intervention is good intentions form government get subverted by poor to increase the efficiency of processes. Accelerating execution. Housing development is notorious for lack of mortgage registration and title transfers could have transparency, and as such needs to be done in a careful way. significant impact on the ability of developers to reach scale in affordable housing developments, and to better manage 5.8.3. The key areas where government can help in their capital and liquidity constraints. creating the right environment are first and foremost on the macro economic framework. For any form of long term 5.8.6. A fourth area where the government can finance, having low interest rates is the most effective way support housing is to work with the private sector to ensure affordability. If interested rates are low it becomes in attracting financing through catalytic financing much easier to extend lending for a longer period thereby instruments. For example, housing guarantees can provide significantly lowering the cost of housing. In Kenya, inflation comfort to private sector lenders to reach out to borrowers Providing access to land titles and a secure creditor rights framework for secured lending is the foundation of any mortgage system. ©Sarah Farhat, World Bank 40 April 2017 | Edition No. 15 Special Focus with informal incomes. MRC’s require government capital risen and the fixed monthly payment will be much more upfront, but otherwise rely on private investors and manageable and not require a subsidy. This is a prime financiers (including SACCOs) to raise capital and expand reason why interest rate subsidies with no time limit can their pool of lenders. prove very expensive for the state, and actually have very limited long term impacts. 5.8.7. Subsidizing housing can be a very good way of sharing economic benefits across society, however it is 5.8.8. In considering its role, the Government of important to have a careful design which targets right Kenya should balance its fiscal capacity with its ability to segments of the population and a subsidy which does create meaningful change in the housing sector. The best not last for whole life of mortgage loan. Because housing approach at present would seem to be to rely on markets is a long term commitment it does also need some special to provide funding while role of government is limited to subsidy design to take this into account. It is really the first improving access to land, providing basic infrastructure few years of a loan where the fixed monthly payments can and improving credit environment. Over time as the out a strain on a household’s ability to pay. A subsidy should system grows and becomes more relevant to middle and only be there where it is truly bridging an affordability gap. lower income households, some form of subsidy could be Typically, after a few years, household income will have considered, targeted at the most needy. April 2017 | Edition No. 15 41 REFERENCES Arkaja Singh, adapted from Case Study of Swarma Pragati Housing Microfinance in Rural Areas, November 2015. Centre for Affordable Housing Finance in Africa: Yearbook 2016 (7th Edition), September 2016. Central Bank of Kenya. Bank Supervision Annual Report 2015. Constantinescu, C.; Matoo, A.; and Ruta, M. 2015. The Global Trade Slowdown: Cyclical or Structural? International Monetary Fund. Working Paper, WP/15/6. East African Community (EAC). Trade Report 2014, 2013, 2008 and 2006. Arusha. Hassler, O. 2011. Housing and Real Estate Finance in Middle East and North Africa Countries. Kenya National Bureau of Statistics.2016. Economic Survey 2016. Nairobi. Kenya National Housing Survey 2012/2013. McKinsey Global Institute. A blueprint for addressing the global affordable housing challenge. October 2014. National Treasury. Budget Summary for the Fiscal Year 2017/18 and the Supporting Information. Nairobi. National Treasury. 2017. Medium Term Budget Policy Statement. November 2016. Nairobi. National Treasury. Quarterly Budget and Economic Review, various issues. Nairobi. Republic of Kenya. Kenya Meteorological Department. Review of Weather in January and the Outlook for February 2017. Ref. No. KMD/FCST/4-2017/MO/02. Viruly (2012), Tibaijuka, Anne. 2009. Building Prosperity: Housing and Economic Development. UN HABITAT. World Bank. 2016a. Kenya Urbanization Review. World Bank. 2016b. Doing Business Report. 42 April 2017 | Edition No. 15 STATISTICAL TABLES Statistical Tables Table 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 2016e GDP growth Rates (percent) 3.3 8.4 6.1 4.5 5.9 5.4 5.7 5.8 Agriculture -2.3 10.1 2.4 2.8 5.4 4.3 5.5 4.0 Industry 3.7 8.7 7.2 4.2 5.3 6.5 6.9 5.7 Manufacturing -1.1 4.5 7.2 -0.6 5.6 2.5 3.6 3.5 Services 6.2 7.3 6.1 4.7 5.4 5.8 5.5 5.3 Fiscal Framework (percent of GDP)/1 Total revenue 19.4 19.4 18.8 19.2 19.2 19.1 18.8 20.4 Total expenditure 24.0 23.5 23.7 25.1 25.6 28.2 27.1 30.0 Grants 1.0 0.5 0.4 0.5 0.5 0.5 0.4 0.4 Budget deficit (including grants) -5.8 -3.4 -4.5 -5.4 -5.9 -8.4 -7.5 -8.9 Total debt (net) 36.6 39.1 37.0 38.5 43.7 44.8 48.7 45.3 External Account (percent of GDP) Exports (fob) 12.2 13.1 13.9 12.3 10.6 10.1 9.4 9.1 Imports (cif ) 25.6 28.7 33.8 30.8 29.2 28.6 24.5 21.5 Current account balance -4.6 -5.9 -9.1 -8.3 -8.8 -9.8 -6.8 -6.0 Financial account -10.2 -8.1 -8.2 -11.0 -9.4 -11.4 -8.0 -10.9 Capital account 0.7 0.6 0.6 0.5 0.3 0.4 0.4 0.4 Overall balance -3.0 -0.4 2.1 -2.4 -0.7 -2.4 0.4 -0.2 Prices Inflation 10.5 4.1 14.0 9.6 5.7 6.9 6.6 6.3 Exchange rate (average Ksh/USD) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 101.5 Source: Kenya National Bureau of Statistics, National Treasury and Central Bank of Kenya End of FY in June (e.g 2009 = 2009/2010) 1 /Figures for 2015 are actuals for 2015/16 Table 2: GDP growth rates for Kenya and EAC 2010 2011 2012 2013 2014 2015 2016e Kenya 8.4 6.1 4.5 5.9 5.4 5.7 5.8 Uganda 5.7 9.4 3.8 3.6 5.2 5.1 4.6 Tanzania 6.4 7.9 5.1 7.3 7.0 7.0 7.4 Rwanda 7.3 7.9 8.8 4.7 7.0 6.9 6.3 Average 6.9 7.8 5.6 5.3 6.1 6.2 6.1 Source: World Bank Note: e(estimate); f(forecast) 44 April 2017 | Edition No. 15 Statistical Tables Table 3: Kenya Annual GDP GDP, 2009 constant GDP/capita, current Years GDP, current prices GDP growth prices prices Ksh Billions Ksh Billions US$ Percent 2007 2151 2766 858 6.9 2008 2483 2772 939 0.2 2009 2864 2864 943 3.3 2010 3169 3104 992 8.4 2011 3726 3294 1013 6.1 2012 4261 3444 1185 4.5 2013 4745 3647 1261 5.9 2014 5402 3842 1368 5.4 2015 6235 4062 1377 5.7 2016 7159 4299 5.8 Source: Kenya National Bureau of Statistics and World Development Indicators Note: 2016 is an estimate April 2017 | Edition No. 15 45 Statistical Tables Table 4: Sectoral contribution to GDP growth (Quarterly, Percent) Year Quarterly Agriculture Industry Services GDP Q1 0.8 0.7 2.6 4.1 Q2 0.5 1.2 2.5 4.2 2012 Q3 0.6 2.3 2.3 5.2 Q4 0.8 1.0 2.9 4.7 Q1 1.4 2.6 2.0 6.0 Q2 1.7 2.1 3.7 7.5 2013 Q3 1.1 1.7 3.7 6.5 Q4 0.7 0.1 2.8 3.5 Q1 1.1 1.7 2.4 5.2 Q2 1.1 2.2 2.8 6.0 2014 Q3 1.4 1.1 2.1 4.6 Q4 0.4 1.7 3.5 5.5 Q1 2.1 1.6 2.0 5.7 Q2 1.1 1.7 2.7 5.5 2015 Q3 0.8 2.3 2.8 5.9 Q4 0.7 1.8 3.3 5.8 Q1 1.5 1.2 3.3 6.0 Q2 1.0 1.5 3.4 5.9 2016 Q3 0.6 1.5 3.5 5.7 Q4 0.4 1.5 4.0 5.8 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Agriculture = Agriculture, forestry and fishing Industry = Mining and quarrying + Manufacturing + Electricity and water supply + Construction Services = Whole sale and retail trade + Accommodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Proffessional administration and support services +Real estate +Education + Health + Other services + FISIM + Taxes on products 46 April 2017 | Edition No. 15 Table 5: Contribution by broad sub-sectors (Quarterly, percent) Statistical Tables Service by sub sector contribution Industry by sub sector contribution Agriculture Quarterly contribution Electricity Industries Transport Financial Services to GDP Mining and Accomodation Information and Manufacturing and water Construction and Real estate and Other quarrying and restaurant communication supply storage insurance Q1 0.8 0.1 -0.1 0.2 0.7 0.9 0.2 0.5 0.4 0.4 0.0 1.0 2.4 Q2 0.5 0.2 -0.2 0.1 0.3 0.4 0.0 0.5 0.3 -0.2 0.3 2.3 3.3 2012 Q3 0.6 0.2 0.1 0.2 0.5 1.0 0.0 -0.1 0.3 -0.4 0.4 3.5 3.6 Q4 0.8 0.2 0.0 0.2 0.4 0.9 0.1 -0.1 0.3 0.5 0.6 1.6 3.0 Q1 1.4 0.2 1.0 0.1 0.4 1.7 -0.5 -0.6 0.3 0.4 0.6 2.7 3.0 Q2 1.7 -0.2 0.8 0.2 0.4 1.3 0.0 0.1 0.3 0.3 0.6 3.3 4.5 2013 Q3 1.1 0.0 0.6 0.2 0.4 1.2 0.2 0.2 0.4 0.4 0.4 2.6 4.1 Q4 0.7 -0.1 0.1 0.1 -0.1 -0.1 0.0 0.7 0.4 0.5 0.3 1.1 3.0 Q1 1.1 0.1 0.5 0.1 0.3 1.1 -0.3 0.2 0.4 0.4 0.4 2.0 3.1 Q2 1.1 0.2 0.8 0.1 0.7 1.8 -0.3 0.4 0.4 0.3 0.4 1.9 3.1 2014 Q3 1.4 0.0 0.1 0.2 0.4 0.7 -0.4 0.6 0.5 0.6 0.5 0.8 2.6 Q4 0.4 0.2 -0.3 0.2 0.9 1.0 0.0 0.3 0.4 0.7 0.6 2.0 4.2 Q1 2.1 0.1 0.3 0.2 0.6 1.2 -0.1 0.4 0.5 0.3 0.6 0.8 2.4 Q2 1.1 0.1 0.3 0.3 0.6 1.3 0.0 0.6 0.5 0.2 0.5 1.2 3.0 2015 Q3 0.8 0.2 0.5 0.2 0.8 1.7 0.0 0.7 0.6 0.2 0.7 1.1 3.4 Q4 0.7 0.1 0.4 0.1 0.7 1.3 0.1 0.4 0.7 0.3 0.5 1.7 3.7 Q1 1.5 0.1 0.2 0.2 0.5 0.9 0.1 0.6 0.8 0.4 0.5 1.2 3.6 Q2 1.0 0.1 0.6 0.2 0.4 1.3 0.1 0.6 0.8 0.3 0.5 1.3 3.5 2016 Q3 0.6 0.1 0.5 0.1 0.4 1.1 0.1 0.7 0.7 0.3 0.5 1.6 3.9 Q4 0.4 0.1 0.3 0.1 0.6 1.1 0.2 0.5 0.6 0.5 0.3 2.3 4.3 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Other = Whole sale and retail trade + Public administration + Proffessional, administration and support services + Education + Health + Other services + FISIM + Taxes on products April 2017 | Edition No. 15 47 48 Table 6: Quarterly growth rates (percent) Agriculture Industry Services GDP Year Quarter Four Quarter Four Quarter Four Quarter Four Quarter Quarter-on- Quarter-on- Quarter-on- Quarter-on- Year-on-Year Moving Year-on-Year Moving Year-on-Year Moving Year-on-Year Moving April 2017 | Edition No. 15 Quarter Quarter Quarter Quarter Average Average Average Average 1 48.9 3.5 2.6 -4.6 5.8 6.7 -1.0 4.4 5.2 7.5 4.7 5.4 2 -10.6 2.1 2.3 -1.2 2.0 4.6 -1.3 5.3 5.2 -3.5 4.3 4.8 2012 3 -22.7 2.0 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.5 4.5 4.5 4 1.3 4.1 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.6 1 52.2 6.5 3.9 -0.2 9.3 5.1 -2.4 3.3 4.4 8.6 5.8 4.9 2 -10.4 6.8 5.1 -4.2 6.0 6.0 2.8 7.7 5.1 -1.9 7.0 5.7 2013 3 -22.9 6.6 6.1 4.6 6.8 6.6 2.4 4.8 5.1 -2.6 6.3 6.1 4 -3.9 1.1 5.4 -0.4 -0.3 5.3 2.7 5.6 5.4 -0.6 3.1 5.7 1 53.8 2.2 4.1 6.7 6.5 4.7 -2.8 5.2 5.8 10.3 4.7 5.4 2 -10.4 2.1 2.8 -0.6 10.5 5.8 4.0 6.4 5.5 -0.8 5.9 5.0 2014 3 -19.3 6.8 2.9 -1.6 4.0 5.1 1.4 5.3 5.6 -3.3 5.2 4.8 4 -6.6 3.8 3.5 0.6 5.0 6.5 3.5 6.1 5.8 -0.3 5.5 5.3 1 52.5 2.9 3.7 8.2 6.6 6.5 -2.9 6.0 6.0 9.7 5.0 5.4 2 -9.5 4.0 4.2 0.2 7.4 5.8 4.2 6.3 6.0 0.1 5.9 5.4 2015 3 -18.2 5.5 4.0 -1.1 7.9 6.7 1.7 6.6 6.3 -3.2 6.0 5.6 4 -1.0 11.8 5.6 -1.4 5.7 6.9 0.3 3.3 5.5 -0.6 5.7 5.6 1 43.3 5.1 6.3 8.3 5.7 6.7 0.5 6.9 5.7 10.0 5.9 5.9 2016 2 -9.1 5.5 6.6 0.3 5.9 6.3 4.2 6.9 5.9 0.3 6.2 6.0 3 -19.4 3.9 6.3 -1.9 5.1 5.6 1.6 6.8 6.0 -3.6 5.7 5.9 Source: World Bank, based on data from Kenya National Bureau of Statistics Statistical Tables Statistical Tables Table 7: Leading Economic Indicators year-to-date growth rates (Percent) Year Month Horticulture Coffee Tea January 0.5 13.6 -0.9 February -4.6 -7.4 -6.1 March -4.7 9.1 -4.4 April -2.6 12.8 -2.2 May 0.7 6.3 -0.9 June 3.3 2.3 -0.2 2014 July 4.5 4.6 1.6 August 5.0 -0.3 1.6 September 5.0 -2.5 1.6 October 4.1 -2.9 1.7 November 3.4 -2.9 2.4 December 3.0 -3.0 2.9 January -1.8 -10.3 -7.4 February 1.7 -8.3 -16.3 March 5.4 -7.5 -27.2 April 5.0 -11.0 -30.6 May 3.3 -9.5 -26.0 June 1.6 -9.3 -22.2 2015 July 1.6 -12.5 -19.4 August 1.2 -9.3 -17.0 September 5.1 -9.7 -14.2 October 5.9 -7.0 -13.6 November 6.6 -8.5 -11.8 December 8.1 -8.1 -10.3 January 10.9 -13.9 20.8 February 9.6 0.0 43.0 March 11.3 -1.2 71.1 April 13.9 5.3 68.0 May 2.9 6.3 49.5 June 5.2 8.5 42.3 2016 July 5.0 7.5 35.1 August 6.8 5.6 31.3 September 3.4 4.3 27.2 October 3.6 0.5 23.6 November 4.8 3.3 20.8 December 0.7 3.9 18.0 Source: World Bank, based on data from Kenya National Bureau of Statistics April 2017 | Edition No. 15 49 Statistical Tables Table 8: Inflation Year Month Overall Inflation Food Inflation Energy Inflation Core Inflation January 7.2 10.1 5.5 5.4 February 6.9 9.1 5.6 5.5 March 6.3 8.3 4.7 5.4 April 6.4 8.1 5.9 5.3 May 7.3 8.9 8.1 5.6 June 7.4 8.4 9.0 5.6 2014 July 7.7 9.1 9.1 5.5 August 8.4 10.9 8.6 5.6 September 6.6 8.4 7.2 4.4 October 6.4 8.2 7.0 4.4 November 6.1 7.5 6.4 4.6 December 6.0 7.7 6.0 4.5 January 5.5 7.7 4.5 4.1 February 5.6 8.7 3.3 4.1 March 6.3 11.0 2.9 3.9 April 7.1 13.4 1.5 4.0 May 6.9 13.2 0.3 4.2 June 7.0 13.4 0.2 4.4 2015 July 6.6 12.1 0.6 4.4 August 5.8 9.9 1.1 4.3 September 6.0 9.8 1.5 4.4 October 6.7 11.3 2.0 4.4 November 7.3 12.7 2.3 4.2 December 8.0 13.3 2.9 5.1 January 7.8 12.7 2.9 5.4 February 7.1 10.8 1.7 5.4 March 6.5 9.4 2.1 5.4 April 5.3 6.8 2.0 5.2 May 5.0 6.6 1.8 4.7 June 5.8 8.9 1.4 4.5 2016 July 6.4 10.8 0.9 4.4 August 6.3 10.9 0.1 4.6 September 6.3 10.9 0.2 4.6 October 6.5 11.0 0.1 4.6 November 6.7 11.1 0.6 4.7 December 6.4 11.2 0.1 3.8 January 7.0 12.5 0.7 3.3 2017 February 9.0 16.5 3.0 3.3 March 10.3 18.6 3.3 3.3 Source: World Bank, based on data from Kenya National Bureau of Statistics 50 April 2017 | Edition No. 15 Statistical Tables Table 9: Tea production and exports Exports value Ksh Year Month Production MT Price Ksh/Kg Exports MT million January 44,970 236 38,652 8,784 February 33,774 203 33,514 7,317 March 33,336 187 37,642 7,938 April 39,975 188 37,439 7,782 May 41,186 179 36,216 7,380 June 31,945 178 39,011 7,692 2014 July 30,790 200 42,393 8,468 August 26,756 191 38,121 7,974 September 33,321 178 35,961 7,244 October 45,368 180 37,637 7,444 November 38,614 182 38,275 7,595 December 45,071 182 41,631 8,379 January 41,653 212 40,970 8,485 February 24,276 221 41,086 9,313 March 15,688 250 35,700 8,796 April 23,837 258 28,262 7,189 May 37,523 297 27,016 7,506 June 32,286 319 35,915 11,263 2015 July 30,942 344 30,623 10,146 August 28,410 330 27,687 9,481 September 36,484 327 33,528 11,413 October 41,343 333 40,246 13,538 November 40,382 313 36,714 12,126 December 46,387 309 42,779 13,768 January 50308 279 36575 11013 February 43969 253 43287 12199 March 45330 234 37571 9887 April 37571 214 39313 9517 May 36573 223 44901 10658 June 35603 243 52175 12613 2016 July 29285 246 42751 10679 August 29462 234 39673 9993 September 36785 236 33528 8454 October 41342 243 29656 7548 November 39903 273 41138 11123 December 45103 273 39396 10811 Source: World Bank, based on data from Kenya National Bureau of Statistics April 2017 | Edition No. 15 51 Statistical Tables Table 10: Coffee production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh million January 2,850 293 3,169 1,055 February 5,382 399 3,078 1,118 March 6,212 459 4,584 1,533 April 6,611 393 4,858 2,013 May 3,747 349 4,594 2,024 June 2,860 358 4,587 2,007 2014 July 1,292 315 5,425 2,383 August 3,214 381 3,313 1,474 September 3,424 404 3,944 1,722 October 2,801 423 3,618 1,645 November 1,703 410 3,718 1,747 December 2,354 414 2,551 1,192 January 2,795 412 2,844 1,307 February 4,837 489 2,884 1,339 March 5,571 378 4,290 2,025 April 3,714 310 3,948 1,901 May 2,969 289 4,383 2,236 June 0 0 4,220 2,068 2015 July 2,086 339 3,938 1,943 August 3,286 371 3,991 1,790 September 2,643 364 3,405 1,617 October 1,768 320 4,400 2,019 November 1,268 337 2,769 1,244 December 1,282 435 2,528 1,092 January 3,432 462 2,449 1,184 February 5,220 486 3,277 1,636 March 6,835 437 4,169 2,206 April 4,513 340 4,804 2,540 May 4,731 263 4,814 2,170 June 1,747 268 4,983 2,369 2016 July 568 324 3,987 1,798 August 3,723 431 3,719 1,637 September 3,284 437 3,173 1,399 October 1,573 410 3,116 1,489 November 2,374 468 3,929 1,691 December 1,666 514 2,886 1,252 Source: Kenya National Bureau of Statistics 52 April 2017 | Edition No. 15 Statistical Tables Table 11: Horticulture exports Exports value Ksh. Year Month Exports MT million January 18,494 8,376 February 19,640 7,729 March 18,834 9,741 April 20,569 6,636 May 19,858 7,533 June 18,237 6,536 2014 July 17,114 6,138 August 16,459 5,203 September 18,488 5,479 October 19,638 7,380 November 17,089 7,815 December 15,825 5,517 January 18,170 6,413 February 20,599 7,892 March 21,259 10,510 April 21,410 6,223 May 19,160 6,300 June 16,904 5,140 2015 July 17,359 8,551 August 16,175 5,824 September 25,188 8,187 October 22,179 9,905 November 19,428 8,095 December 20,179 7,399 January 20,160 10,927 February 22,335 10,151 March 24,313 11,139 April 25,931 8,611 May 10,783 7,004 June 20,157 10,293 2016 July 17,981 5,577 August 19,650 7,293 September 20,924 6,659 October 23,327 8,312 November 22,772 7,641 December 11,294 7,906 Source: Kenya National Bureau of Statistics April 2017 | Edition No. 15 53 Statistical Tables Table 12: Local electricity generation by source Hydro KWh Geo-thermal KWh Thermal KWh Year Month Total KWh million million million million January 339 179 226 747 February 270 145 257 674 March 287 171 279 737 April 308 170 240 717 May 250 191 296 737 June 263 221 246 730 2014 July 254 258 252 763 August 294 247 224 765 September 278 293 164 735 October 279 339 157 775 November 307 322 122 751 December 282 382 94 758 January 278 388 109 776 February 230 352 121 703 March 246 377 134 757 April 264 359 121 744 May 301 380 103 784 June 297 362 109 769 2015 July 305 353 143 801 August 319 378 112 808 September 306 389 99 794 October 310 402 100 812 November 300 393 89 782 December 307 387 92 786 January 322 392 93 808 February 297 392 95 784 March 335 383 112 830 April 303 394 102 800 May 334 403 92 830 June 348 342 113 803 2016 July 337 393 110 840 August 364 345 138 846 September 349 335 137 821 October 357 364 135 856 November 315 369 158 842 December 299 371 158 828 2017 January 252 380 197 830 Source: Kenya National Bureau of Statistics 54 April 2017 | Edition No. 15 Statistical Tables Table 13: Soft drinks, sugar, galvanized sheets and cement production Soft drinks Litres Galvanized sheets Year Month Sugar MT Cement MT (thousands) MT January 39,007 64,298 22,090 454,960 February 39,146 60,044 18,573 442,636 March 40,320 63,365 21,267 478,416 April 37,885 47,279 25,989 468,022 May 40,430 44,094 27,433 464,695 June 28,706 42,866 24,465 464,929 2014 July 33,790 55,912 21,779 503,428 August 33,404 50,140 25,753 492,801 September 35,899 47,915 26,126 499,479 October 41,601 42,197 26,732 553,186 November 40,134 34,455 25,763 545,041 December 49,142 64,298 18,539 492,944 January 41,348 63,227 21,304 511,298 February 41,440 57,917 20,078 465,471 March 48,865 63,389 22,797 550,556 April 42,148 46,280 20,674 537,452 May 36,874 44,081 23,132 516,513 June 36,274 46,098 20,358 516,185 2015 July 32,086 47,957 18,415 570,904 August 38,432 54,089 20,871 553,929 September 40,176 61,069 20,581 561,235 October 42,936 56,360 26,024 557,589 November 40,025 43,401 25764 510,747 December 49,966 48,089 16,938 486,306 January 50,502 64,499 21,330 533,490 February 45,237 59,863 20,102 531,813 March 58,038 65,708 20,120 541,438 April 44,429 48,802 23,109 568,253 May 43,189 45,156 21,980 585,929 June 39,191 53,797 20,180 547,238 2016 July 42,393 56,948 18,320 575,193 August 39,331 52,232 24,190 591,612 September 48,884 44,686 21,045 528,494 October 46,131 48,929 18,328 573,034 November 41,877 51,298 23,099 584,780 December 52,185 46,422 558,112 Source: Kenya National Bureau of Statistics April 2017 | Edition No. 15 55 Statistical Tables Table 14: Tourism arrivals Year Month JKIA MIA TOTAL January 75,906 19,853 95,759 February 50,270 18,334 68,604 March 76,561 15,041 91,602 April 59,357 7,293 66,650 May 54,334 3,967 58,301 June 42,549 4,758 47,307 2014 July 78,902 7,764 86,666 August 82,465 10,962 93,427 September 53,743 6,778 60,521 October 52,606 6,323 58,929 November 51,480 7,153 58,633 December 65,427 9,570 74,997 January 40,846 10,107 50,952 February 45,141 7,882 53,053 March 66,121 6,958 73,079 April 49,933 4,020 53,953 May 50,764 2,511 53,275 June 59,867 3,218 63,146 2015 July 72,515 5,728 78,243 August 63,332 7,546 70,878 September 54,162 5,114 59,276 October 66,441 6,049 72,490 November 53,622 7,718 61,340 December 50,015 9,070 59,085 January 65,431 9,407 74,838 February 62,856 9,983 72,839 March 49,996 8,551 58,547 April 51,311 3869 55,180 May 59,294 3,578 62,872 June 64,451 4,182 68,633 2016 July 81,729 7,832 89,561 August 87,141 9,817 96,958 September 67,249 8,381 75,630 October 63,229 9,015 72,244 November 61,224 7,990 69,214 December 67,602 10,267 77,869 Source: Kenya National Bureau of Statistics 56 April 2017 | Edition No. 15 Statistical Tables Table 15: New vehicle registration All body types Year Month (numbers) January 15,411 February 17,779 March 15,629 April 12,789 May 14,109 June 14,011 2014 July 16,490 August 32,401 September 24,390 October 17,214 November 17,226 December 20,608 January 15,366 February 17,409 March 25,067 April 20,730 May 22,837 June 25,070 2015 July 21,132 August 17,360 September 18,596 October 18,740 November 23,209 December 22,308 January 14,690 February 12,771 March 10,280 April 13,699 May 11,855 June 22,428 2016 July 23,442 August 18,288 September 18,527 October 13,018 November 27,286 December 27,431 Source: Kenya National Bureau of Statistics April 2017 | Edition No. 15 57 Statistical Tables Table 16: Exchange rate Year Month USD UK Pound Euro January 86.2 142.0 117.5 February 86.3 142.8 117.8 March 86.5 143.8 119.6 April 86.7 145.1 119.8 May 87.4 147.3 120.1 June 87.6 148.1 119.2 2014 July 87.8 150.0 119.0 August 88.1 147.2 117.4 September 88.8 145.0 114.7 October 89.2 143.7 113.2 November 90.0 142.0 112.3 December 90.4 141.5 111.5 January 91.4 138.5 106.3 February 91.5 140.2 103.9 March 91.7 137.5 99.4 April 93.4 139.6 100.7 May 96.4 149.1 107.5 June 97.7 152.2 109.7 2015 July 101.2 157.5 111.4 August 102.4 159.8 114.1 September 105.3 161.5 118.2 October 102.8 157.5 115.4 November 102.2 155.4 109.8 December 102.2 153.3 111.1 January 102.3 147.5 111.1 February 101.9 145.9 113.0 March 101.5 144.2 112.6 April 101.2 144.8 114.8 May 100.7 146.3 114.0 June 101.1 144.3 113.7 2016 July 101.3 133.4 112.1 August 101.4 132.9 113.7 September 101.3 133.2 113.5 October 101.3 125.4 111.9 November 101.7 126.3 110.0 December 102.1 127.7 107.7 January 103.7 128.0 110.2 2017 February 103.6 129.5 130.4 Source: Central Bank of Kenya 58 April 2017 | Edition No. 15 Table 17: Interest rates Short-term Long-term Year Month Average deposit Overall weigheted Interest rate Interbank 91-Treasury Bill Central Bank Rate Savings rate lending rate spread January 10.6 9.3 8.5 6.6 1.6 17.0 10.5 February 9.1 9.2 8.5 6.6 1.5 17.1 10.5 Statistical Tables March 6.6 9.0 8.5 6.6 1.6 16.9 10.3 April 7.6 8.8 8.5 6.5 1.5 16.7 10.2 May 7.8 8.8 8.5 6.4 1.5 17.0 10.6 June 6.9 9.8 8.5 6.6 1.5 16.4 9.8 2014 July 8.0 9.8 8.5 6.6 1.3 16.9 10.3 August 11.7 8.3 8.5 6.5 1.5 16.3 9.8 September 7.4 8.4 8.5 6.6 1.5 16.0 9.4 October 6.8 8.7 8.5 6.6 1.6 16.0 9.4 November 6.9 8.6 8.5 6.7 1.5 15.9 9.2 December 6.9 8.6 8.5 6.8 1.9 16.0 9.2 January 7.2 8.6 8.5 6.7 1.6 15.9 9.3 February 6.9 8.6 8.5 6.7 1.5 15.5 8.8 March 6.8 8.5 8.5 6.6 1.5 15.5 8.8 April 8.9 8.4 8.5 6.6 1.9 15.4 8.8 May 11.1 8.3 8.5 6.6 1.5 15.3 8.7 June 11.9 8.3 10.0 6.6 1.9 16.1 9.4 2015 July 13.4 10.6 11.5 6.3 1.4 15.8 9.4 August 18.6 11.5 11.5 6.9 1.5 15.7 8.8 September 21.3 14.0 11.5 7.3 1.7 16.8 9.5 October 15.3 21.0 11.5 7.5 1.7 16.6 9.0 November 8.9 12.3 11.5 7.4 1.3 17.2 9.8 December 5.3 9.7 11.5 8.0 1.6 18.3 10.3 January 6.4 11.2 11.5 7.6 1.6 18.0 10.4 February 4.5 10.6 11.5 7.5 1.4 17.9 10.4 March 4.0 8.7 11.5 7.2 1.4 17.9 10.7 April 3.9 8.9 11.5 6.9 1.5 18.0 11.2 May 3.6 8.2 10.5 6.4 1.6 18.2 11.8 June 4.9 7.3 10.5 6.8 1.6 18.2 11.4 2016 April 2017 | Edition No. 15 July 5.5 7.4 10.5 6.6 1.7 18.1 11.5 August 5.0 8.5 10.0 6.4 1.7 17.7 11.2 59 September 4.9 8.1 10.0 6.9 3.8 13.9 6.9 October 4.1 7.8 10.0 7.8 6.1 13.7 5.8 November 5.1 8.2 10.0 7.7 6.1 14.3 6.7 December 5.9 8.4 10.0 7.3 6.4 13.7 6.4 Source: Central Bank of Kenya Statistical Tables Table 18: Money aggregate Growth rates Money supply, Money supply, Money supply, Year Reserve money (yoy) M1 M2 M3 January 19.9 16.7 17.1 10.3 February 20.3 17.8 16.2 9.9 March 20.4 19.0 17.3 7.7 April 16.9 16.1 16.6 17.7 May 19.9 18.4 17.8 11.9 June 21.3 18.8 18.2 12.6 2014 July 18.9 18.8 19.3 7.3 August 21.0 20.0 21.8 15.2 September 12.6 17.1 19.4 11.2 October 12.9 18.4 18.9 13.5 November 13.5 17.8 17.5 9.3 December 13.2 18.6 16.7 18.5 January 11.4 17.0 16.0 15.8 February 10.0 17.2 18.6 11.5 March 11.9 16.4 16.4 11.8 April 13.4 17.2 17.3 12.0 May 10.0 14.8 16.5 15.0 June 9.6 16.4 18.6 14.9 2015 July 13.0 16.0 16.4 25.8 August 10.5 14.3 14.0 2.9 September 8.5 12.7 13.5 16.7 October 10.8 13.6 13.6 24.5 November 7.9 11.6 13.0 13.0 December 8.5 12.4 13.7 3.3 January 11.6 11.0 11.3 9.1 February 10.7 10.2 9.5 9.2 March 10.9 10.5 11.0 16.1 April 10.0 8.1 7.9 9.0 May 12.4 9.5 8.3 7.6 June 13.0 8.9 7.9 4.9 2016 July 8.9 7.2 6.4 4.3 August 9.6 6.6 6.6 6.8 September 26.2 8.8 8.1 4.3 October 25.4 7.2 7.1 -7.4 November 26.7 6.9 6.7 0.5 December 28.9 5.2 3.9 4.8 Source: Central Bank of Kenya 60 April 2017 | Edition No. 15 Statistical Tables Table 19: Mobile payments Number of Number of Value of Year Month Number of Agents customers transactions transactions (Millions) (Millions) (Billions) January 114,107 25.8 67.1 178.5 February 115,015 26.1 65.6 172.8 March 116,196 26.2 74.0 192.7 April 116,581 26.1 72.1 186.7 May 117,807 25.8 74.5 198.1 June 120,781 25.9 74.0 189.9 2014 July 122,462 26.2 77.5 201.0 August 124,708 26.3 78.9 206.7 September 124,179 26.3 78.2 206.3 October 128,706 26.0 82.9 210.3 November 121,419 24.9 81.0 203.2 December 123,703 25.2 85.6 225.5 January 125,826 25.4 81.7 210.5 February 127,187 25.5 80.7 208.1 March 128,591 25.7 90.3 231.8 April 129,218 26.1 84.9 213.7 May 129,735 26.5 89.9 230.2 June 131,761 26.5 90.7 227.9 2015 July 133,989 26.7 94.0 238.9 August 136,042 27.0 94.1 248.2 September 138,131 27.3 96.3 247.5 October 140,612 27.5 102.8 255.8 November 142,386 28.1 101.3 236.4 December 143,946 28.6 107.4 267.1 January 146,710 29.1 108.1 243.4 February 148,982 29.5 114.1 257.2 March 150,987 30.7 121.7 273.6 April 153,762 31.4 120.2 269.8 May 156,349 31.3 122.6 277.9 June 162,465 31.4 121.8 271.0 2016 July 167,072 32.3 127.0 281.9 August 173,774 32.8 131.5 296.9 September 173,731 33.4 130.7 283.9 October 181,456 34.0 141.4 292.1 November 162,441 34.3 140.8 291.2 December 165,908 35.0 146.2 316.8 Source: Central Bank of Kenya April 2017 | Edition No. 15 61 Statistical Tables Table 20: Nairobi Securities Exchange (NSE20 Share Index) NSE 20 Share Year Month Index January 4,856 February 4,933 March 4,946 April 4,949 May 4,882 June 4,885 2014 July 4,906 August 5,139 September 5,256 October 5,195 November 5,156 December 5,113 January 5,212 February 5,491 March 5,248 April 5,091 May 4,787 June 4,906 2015 July 4,405 August 4,177 September 4,174 October 3,869 November 4,016 December 4,041 January 3,773 February 3,862 March 3,982 April 4,009 May 3,828 June 3,641 2016 July 3,489 August 3,179 September 3,243 October 3,229 November 3,247 December 3,186 January 2,794 2017 February 2,995 Source: Financial Times 62 April 2017 | Edition No. 15 Statistical Tables Table 21: Central Bank Rate and Treasury Bills Year Month Central Bank Rate 91-Treasury Bill 182-Treasury Bill 364-Treasury Bill January 8.5 9.3 10.4 10.6 February 8.5 9.2 10.4 10.7 March 8.5 9.0 10.3 10.5 April 8.5 8.8 10.1 10.2 May 8.5 8.8 9.9 10.1 June 8.5 9.8 10.1 10.5 2014 July 8.5 9.8 10.4 11.0 August 8.5 8.3 10.0 10.3 September 8.5 8.4 9.4 10.3 October 8.5 8.7 8.8 10.3 November 8.5 8.6 8.9 10.2 December 8.5 8.6 9.2 10.4 January 8.5 8.6 9.6 12.1 February 8.5 8.6 10.0 11.0 March 8.5 8.5 10.3 10.7 April 8.5 8.4 10.3 10.6 May 8.5 8.3 10.3 10.7 June 10 8.3 10.4 11.0 2015 July 11.5 10.6 11.0 11.6 August 11.5 11.5 11.5 13.3 September 11.5 14.0 12.5 15.2 October 11.5 21.0 15.7 21.5 November 11.5 12.3 16.3 15.2 December 11.5 9.7 15.7 12.5 January 11.5 11.2 13.0 14.1 February 11.5 10.6 12.8 13.7 March 11.5 8.7 12.6 12.3 April 11.5 8.9 11.7 11.8 May 10.5 8.2 10.7 11.6 June 10.5 7.3 10.2 10.8 2016 July 10.5 7.4 9.9 10.9 August 10.0 8.5 10.8 11.7 September 10.0 8.1 10.8 11.0 October 10.0 7.8 10.3 10.4 November 10.0 8.2 10.3 10.8 December 10.0 8.4 10.5 10.6 2017 January 10.0 11.0 10.5 11.0 Source: Central Bank of Kenya April 2017 | Edition No. 15 63 Statistical Tables Table 22: Nominal & Real Effective and USD Exchange Rates (Index January 2016 = 100) Year Month NEER REER USD January 92.3 103.9 84.3 February 92.3 103.8 84.3 March 92.8 104.6 84.5 April 93.1 104.4 84.8 May 93.9 104.5 85.4 June 93.8 104.4 85.6 2014 July 94.0 104.3 85.8 August 93.8 103.2 86.1 September 93.7 102.9 86.8 October 93.5 103.2 87.2 November 93.5 102.9 87.9 December 93.3 101.7 88.4 January 93.0 99.6 89.3 February 92.7 99.2 89.4 March 91.8 97.8 89.7 April 93.4 99.2 91.3 May 97.0 101.3 94.2 June 98.1 102.4 95.5 2015 July 101.2 105.7 98.9 August 102.1 106.2 100.1 September 104.8 108.3 102.9 October 102.4 105.8 100.5 November 100.7 103.4 99.9 December 100.5 101.9 99.9 January 100.0 100.0 100.0 February 100.1 100.5 99.6 March 100.0 100.3 99.2 April 100.6 100.7 98.9 May 99.9 99.7 98.5 June 100.2 99.5 98.9 2016 July 99.7 98.5 99.0 August 100.3 99.1 99.1 September 100.3 99.8 99.0 October 99.3 98.9 99.0 November 99.0 98.6 99.4 December 98.5 98.8 99.8 2017 January 100.2 100.1 101.4 Source: World Bank, based on data from Central Bank of Kenya 64 April 2017 | Edition No. 15 Statistical Tables Table 23: National Fiscal Position Actual (percent of GDP) 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 * 2016/17 Revenue and Grants 19.7 18.9 20.6 19.8 19.2 19.8 19.7 19.6 19.2 20.9 Total Revenue 18.6 18.2 19.6 19.3 18.8 19.3 19.2 19.1 18.8 20.4 Tax revenue 15.7 15.6 16.0 16.1 15.5 15.6 16.8 16.6 16.3 17.1 Income tax 6.8 6.9 7.2 7.5 7.8 8.3 8.9 8.8 8.6 8.9 VAT 4.8 4.7 4.9 5.0 4.4 4.1 4.6 4.5 4.4 4.6 Import Duty 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 1.2 1.2 Excise Duty 2.7 2.6 2.5 2.3 2.0 1.9 2.0 2.0 2.1 2.4 Other Revenues 1.4 1.4 2.0 1.5 1.6 1.7 1.3 1.2 1.3 1.4 Railway Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.3 Appropriation in Aid 1.5 1.2 1.6 1.7 1.7 2.0 1.1 1.0 0.9 1.7 Grants 1.1 0.7 1.0 0.5 0.4 0.5 0.5 0.5 0.4 0.4 Expenditure and Net 23.1 22.3 24.0 23.5 23.7 25.1 25.6 28.2 27.1 30.0 Lending Recurrent 17.4 16.3 16.9 17.2 16.3 18.1 15.5 15.4 15.6 16.0 Wages and salaries 6.3 5.8 5.7 5.8 5.5 6.1 5.5 5.1 4.7 4.9 Interest Payments 2.1 1.9 2.1 2.2 2.1 2.7 2.7 3.0 3.3 3.1 Other recurrent 9.0 8.6 9.1 9.2 8.7 9.3 7.3 7.3 7.6 8.0 Development and net 5.7 6.0 7.1 6.4 7.4 6.8 6.3 8.8 7.4 9.8 lending County allocation 0.0 0.0 0.0 0.0 0.0 0.2 3.8 3.9 4.0 3.8 Contigecies 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 Parliamentary Service 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.4 0.3 Judicial Service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 Fiscal balance Deficit excluding grants -4.4 -4.0 -4.6 -4.2 -4.9 -5.8 -6.4 -9.2 -8.3 -7.4 (commitment basis) Deficit including grants -3.3 -3.4 -3.6 -3.6 -4.5 -5.4 -5.9 -8.7 -7.9 -7.0 (commitment basis) Deficit including grants 0.3 -4.4 -5.8 -3.4 -4.5 -5.4 -5.9 -8.4 -7.5 -8.9 (cash basis) Financing Foreign Financing 0.3 1.5 0.8 0.8 2.8 1.9 2.1 3.7 4.1 3.9 Domestic Financing -0.6 2.8 5.0 2.7 1.6 3.8 4.0 4.3 3.1 3.1 Total Public Debt (net) 33.4 35.4 36.6 39.1 37.0 38.5 43.7 44.8 48.7 45.3 External Debt 19.1 20.0 18.9 21.0 19.6 18.7 22.2 24.5 27.4 24.1 Domestic Debt (net) 14.3 15.4 17.7 18.1 17.4 19.8 21.5 20.3 21.4 21.2 Memo: GDP (Calender year 2,483 2,864 3,169 3,726 4,261 4,745 5,398 6,224 current market prices, Ksh billion GDP (Fiscal year current 2,317 2,673 3,017 3,448 3,994 4,503 5,072 5,811 6,586 7,435 market prices, Ksh billion) Source: Quarterly Budget and Economic Review (various issues, the Budgetry Summary for the fiscal year 2017/18 and the supporting information, (February 2017): National Treasury Note: *indicate Preliminary results April 2017 | Edition No. 15 65 Table 24: 12-months cumulative balance of payments BPM6 Concept (US$ million) Actual (percent of GDP) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 66 A. Current Account, n.i.e. -505 -796 -1,821 -1,713 -2,371 -3,821 -4,205 -4,838 -5,998 -4,322 -3,817 Merchandise A/C -3,243 -4,222 -5,593 -4,952 -6,216 -8,355 -9,315 -10,243 -11,319 -9,577 -7,861 Goods: exports f.o.b. 3,509 4,153 5,067 4,526 5,248 5,834 6,212 5,846 6,219 5,985 5,761 Goods: imports f.o.b. 6,752 8,375 10,659 9,479 11,464 14,189 15527 16,089 17,538 15,563 13,622 Oil 1,745 1,919 3,051 2,192 2,673 4,082 4,081 3,838 4,026 2,500 2,087 Services 1,013 1,263 1,377 1,084 1,744 1,994 2,602 2,926 2,405 2,329 1,260 April 2017 | Edition No. 15 Services: credit 2,431 2,938 3,260 2,904 3,789 4,131 4,990 5,130 5,066 4,496 4,046 Services: debit 1,418 1,675 1,883 1,820 2,045 2,138 2,387 2,204 2,662 2,167 2,786 Income 1,725 2,162 2,395 2,156 2,101 2,540 2,507 2,479 2889 2,795 2,538 B. Capital Account, n.i.e. 168 157 94 261 240 235 235 158 275 257 237 C. Financial Account, n.i.e. -677 -2,247 -1,423 -3,782 -3,252 -3,425 -5,542 -5,183 -7,008 -5,070 -6,906 Foreign Direct Investments -27 -1,001 -384 -1452 -1,117 -1,364 -1,142 -920 -1,045 -1,088 -194 Private Investments (Medium and Long-term) 21 16 25 -81 -156 1 -218 -273 -3,716 156 -447 Official Investments (Medium and Long-Term) -671 -1,262 -1,064 -2,249 -1,979 -2,062 -4,182 -3,990 -2,248 -4,139 -6,265 D. Net Errors and Omissions 235 -805 -189 -1,215 -947 -734 -348 -134 168 -1,260 -3,197 E. Overall Balance -575 -802 493 -1115 -174 896 -1223 -369 -1453 255 -129 F. Reserves and Related Items 575 802 -493 1115 174 -896 1223 369 1453 -255 129 Reserve assets 618 941 -480 1322 154 246 1455 859 1333 -361 38 Credit and loans from the IMF -6 116 -17 199 -34 284 193 177 -119 -107 -91 Exceptional financing 48 23 30 8 13 858 38 312 0 0 0 Gross Reserves (USD Million) 3,331 4,557 4,641 5,064 5,123 6,045 7,160 8,483 9,738 9,794 9,588 Official 2,415 3,355 2,875 3,847 4,002 4,248 5,702 6,560 7,895 7,534 7,573 Commercial Banks 916 1,202 1,765 1,217 1,121 1,797 1,458 1,923 1,843 2,259 2,015 Import cover (calender year) 3.5 4.0 2.8 4.1 3.6 3.1 3.8 4.3 4.7 5.1 5.3 Imports cover (36 months import) 3.9 4.4 3.1 3.9 3.9 3.4 4.0 4.3 4.9 4.8 Memo: Annual GDP at Current prices (USD Million) 25,826 31,958 35,895 37,022 40,000 41,953 50,411 55,101 61,395 63,398 Statistical Tables Source: Central Bank of Kenya Table 25: Kenya’s public and publicly guaranteed debt, June 2014 to September 2016 KShs. Millions 14-Jun 14-Sep 14-Dec 15-Mar 15-Jun 15-Sep 15-Dec 16-Mar 16-Jun Sept16* TOTAL PUBLIC DEBT (Net) 2217315 2103447 2275952 2394450 2601430 2723629 2844003 2938292 3217831 3133916 Statistical Tables Lending -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 -5701 Government Deposits -199815 -239554 -298879 -275083 -236565 -208869 -305496 -320041 -394856 -426911 Total Public Debt (Gross) 2422831 2348702 2580532 2675234 2843696 2938199 3155200 3264034 3618388 3566528 External Debt 1138504 1087828 1272583 1278108 1423253 1550233 1615183 1617506 1803255 1711973 Bilateral 289914 278547 389083 384607 445057 482203 481282 478883 539181 540589 Multilateral 597340 608022 612353 618456 684631 754599 751154 762089 812270 719292 Commercial Banks 234799 185163 255188 259746 276937 295642 366231 360175 442598 442886 Suppliers Credit 16451 16096 15959 15298 16628 17788 16516 16359 9206 9206 Domestic Debt 1284327 1260874 1307949 1397126 1420443 1387966 1540017 1646528 1815133 1854555 Central Bank 65700 63580 58286 64835 63335 107637 101386 102648 99856 58945 Commercial Banks 617221 601426 649940 715011 730419 682694 764399 829688 927307 969790 Non Banks & Nonresidents 601406 595868 599723 617280 626689 597635 674232 714192 787970 825820 (%) of Total public debt(gross) External Debt 47.0 46.3 49.3 47.8 50.0 52.8 51.2 49.6 49.8 48.0 Domestic Debt 53.0 53.7 50.7 52.2 50.0 47.2 48.8 50.4 50.2 52.0 % of External debt Bilateral 25.5 25.6 30.6 30.1 31.3 31.1 29.8 29.6 29.9 31.6 Multilateral 52.5 55.9 48.1 48.4 48.1 48.7 46.5 47.1 45.0 42.0 Commercial Bank & Supplier Credit 22.1 18.5 21.3 21.5 20.6 20.2 23.7 23.3 25.1 26.4 Commercial Banks 20.6 17.0 20.1 20.3 19.5 19.1 22.7 22.3 24.5 25.9 Suppliers Credit 1.4 1.5 1.3 1.2 1.2 1.1 1.0 1.0 0.5 0.5 % of Domestic debt April 2017 | Edition No. 15 Central Bank 5.1 5.0 4.5 4.6 4.5 7.8 6.6 6.2 5.5 3.2 67 Commercial Banks 48.1 47.7 49.7 51.2 51.4 49.2 49.6 50.4 51.1 52.3 Non Banks & Nonresidents 46.8 47.3 45.9 44.2 44.1 43.1 43.8 43.4 43.4 44.5 Source: National Treasury (Quarterly Economic Budgetary Review, November 2016) Note: *Provisional Statistical Tables Table 26: Growth outlook Annual growth (percent) 2014 2015 2016e 2017f 2018f 2019f BASELINE GDP Revised projections 5.4 5.7 5.8 5.5 5.8 6.1 Previous projections (KEU 14) 5.3 5.6 5.9 6.0 6.1 Previous projections (KEU 13) 5.3 5.6 5.9 6.1 6.2 Private consumption 4.3 5.1 4.8 5.7 5.8 5.9 Government consumption 1.7 13.0 7.0 1.5 1.1 0.8 Gross fixed capital investment 14.2 6.7 -9.3 7.8 9.4 10.8 Exports, goods and services 5.8 6.2 0.6 4.0 4.3 4.8 Imports, good and services 10.4 1.2 -4.7 4.5 5.1 5.7 Agriculture 3.5 5.6 5.6 5.4 5.4 5.4 Industry 6.5 6.9 5.7 5.7 5.6 5.6 Services 5.7 5.4 5.3 5.5 6.0 6.6 Inflation (Consumer Price Index) 6.9 6.6 6.5 8.0 6.8 6.5 Current account balance (% of GDP) -10.3 -6.8 -6.0 -6.4 -7.2 -8.0 Fiscal balance (% of GDP) -8.4 -7.5 -8.5 -6.7 -5.4 -4.4 Debt (% of GDP) 49.0 47.9 48.3 48.0 47.2 46.0 Primary Balance (% of GDP) -5.8 -5.0 -6.1 -4.3 -2.6 -2.0 Source: World Bank Note: e (estimate); f (forecast) 68 April 2017 | Edition No. 15 Table 27: Credit to private sector Total private Building and Transport and Finance and Mining and Private Consumer Business Year Month sector annual Agriculture Manufacturing Trade Real estate Other activities construction communication insurance quarrying households durables services growth rates January 20.5 -1.1 12.8 18.6 0.1 23.1 -13.6 23.3 -16.3 35.6 20.2 50.1 24.6 February 21.5 3.4 16.8 20.2 5.4 31.2 12.1 24 -14 30.9 20.4 48.1 15.1 Statistical Tables March 22.7 7.7 17.3 25.2 2 44.8 39 28.4 -8.6 44 22.5 45.5 -14.6 April 23.9 16.1 22.8 24.5 4.4 45.4 31.2 33.2 5.9 35.2 21.8 51 -15.5 May 25 16.7 28.5 25.4 10.7 50.1 26.5 31.6 9.2 24.7 22 44 -3.4 June 25.8 17.9 31.7 24.4 15.1 44.3 31.2 27.5 30.7 28.3 20.6 38.2 3 2014 July 25.5 18.8 27.5 25.9 9.4 42.3 37.8 30.8 24.3 30.2 20.3 36.5 1.8 August 24.5 20.9 27 25.1 10.8 46.1 42.6 29.4 19.6 27.8 18.4 31.7 -0.2 September 24.5 30.8 35.2 20.7 11.8 43.8 40.4 36.5 -0.5 23.8 16.4 44.1 -12.3 October 23.6 36.8 32.7 18.7 10.3 45.4 75.1 35.7 3.5 38 11.4 27.5 -24.8 November 22.2 32.1 29.8 19.7 11.3 45.2 66.9 31.6 1.9 38.9 12.4 28.9 -29.9 December 22.2 27.9 30.7 21.2 13.6 45.6 68.4 32.4 -15.8 39.1 18.7 25 -32.3 January 21.8 25.2 30.1 19.8 17.6 43 76.1 33.4 -3.8 35.2 14.2 24.8 -31.3 February 20.7 24.7 27.5 21.5 11.6 38.6 79.6 29.1 -16.2 38.7 15.3 19.3 -31.4 March 19.6 22.3 21.1 18.8 12.7 31.3 47.5 19.6 -20.1 28 12.4 27.8 -8.9 April 19.9 20.8 21.6 23.6 12.6 32.3 49.2 17.7 -17.1 29.5 13.1 19.7 -8.9 May 20.9 20.5 25.8 23 14.5 27 50.8 21.3 -13.7 31.5 11.6 16.4 -3.9 June 20.5 24 20 25.9 15.5 33.8 43.3 19.4 -22.1 31.2 21.6 15.8 -11.1 2015 July 21.2 28.5 22.3 26.7 19.8 33.4 46.8 15.5 -17.9 28.6 21.5 25.3 -12.6 August 21 28.7 25.3 25.9 22.1 30 50.5 15 -18 28.5 21 22.5 -14.2 September 20.8 21.4 19.3 29.7 27.9 29 45.7 12.5 -5.4 26.6 19 15.9 -0.9 October 19.5 17.2 20.2 23.6 37.6 32.1 26.4 9.8 -15.5 18.2 18 24.1 8.6 November 18.7 12.5 20.8 22.2 34 32.3 28.5 10.6 -22.8 16.7 15.3 19.3 14.6 December 18 14.1 16.2 21.3 30.7 26.5 0 6.2 -11.3 9.1 14.3 63.5 -1 January 16.8 27.3 19.3 11.7 28.4 39.1 65.2 15.9 -9.3 9.3 39.9 -5.0 2.0 February 16.0 31.7 22.0 9.2 23.6 36.3 61.7 17.3 1.7 6.7 36.8 -3.5 -3.1 March 15.5 26.8 24.1 6.8 26.3 30.7 64.9 22.5 12.5 5.0 37.6 -5.0 -7.1 April 13.5 23.5 18.3 7.0 26.2 28.5 70.2 23.5 5.3 5.0 35.0 -13.3 -11.8 May 11.1 28.3 15.1 -2.1 19.3 25.5 58.7 17.7 3.2 5.1 9.3 1.6 3.5 June 9.0 21.0 16.1 -1.3 15.9 22.8 59.4 20.2 -1.6 0.1 24.5 -13.7 -8.3 2016 July 7.1 12.0 15.3 -1.6 12.8 21.4 65.2 17.0 -4.5 -2.4 24.2 -16.7 -10.0 August 5.4 5.8 2.2 0.7 11.2 26.3 48.7 18.3 -32.8 1.5 30.4 -25.1 -12.8 April 2017 | Edition No. 15 September 4.8 1.2 -2.0 20.3 1.3 13.1 9.1 8.7 -33.7 7.8 30.1 -15.9 -29.6 69 October 4.7 1.5 -4.3 18.0 -4.9 14.3 7.9 9.2 -36.4 7.3 32.9 -9.2 -27.0 November 4.6 6.2 -4.0 24.3 -5.3 11.4 6.6 8.8 -21.3 7.8 37.1 -18.7 -33.0 December 4.3 4.2 -7.0 22.3 -3.9 5.5 8.2 8.9 -19.1 9.0 31.6 -18.5 -22.5 Source: Central Bank of Kenya Kenya is at a critical juncture as it transitions from the completion of the Second Medium Term Plan (MTP-II, 2013-2017) to MTP-III (2018-2022), which is currently under preparation. The report has four main messages. First, Kenya’s economic growth continued to outperform its peers in 2016. In contrast to the slump in economic growth in Sub Saharan Africa to 1.5 percent (a three decade low), growth in Kenya accelerated for the third consecutive year reaching 5.8 percent. Kenya’s robust growth performance was supported by lower oil prices, favorable agriculture output in the rst half of 2016, a tourism sector rebound, strong inward remittances, a relatively stable macroeconomic environment and improvements in the steady easing of certain supply-side constraints due to earlier public investments. Secondly, due to emerging headwinds, economic activity in Kenya will encounter some speed bumps in the near to medium term which will likely impact MTP-II implementation and should inform the scope of the MTP-III. These headwinds include, the ongoing drought, depressed private sector credit growth, the rise in oil prices, and scal pressures. However, the completion of phase one of Standard Gauge Railway and a projected strengthening of the global economy is expected to provide some tailwind. The net e ect of these changes in the economic landscape will likely cause near term growth to moderate to 5.5 percent in 2017 before picking up to 6.1 percent by 2019 as headwinds (e.g. drought) subside. Third, sustaining Kenya’s robust growth will require safeguarding its hard earned macroeconomic stability by continuing to implement prudent scal and monetary policies. The consolidation of the scal stance in line with the Medium Term Fiscal Framework should help anchor macroeconomic stability and create the scal space for a public investment drive supportive of the medium term plans. Further, given the systemic importance of the banking sector, addressing the unintended consequences of the interest rate caps should help strengthen nancial intermediation in the Kenyan economy. Finally, while Kenya’s growth has been robust, there are latent opportunities to accelerate growth to levels necessary to achieve Vision 2030. This report identi es some of these growth and job-creation opportunities as well as the need to address a critical social need by supporting the development of the housing market for lower income households in Kenya. On the demand side, a key constraint to housing is nance. The report addresses policy measures that can be taken to alleviate the housing nance problem, including those that have worked well in other middle income countries. The World Bank remains committed to working with key Kenyan stakeholders to identify potential policy and structural issues that will enhance economic growth and keep Kenya on the path to upper middle income status in accordance with the aspirations of Vision 2030. The semi-annual Kenya Economic Update o ers a forum to discuss these development trends. We hope that you too will join us in debating topical policy issues that can contribute to fostering growth, shared prosperity and poverty reduction in Kenya. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @Worldbankkenya Nairobi, Kenya #KenyaEconomicUpdate Telephone: +254 20 2936000 Fax: +254 20 2936382 http://www.worldbank.org/en/country/kenya Produced by Macroeconomic & Fiscal Management, Finance & Markets, Social Urban, Rural & Resilience and Poverty & Equity Global Practice