63265 June 2011 | Edi on No. 4 Turning the Tide in Turbulent Times Making the most of Kenya’s demographic change and rapid urbaniza on Poverty Reduc on and Economic Management Unit Africa Region TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS i FOREWORD ii ACKNOWLEDGEMENT iii EXECUTIVE SUMMARY iv THE STATE OF KENYA’S ECONOMY 1 1. Naviga ng the 2011 Economic Storm 2 2. S ll at The Tipping Point? Outlook for 2011 and Beyond 11 3. New Products and New Markets 13 MAKING THE MOST OF KENYA’S DEMOGRAPHIC CHANGE AND RAPID URBANIZATION 17 4. Demographic Change: More People, Living Longer 18 5. Geographic Change: From Rural to Urban 20 6. Devolu on: From Central to Local 27 ANNEXES 32 Annex 1: Impact of Exchange Rate Changes on Kenya’s Domes c Oil Prices 33 Annex 2: Analyzing Kenya’s Export Diversity 34 Annex 3: What is Rural and What is Urban? 35 Annex 4: Data Tables and Figures 37 LIST OF TABLES Table 1: S ll at the pping point? Growth scenarios for 2011 and beyond 11 Table 2: Kenya’s key macroeconomic indicators 12 Table 3: Fer lity rates in Kenya: A rural – urban divide 19 Table 4: Kenya’s rapidly growing towns 24 LIST OF FIGURES Figure 1: Kenya outperformed Sub-Saharan Africa in five of the last six years v Figure 2: Kenya can s ll become a Middle Income Country within this decade vii Figure 3: By 2033, most Kenyans will live in ci es viii Figure 4: A strong performance in 2010; growth has been balanced across sectors and quarters 3 Figure 5: Naviga ng an economic storm in 2011 - infla on rises and stock market declines 3 Figure 6: Global oil prices are s ll below the 2008 peak – but Kenya’s prices are at their highest level ever 4 Figure 7: Monetary ghtening has began, as the shilling has weakened 6 Figure 8: Credit growth to the private sector has recovered - real estate & household sectors benefi ed most 7 Figure 9: The fiscal s mulus led to higher development spending - financed through domes c borrowing 8 Figure 10: With higher growth Kenya can afford higher deficits and s ll reach its debt targets 8 Figure 11: Kenya’s exports are weak - the current account deficit widened and the overall balance shrunk 10 Figure 12: Oil, machinery & transport equipment are driving Kenya’s exports 10 Figure 13: Rising oil prices have a nega ve impact on Kenya’s external posi on 11 Figure 14: In 2011, the economy is expected to grow at 4.8 % but, with shocks, could moderate to 4.2 % 13 Figure 15: Kenya’s main exports remain tea, hor culture, and tourism - which make it vulnerable to external shocks 14 Figure 16: New markets - Africa overtakes Europe 14 Figure 17: The transforma on of Kenya’s tea exports - UK has been overtaken by Pakistan and Egypt 15 Figure 18: Tex les, chemicals, and machines have the highest export poten al 15 Figure 19: New products - exponen al export growth in some manufactured products, but from a very low base 16 Figure 20: Kenya today and tomorrow - double the popula on but not many more children 18 Figure 21: Urbaniza on – a fact of life in Kenya and beyond 20 Figure 22: Richer countries are more urbanized 20 Figure 23: Two hubs – Kenya’s best jobs are in Nairobi and Mombasa 22 Figure 24: Kenya has the best market access in East and Central Africa 26 Figure 25: Despite rapid urbaniza on, most coun es are s ll predominantly rural 29 Figure 26: Service provision has not kept pace with rapid urbaniza on 29 LIST OF BOXES Box 1: Protec ng the poor - what can policy makers do? 5 Box 2: The demographic dividend 19 Box 3: Life in the city is hard, but it offers opportuni es 21 Box 4: Korea’s Urbaniza on: A model for Kenya? 23 Box 5: Short routes but long economic distance – the case of Kenya’s manufacturers 26 ABBREVIATIONS AND ACRONYMS AGOA Africa Growth and Opportunity Act BPO Business Process Outsourcing CBK Central Bank of Kenya CBR Central Bank Rate CCK Communica on Commission of Kenya COMESA Common Market of Eastern and Southern Africa CPI Consumer Price Index CRR Cash Reserve Ra o DRC Democra c Republic of Congo EAC East African Community FDI Foreign Direct Investment GDP Gross Domes c Product HA Hectare ICC Interna onal Criminal Court ICT Informa on and Communica on Technology IT Informa on Technology JKIA Jomo Kenya a Interna onal Airport KEU Kenya Economic Update KNBS Kenya Na onal Bureau of Sta s cs KRA Kenya Revenue Authority MIC Middle Income Country MT Metric Ton NBFI Non Bank Financial Ins tu ons NEER Nominal Effec ve Exchange Rate ODA Official Development Assistance OECD Organiza on for Economic Co-opera on and Development RCA Revealed Compara ve Advantage REER Real Effec ve Exchange Rate SME Small & Medium Enterprises SSA Sub-Saharan Africa UN United Na ons US United States VAT Value Added Tax WRS Warehouse Receip ng System WB World Bank June 2011 | Edi on No. 4 i FOREWORD I t is my great pleasure to present the fourth edi on of the World Bank’s Kenya Economic Update. The year 2011 will be challenging for Kenya. Global and domes c shocks are tes ng Kenya’s resilience yet again. The Government has started to implement the new cons tu on, which Kenyans have embraced with high hopes for sustained structural change. Rapid popula on growth and urbaniza on have been changing Kenya’s face, and these trends will con nue to shape the country’s development prospects. This is why we chose as the tle of this report “Turning the Tide in Turbulent Times”. We argue that Kenya can manage its major challenges successfully, while addressing short-term shocks at the same me. The Kenya Economic Updates, which the Bank is publishing every six months, have become our leading vehicle to analyze development trends in Kenya. With these reports, we want to support all those who want to improve the economic management of Kenya. In par cular, we intend to help inform and s mulate debate on topical policy issues, and to make a contribu on to unleashing Kenya’s growth poten al. This edi on has three main messages. First, Kenya will need to navigate through another economic storm in 2011. This will reduce growth to a projected 4.8 percent, which is lower than last year but s ll substan ally higher than the average of the last decade. Second, Kenya had a good economic start for the current decade, because in 2010, growth was higher than expected, at 5.6 percent. In fact, if growth would accelerate to 6 percent, Kenya could reach Middle Income Country status, or a per capita income of US$ 1,000, by 2019. Third, Kenya is at the beginning of a major demographic transi on and is urbanizing rapidly. Kenya will con nue to grow each year by more than one million people, who will increasingly live longer, be be er educated, and choose to make their home in ci es. This social and economic transforma on, if managed well, can create a posi ve development impact for Kenya. The World Bank remains ready to work with all Kenyan stakeholders who want to turn the de in these turbulent mes and make the most of the major structural shi s that are currently underway. Johannes Zu World Bank Country Director for Kenya June 2011 | Edi on No. 4 ii ACKNOWLEDGEMENT T his fourth edi on of the Kenya Economic Update was prepared by a team led by Jane Kiringai and Wolfgang Fengler. The report’s special focus on demographic change and urbaniza on was led by Anton Dobronogov and Aurelien Kruse. The core team also included Allen Dennis, John Randa, Be y Maina, Fred Owegi, Philip Jespersen, Rosemary O eno, Roger Sullivan, Catherine Gachukia, and Fred Wamalwa. The team acknowledges the contribu ons of Brian Blankespoor, Sumila Gulyani, Tracey Lane, Laban Maiyo, Yira Mascaró, Diana Or z, Ravi Ruparel, Emi Suzuki, Aaron Thegea, and Kathy Whimp, as well as Dimitri Stoelinga and Sachin Gathani from Laterite. The report benefited from the insights of several peer reviewers, including Indermit Gill, Gabriel Demombynes, and Aly Khan Satchu, as well as from the comments shared by Uwe Deichmann, Jonathan Rose, and Birgt Hansl. The team received guidance from Kathie Krumm and Johannes Zu . The report was made possible by a successful partnership with key Kenyan policy makers. An earlier dra of this report was presented to the Quartely Economic Roundtable chaired by Professor Njuguna Ndung’u, Governor of the Central Bank of Kenya, on May 6, 2011. Roundtable par cipants included senior officials from the Ministry of Finance, the Prime Minister’s Office, the Central Bank of Kenya, the Kenya Na onal Bureau of Sta s cs, the Kenya Ins tute of Public Policy and Research Analysis, the Kenya Revenue Authority, the Interna onal Monetary Fund, the Australian High Commission and AusAID. We also add our thanks to AusAid for suppor ng the World Bank’s Fiscal Decentraliza on Knowledge Program, a source of important informa on for this report. June 2011 | Edi on No. 4 iii Main Messages and Key Recommenda ons Main Messages • Kenya will need to navigate through another economic storm in 2011. This will reduce growth to a projected 4.8 percent, which is s ll substan ally higher than the average of the last decade. • The decade started on a bullish note for Kenya. In 2010, growth was higher than expected at 5.6 percent. If growth accelerated to 6 percent, Kenya could reach Middle Income Country status by 2019. • Kenya is at the threshold of a major demographic transi on and is urbanizing rapidly. Each year, Kenya will con nue to grow by more than one million people, who will live longer, be be er educated, and increasingly live in ci es. This social and economic transforma on needs to be managed well to catalyze its development impact. Key Recommenda ons to Respond to the Economic Turbulence • Maintain macroeconomic stability, and contain infla on and further increases in debt. This entails ghter monetary policies and a reduc on of the fiscal deficit. If there is a need for addi onal expenditures in response to external shocks, realloca ons seem to be the most appropriate response. • If high food prices persist and it becomes necessary to cushion the most vulnerable, distribute cash rather than food, if poor families in need can be iden fied. Given Kenya’s success with ‘mobile money’, this is a more effec ve approach and one that would also help to build a more robust social protec on system. • Enhance export compe veness. Kenya can leverage its auspicious loca on and its role as a hub for the larger East African region by upgrading its infrastructure, crea ng a good business environment, and con nuing with regional integra on. This would also posi on Kenya globally and generate addi onal exports in services and manufacturing. The best way to start making Kenya more compe ve is to strengthen its coastal hub and to modernize the port of Mombasa. Key Recommenda ons to Help Manage Kenya’s Demographic and Geographic Transi ons • Invest in people rather than places. Economic ac vity will always be uneven, but development can s ll be inclusive if the government adopts “spa ally blind” social policies and provides access to basic services for all Kenyans. As people move to urban areas they will then be in a posi on to find or to create be er jobs. • Let ci es grow and thrive. Kenya will become a predominantly urban country by 2033. Ci es are the world’s growth poles. To allow its ci es to thrive, Kenya needs to further upgrade infrastructure in and between ci es. The more determined Kenya will be in establishing this “connec ng infrastructure”, the more likely it will succeed in its development efforts. • Manage devolu on to empower ci es, and to provide basic services to rural Kenyans. Even though Kenya is rapidly urbanizing, 42 out of the 47 new coun es will be predominantly rural. Devolu on will provide opportuni es for be er accountability and local service delivery. At the same me, there is a risk that Kenya’s medium-sized ci es with 100,000 to 400,000 people, will not receive the autonomy and resources they need. Kenya needs a separate urban er to help manage rapid urbaniza on successfully. June 2011 | Edi on No. 4 iv EXECUTIVE SUMMARY O ver the last decade, Kenya’s society and economy have changed fundamentally and these deep trends will con nue. Rapid popula on growth and urbaniza on will create many new challenges which need to be managed well to support Kenya’s economic take-off in the medium- term. This fourth edi on of the Kenya Economic Update argues that Kenya can Turn the Tide in Turbulent Times and make the most of the ongoing structural shi s. In 2011, Kenya will need to address short-term domes c and interna onal shocks, including higher infla on, pressures on the exchange rate and, most importantly, a vola le poli cal environment. The government will need to navigate through these shocks successfully and to con nue with its economic reform program to achieve higher growth. At the same me, the government will be making major strategic decisions in Kenya’s decentraliza on architecture which will shape the medium-term development prospects of the country. Economic success is possible, as the 5.6 percent growth in 2010 has shown. If growth would accelerate to an average of 6 percent this decade, Kenya would achieve Middle Income Country status by 2019. Figure 1: Kenya outperformed Sub-Saharan Africa 1. Naviga ng through Another in five of the last six years Economic Storm I n 2011, Kenya will need to navigate through another economic storm. Since the end of 2010, infla on has increased from 3 percent to 12 percent, the shilling has lost ground, and the stock market has declined by 10 percent. Global shocks, especially the rapid rise in food and fuel prices, have added to Kenya’s economic challenges. The poor rainfall during the tradi onal long rains of March-May has put further stress on food prices. Poli cal uncertainty, linked to the Source: World Bank calcula ons based on KNBS Interna onal Criminal Court’s (ICC) inves ga on into prominent public figures and the prospect quarters and there are early signs that growth of the 2012 elec ons, also adds to economic remained robust in the first quarter of 2011. Kenya has been growing above the African vola lity, as investors and interna onal partners have again become more cau ous. average for five of the last six years (see figure 1); the excep on was 2008, a er the post-elec on Despite these challenges, Kenya began 2011 violence. with the strong momentum generated in 2010, where growth exceeded expecta ons at 5.6 The strong growth in 2010 was driven by a strong percent. Last year, economic ac vity was led by recovery in agriculture, a booming financial rebounding agricultural and industrial sectors, sector, and the full implementa on of the fiscal while most services sub-sectors con nued to s mulus. Helped by good rains, agriculture grew perform strongly as well. Economic growth has by 6.3 percent. The industrial sector rebounded been above 4.0 percent for four consecu ve at 5.3 percent, led by a con nuing construc on June 2011 | Edi on No. 4 v boom. The services sectors, which have been the account for 25 percent of Kenya’s imports, have backbone of Kenya’s economy in recent years, risen sharply in 2011, adding to Kenya’s import bill. grew robustly at 5.4 percent. At the same me, some of Kenya’s major export markets such as Egypt, which consumes large For growth to remain robust in 2011 and 2012, amounts of Kenya’s tea, are experiencing their Kenya needs to preserve its sound macroeconomic own domes c shocks. Kenya’s overall external policies. A er successfully implemen ng the balance weakened due to a deteriora ng current fiscal s mulus, the country must now rebuild its account. If oil prices stay above US$ 100 per fiscal buffers. Since 2009, Kenya has been running barrel in 2011, it is possibly that Kenya’s overall rela vely high fiscal deficits of 6 percent (of GDP) balance will turn nega ve for the first me since and more, mainly to finance the fiscal s mulus. the global financial crisis. As a result the Kenya This has led the debt-to-GDP ra o to increase to shilling depreciated to its lowest level against the close to 50 percent, exceeding the government’s dollar in 15 years, pu ng further upward pressure target rate of 45 percent. This is a small increase on prices given Kenya’s substan al import bill. In compared to those seen in most countries, but the medium-term, the lower exchange rate could reason enough to revert back to lower fiscal benefit exports, but this would also depend on deficits. If Kenya’s growth rate remains close to many other improvements in the investment 5 percent, the government can only afford to climate and in infrastructure. run a fiscal deficit of around 4 percent―about two percentage points lower than currently―if it 2. S ll at the Tipping Point? wants to achieve a 45 percent debt-to-GDP ra o by 2013/14. F or 2011, the World Bank is lowering its growth forecast to 4.8 percent. This is half In 2011, infla on has been rising rapidly a er a percentage point lower than our previous reaching its lowest level in a decade in October forecast and in line with the expected overall 2010 and averaging 4.1 percent for the whole decline in Africa’s growth. While lower than year. Like elsewhere, higher food and fuel ini ally expected, this year’s growth would s ll prices in 2011 have been driving infla on, which rank among the high growth periods of the last dispropor onally hit the poor as they spend a 30 years. large share of their income on food. However, when global food prices started to increase, For 2012, we project growth at 5.0 percent, Kenya was in a be er posi on than during the assuming a more favorable external environment 2008/09 food crisis because the domes c price and a peaceful run-up to the general elec ons. of maize declined as a result of good rains and There are a number of structural factors which a strong 2010 harvest. As prices rose steadily will benefit Kenya in the medium-term and through April 2011, the government took ini al already bear fruits in 2012. These include measures to respond, while learning the lessons improved infrastructure services (especially from the 2009 drought and corrup on scandal roads and energy), the spill-over effects of the ICT when import du es on maize were lowered. revolu on, and an accelera on of south-south integra on. These improvements will boost Kenya has also been hit by rising and vola le investor confidence, especially if the government oil prices, which have weakened its external con nues with its ins tu onal reforms to ease posi on. Oil and hydrocarbon products, which the cost of business. June 2011 | Edi on No. 4 vi With projected growth at 5.1 percent over 2010 Star ng from a low base, Kenya’s has also to 2012, Kenya will have started the decade on broadened its export product range. This is a posi ve note. This is higher than the average par cularly so in a number of manufacturing of all previous decades (including 2000-2009), sub-sectors, including machinery, apparel, and but substan ally lower than the 10 percent chemicals. In the 1990s, these three sub-sectors growth rate an cipated under Kenya’s Vision accounted jointly for about US$ 120 million in 2030 development strategy. Kenya could s ll average yearly export earnings. In the 2000s, the reach Middle Income Country status of $1,000 figure was four mes larger at US$ 480 million. For GDP per capita even by the end of this decade machineries and chemicals, the export markets if growth accelerates to an average of 6 percent. are almost exclusively in Africa and Asia, while However, if growth slowed down to an average tex les are predominantly going to the USA. of 3.7 percent (the level experienced over 2000- 2010), Kenyans would need to wait un l 2036 to These sectoral shi s demonstrate that Kenya a ain this status (see figure 2). can indeed start its export engine and establish an industrial base. Kenya would be in a good Figure 2: Kenya can s ll become a Middle Income Country within this decade posi on to benefit from “scale economies” and become one of Africa’s manufacturing hubs if it improved its investment climate. It has be er access to global markets than most African countries, thanks partly to a good geographical loca on, and a large supply of labor. With a be er business environment and upgraded infrastructure, especially a modernized port of Mombasa, Kenya will have a great opportunity to accelerate its export performance. 3. Harnessing Kenya’s Demographic Source: World Bank projec ons and Geographic Transi on Over the last years, Kenya has started to diversify its export markets. Since 2000, there has been a major shi away from Europe towards Africa K enya’s momentous transi on to devolved government under the new cons tu on comes at a me of fundamental structural and Asia. Today, more than 45 percent of Kenya’s transforma ons. These trends are changing the trade is with other African countries, while trade face of the na on. The average Kenyan used to with Asia is rising exponen ally. This geographic be young, dependent, and rural; increasingly diversifica on of Kenya’s exports has been mainly Kenyans will be middle-aged, ac ve, and urban. taking place both in new and tradi onal export The first shi is demographic. Kenya’s popula on products. For tea―Kenya’s top foreign exchange will con nue to grow rapidly, adding more than earner at US$ 1.2 billion―the United Kingdom is one million people every year, albeit for different now in third place behind Egypt and Pakistan. The reasons than in the past. Kenyans will live longer, USA is a special case as Kenya’s apparel exports have fewer children, and become increasingly there have soared as a result of the Africa Growth educated. The second shi is geographic. While and Opportunity Act (AGOA). s ll being predominantly rural, Kenya is rapidly June 2011 | Edi on No. 4 vii urbanizing. The challenge for policy makers will be sector of the economy employing more than a to make the most out of this process by managing third of adults. At the same me, the country is the growth of ci es to leverage the economic and urbanizing rapidly. Every year more than 250,000 social dividends of urbaniza on. Kenyans are moving to ci es and formerly rural areas are becoming increasingly Kenya’s popula on is rising rapidly. urban. Twenty years ago Kenya’s Today, it is home to 40 million people. Every year more urbaniza on level was only 18 This is a five-fold increase compared to than 250,000 percent. Since then, Kenya’s urban 1963, at the eve of independence, when popula on has been rising rapidly. it had just over 8 million people. Rapid Kenyans are The share of the urban popula on popula on growth is set to con nue - moving to ci es is set to rise to 37 percent by 2020, by 2040, Kenya will have an es mated and formerly rural and in 2033 Kenya will reach an 75 million people and become the 21st areas are becoming important milestone, when most largest country in the world, larger increasingly urban of its popula on will live in urban than the United Kingdom, Germany, or areas (see figure 3). France. Figure 3: By 2033, most Kenyans will live in ci es Steady popula on growth masks a deep demographic transi on. While popula on growth appears steady, the factors driving it are changing fundamentally. Un l about 2000, it was due to increasing numbers of children. Today, the average number of children per family has fallen sharply, from 8.1 in 1978 to 4.6 in 2008, and it is projected to decline further to 2.4 children by 2050. Kenya’s popula on con nues to grow because people live longer and because there is an increasing number of women in their twen es and thir es. Source: World Bank calcula ons based on KNBS, 2009, Census and United Na ons, 2009, World Popula on Prospects These trends create the opportunity to reap a “demographic dividend”. Adults in their workingAs elsewhere, urbaniza on provides many ages (16-64) will increasingly outnumber their opportuni es for economic and social dependents; children and the elderly. At the development. Economic ac vi es located in end of the 1990s, the number of working adults the ci es and towns are on average much more overtook the number of children and elderly. Byproduc ve than those located in rural areas – so 2030, there will be some 40 million working adults when more people live and work in the ci es, this out of a total popula on of 63 million, improving helps economic growth. Economic growth, in the “dependency ra o” to almost 2:1. turn, supports urbaniza on by increasing demand for goods and services produced in urban areas, This demographic transi on coincides and by helping to create urban jobs. Ci es and with a spa al transforma on. Kenya is s ll towns thrive when they can serve larger markets, predominantly rural. Seven out of ten Kenyans internal and external. In addi on, access to live in rural areas. Agriculture remains a key social services is higher in bigger ci es, offering June 2011 | Edi on No. 4 viii migrants the prospects of be er, healthier lives geography” of the country, possibly for the and economic promo on for them and their be er, but with substan al risks if this transi on (fewer) children. is handled poorly. With urbaniza on The high costs of Nairobi is Kenya’s main hub, with 3.1 million Kenya could expand people, represen ng 8.1 percent of the total doing business, its emerging industrial popula on. Mombasa is Kenya’s second city, sectors. People and especially due with 940,000 people, followed by 19 medium firms benefit from to infrastructure sized ci es of 100,000 to 400,000 people. One of loca ng in proximity constraints― these is Nakuru, which is one of the world’s fastest to each other – and congested roads, growing ci es. By 2020, when Kenya will be 37 these benefits usually unreliable energy, percent urban, there will be two ci es above one materialize in urban million―Nairobi and Mombasa―and another 37 and an inefficient areas. Kenya can ci es above 100,000 people. increasingly benefit port― are the major from agglomera on hindrance for local Nairobi and Mombasa can both become effects, which are and interna onal growth poles in Kenya’s budding system of genera ng large investors ci es. Nairobi has already established itself enough markets for as a regional hub for the East African region. products, sufficient labor to work in factories, Many interna onal companies have located and new space for innova on. While services their regional headquarters in Nairobi, crea ng are already thriving in Kenya offering new addi onal incen ves for new market entrants to products to mass markets at low cost industrial locate here as well. The capital is also home to produc on has yet to take-off in most sub-sectors. major manufacturers, mainly because most of The high costs of doing business, especially due their markets are in central and western Kenya to infrastructure constraints―congested roads, and their exports to the East African Community unreliable energy, and an inefficient port―are (EAC). the major hindrance for local and interna onal investors. Looking beyond these regional confines, in- Urbaniza on may be a necessary condi on for Due to the high dustrial produc on development, but it is not sufficient. Over the transport costs has become globally last two decades Kenya has been urbanizing with within East Africa, integrated but “ver - low growth and minimal industrializa on. The cally disintegrated.” decline in agriculture has been compensated by only a coastal Manufactured goods an expanding service sector, while manufacturing hub would be in a are less and less pro- remained stagnant at a low 11 percent of GDP (see posi on to become duced at one loca on the Kenya Economic Update, June 2010). Kenya’s a manufacturing but at several loca ons leading ci es are also suffering from conges on hub for global which are connected and crime which are partly offse ng the benefits with each other. Due products of agglomera on. Urban government will also to the high transport be fundamentally challenged under the new costs within East Africa, only a coastal hub would cons tu on, which will alter the “ins tu onal be in a posi on to become a manufacturing hub ¹ See more in Adams, Collier, Ndungu, Kenya – Prospects for Prosperity, Oxford 2011 June 2011 | Edi on No. 4 ix for global products. Hence, Mombasa would be devolu on will profoundly affect service delivery, much be er placed than Nairobi to produce for with significant responsibili es now being global markets. Rising wages in Asia will provide shi ed to new county governments. Major risks increasing incen ves for manufacturing compa- include the interrup on of key services during nies to locate to Africa, and Mombasa could be the transi on to devolved government and the an a rac ve investment des na on. possible development of inequi es in Kenyans’ access to a minimum package of services. These Devolu on can foster development, but there are risks are counterbalanced by the opportunity three major risks. First, if ci es are to con nue to to bring services closer to the people and make nurture and to foster economic ac vity they have governments more accountable for service to be properly managed. This will be par cularly quan ty and quality. Finally, there is a challenge challenging in a context where largely rural to maintain, upgrade, and ra onalize the country’s coun es may end up ‘running’ Kenya’s ci es. connec ve infrastructure as, increasingly, At the same me there is a unique opportunity investment decisions will be fragmented across to re-think the management, financing, and levels of government. accountability structures of Kenya’s ci es. Second, June 2011 | Edi on No. 4 x The State of Kenya’s Economy F ollowing a year of strong economic growth, Kenya has found itself dealing with a number of shocks, both external and internal, in the first half of 2011. As a result, Kenya is expected to grow at 4.8 percent this year. For 2012, growth could reach 5 percent as long as weather condi ons are favorable, global shocks moderate, and the poli cal climate remains stable. While lower than ini ally projected these growth rates are substan ally higher than the average of the last decade. If Kenya could unblock its main bo lenecks infrastructure and the investment climate Kenya could become an industrial hub and a stronger exporter. This would posi on the country well to reach at least 6 percent in the medium term which would propel it to Middle Income Country status (US$ 1,000 per capita income) by the end of this decade. 1. Naviga ng the 2011 Economic In 2010, the economy grew at 5.6 percent exceeding forecasts. Growth was strong across Storm all sectors and quarters (see figure 4). This 1.1. Recent Economic Developments recovery was due to a number of factors, including enya entered 2011 on a strong economic a rebound in the agriculture and industrial K foo ng, but is now experiencing a series produc on, a booming financial sector, and the of shocks, which could dampen its growth full implementa on of the fiscal s mulus: prospects. The most visible shock is the sharp • Agriculture (+6.3 percent) and industry (+5.3 rise in oil prices as a result of supply interrup ons percent) recovered strongly a er two weak linked to unrest in the Middle East and North years. These two cri cal sectors, which Africa. A second major shock in the making is represent almost 40 percent of Kenya’s the steady hike in food prices following the global economy, benefi ed from good rains, more trend, but also partly fueled by expecta ons that reliable energy supplies, and investments in shortages will materialize in Kenya in the second infrastructure. Tea exports were par cularly half of 2011. Infla on is emana ng from these strong due to higher global prices and increased two shocks and clouding the growth prospects for output due to good weather. 2011. • The financial sector was among the strongest performers (8.8 percent) over the last 12 Kenya has been partly cushioned from the months. It has been benefi ng from the ICT severity of the shocks because of its excep onally revolu on, which started to spill over into strong economic performance in 2010. The tradi onal sectors. Lower interest rates and economy benefi ed from a stable economic the expansion of bank branches into rural areas environment, especially low prices. Infla on for contributed to improved access to finance. the year averaged 4.1 percent, levels last seen in 2002, and remained below the Central Bank • The government’s fiscal s mulus as well as of Kenya’s (CBK) target of 5 percent. Infla on ongoing infrastructure; investments also declined during 2010 as a result of lower food, contributed to the strong performance in 2010. oil, and telecommunica on prices. A er a slow start in 2009 the government June 2011 | Edi on No. 4 2 The State of Kenya’s Economy Figure 4: A strong performance in 2010; growth has been balanced across sectors and quarters Source: World Bank es mates; KNBS Note: Sector share in GDP in parenthesis Figure 5: Naviga ng an economic storm in 2011 - infla on rises and stock market declines Source: KNBS, Central Bank of Kenya, Nairobi Stock Exchange, Dow Jones succeeded in implemen ng the fiscal s mulus, 7.0, Rwanda 6.5, Sudan 5.9, and Burundi 3.7) which came together with an expansion of public reflec ng improved prospects in the region. But investment into infrastructure, government Kenya can do even be er and catch up with its consump on expanded by 8.9 percent. neighbors. There are a number of structural factors which it can leverage to achieve higher growth. In 2010 Kenya’s GDP growth exceeded the These include improved infrastructure services average for Sub Saharan-Africa. All of Kenya’s (especially roads and energy), the spill-over immediate neighbors also experienced higher effects of the ICT revolu on, and an accelera on growth rates than in 2009 (Uganda 6.3, Tanzania of south-south integra on. These improvements June 2011 | Edi on No. 4 3 The State of Kenya’s Economy will also boost investor confidence, especially if The increase in food prices, especially for maize, the government con nues to pursue ins tu onal comes at a me when Kenya s ll has enough reforms to ease the cost of business. stocks. Food and beverages, which cons tute 36 percent of the Consumer Price Index (CPI) rose by In 2011, the country will have to grapple with 19.4 percent un l April 2011; the prices of maize internal and external shocks. On the domes c and kale increased by more than 50 percent. front, the proceedings of the ICC against some Kenya was partly sheltered from the global food of the country’s most prominent poli cians have price increases because the 2010 harvest was increased poli cal risk percep ons, such that excep onally strong, especially in maize where poten al investors may defer their plans. In produc on increased by 19 percent (See Annex addi on, rains have arrived late for the agricultural 4, table A23). plan ng seasons of March - May 2011. On external side, Kenya has been hit by hikes in fuel and food The Na onalCerealsandProduceBoardhasfaced prices. These shocks have contributed to higher challenges in procuring maize. Many farmers are infla on, a weaker currency, and a weakening of not selling maize in an cipa on of higher prices the stock market. The Nairobi Stock Exchange if the rains fail and food markets con nue to was a star performer in 2010, recording one of perform poorly. In Kenya, high food prices are the highest gains globally, but this reversed in hur ng the poor dispropor onately because they 2011 (figure 5). This reversal can be explained in devote 70 percent of their spending on food. Even part by foreign investors taking profits on their in the rural areas the poor are hurt because only 2010 investments, capital flight in an cipa on of a small number of large farmers two percent further deprecia on of the Kenya shilling, and the control 50 percent of the maize market benefit poli cal risks associated with ICC process. from higher prices.² Managing high and vola le Figure 6: Global oil prices are s ll below the 2008 peak – but Kenya’s prices are at their highest level ever Source: World Bank calcula ons based on KNBS See Kenya Economic Update, S ll Standing: Kenya’s Slow Recovery from a Quadruple Shock (December 2009) for a detailed analysis of Kenya’s maize sector and previous food crisis. June 2011 | Edi on No. 4 4 The State of Kenya’s Economy Box 1: Protec ng the poor – what can policy makers do? Keep their nerve - let markets work, and compensate the poor. It is cri cal that the current food and fuel induced infla on does not give rise to broad-based infla on. Policy makers must try to mi gate poten al second-round effects and a price-wage spiral if consumers seek to offset the decline in their real wages through higher nominal demands. The second round effects would involve producers passing the increased transport and energy costs to consumers to maintain their profit margins. Tighter control over monetary policy and some form of wage restraint will be required to reign in higher infla on. So far, the policy response to rising food and fuel prices has been appropriate. The government has removed import levies on maize imports. Since Kenya is a net importer of maize, li ing the import levies will allow maize imports to stabilize domes c prices bringing them closer to interna onal prices. Farmers holding onto stocks of maize may be encouraged to release them in the market given the current a rac ve prices and uncertainty over future movements in the interna onal price. The reduc on of duty on kerosene is also appropriate because it will have only a small fiscal impact and does help the poor more as they use kerosene for cooking. By contrast, a blanket reduc on in fuel prices would have dispropor onately benefi ed the rich, especially those who have cars. If the prices of basic commodi es con nue to rise, social assistance might have to be stepped up. Ideally the response should take the form of cash transfers targeted to those who cannot fend for themselves. This category covers the most vulnerable groups such as children and the elderly. Many programs are already in place and could be scaled-up to provide support. The government’s expansion of the Urban Food Subsidy Program to 40,000 individuals star ng by mid 2011 is a natural beginning. However, the logis cs for expanding cash transfers to other groups are not yet in place. Specifically, the government does not have a comprehensive profile and database of the poor. In these cases, in lieu of cash, food should be given through school feeding and work-for-food exchanges, or via direct distribu on centers. The current crisis should serve as a reminder to policy makers that systems for effec ve social protec on must be built during good mes, so that they are available for a mely, efficient and accountable response when the storms set in. Source: World Bank, KEU team; Marcelo Giugale, Huffington Post, April 2011 food and fuel prices will be a challenge in 2011. now at their highest level ever although global The government has responded appropriately prices are s ll below the 2008 peak (figure 6). The by ensuring macroeconomic stability through difference some 20 percent can be explained increasing interest rates combined with an ini al by exchange rate movements (see Annex 1 for a number of targeted interven ons. In the medium more detailed analysis). term, it will be cri cal to build up a more robust social protec on system (box 1). The weaker shilling can increase export earnings. The exchange rate is like a double edged sword; The twin food and fuel price shocks are fuelling good for exports but bad for imports. Kenyan infla on and pu ng pressure on the exchange exporters can benefit from the weaker shilling rate. Part of the pressure on domes c prices is but only if domes c prices are stable. In the coming from the weaker shilling whose value is 20 current situa on, the rising domes c prices, percent lower today than in 2008. This currency par cularly transport and wages, are wiping out deprecia on has contributed to a record increase poten al benefits from the weaker shilling. The in domes c fuel prices. Local pump prices are recent nominal deprecia on of the shilling has Since Kenya buys and sells its goods and services across a number of currencies, it is important to gauge the compe - ve advantage, if any, using the nominal and real effec ve exchange rates. The nominal effec ve exchange rate, is the trade weighted exchange rate, the real effec ve exchange rate is also trade weighted but it takes into account the movement in domes c and foreign prices. June 2011 | Edi on No. 4 5 only marginally enhanced Kenya’s compe veness credit. However, for the most part, commercial in the interna onal market. Figure 7 shows that banks did not pass on the CBR cuts. Average nominal effec ve exchange rate (NEER), has lending rates declined only by 25 basis points, deprecated by 24 percent since May 2008 but from 14.12 to 13.87 percent in December 2010. the real effec ve exchange rate (REER), which is As a result, average spreads (lending rates a good measure of Kenya’s compe veness, has minus deposit rates) have not declined since increased only marginally by about 7 percent . 2004 averaging just under 9 percentage points. The spreads not only reflect commercial banks’ 1.2. Monetary Policy risk percep on but also the increased costs of ccommoda ve monetary policy increased expanding their rural branch networks to remain A liquidity in 2010 in response to excess compe ve in an environment characterized by capacity in the economy. Since 2008, the Central the mobile money boom. Bank Rate (CBR) and the Cash Reserve Ra o (CRR) were reduced con nuously, a trend which Despite high rates, lending to the private sector con nued through 2010 (figure 7). The CBR was rebounded in 2010. A er a slump in 2009, reduced by 25 basis points to 5.75 in January lending to private sector resumed and grew by 2011. Consequently liquidity increased by 22 18.2 percent in 2010 (figure 8). Lending was s ll percent, compared to 17 percent in 2009, and skewed in favor of the non-tradable sectors of the Interbank Rate declined from 3.69 percent in the economy. Lending to the real estate sector January 2010 to 1.24 percent in January 2011. increased by 73 percent, to mining and quarrying by 53 percent and lending to households increased by 26 percent. Of the Kshs 150 billion Lending rates have remained high. The objec ve total credit volume in 2010, real estate received behind these policy measures was to encourage Kshs 46 billion, or 31 percent of all credit, while commercial banks to lower their retail lending private households received Kshs 33 billion or 22 rates and to increase demand for private sector Figure 7: Monetary ghtening has began, as the shilling has weakened Source: World Bank calcula ons based on CBK June 2011 | Edi on No. 4 6 The State of Kenya’s Economy Figure 8: Credit growth to the private sector has recovered – real estate & household sectors benefi ed most Source: World Bank calcula ons based on CBK percent (figure 8). The quality of lending has alsostance in the last two years has cushioned the been improving. Gross non-performing loans as economy from adverse shocks but resulted in a share of the total have fallen from 18 percent in a higher debt-to-GDP ra o. During this period, December 2005 to less than 6 percent in February government expenditure was lted toward 2011. financing the development budget. A significant number of infrastructure projects were started to Monetary ghtening has begun and needs to alleviate infrastructural bo lenecks, enhancing con nue. Excess liquidity needs to be mopped Kenya’s growth poten al. This was in addi on up to stem strong infla onary pressures, and to the “economic s mulus program” which emerging risks of second-round effects of the the government also introduced in 2009/10, shock. This is already happening; in March 2011, and which provided Kshs 22 billion in small the CBK increased the CBR from 5.75 to 6.0 grants for building roads, health, and educa on percent. This ghtening is a prudent response in facili es in each parliamentary cons tuency. The light of infla onary and exchange rate pressures development budget has grown considerably, and is likely to con nue in the months ahead. from 6.7 percent of GDP in 2007/08 to 10.1 Short term interest rates have risen in response percent of GDP in 2010/11 (figure 9). to the CBK’s ac on. The interbank has risen from 1.24 percent in March to 5.75 in May and the These measures were largely financed repo rate has increased from 1.18 to 4.5 percent through domes c borrowing. As a result, the over the same period. These short term rates government’s debt-to-GDP target of 45 percent will con nue to be high in the near term and will was exceeded. The government managed to probably con nue to increase as the CBK mops bring down the debt-to-GDP ra o to a low of up excess liquidity in the market. 34.6 percent in 2007/08, precisely to gain the fiscal space to respond to shocks. But since then, 1.3. Fiscal Performance Kenya has been running a higher fiscal deficit and the current debt-to-GDP ra o increased to about F iscal adjustment and consolida on will be necessary to achieve medium term debt targets. Kenya’s counter cyclical fiscal 47.9 percent in 2010/11. June 2011 | Edi on No. 4 7 The State of Kenya’s Economy Figure 9: The fiscal s mulus led higher development spending - financed through domes c borrowing Source: Ministry of Finance Figure 10: With higher growth Kenya can afford higher fiscal deficits and s ll reach its debt targets Source: World Bank simula ons based on Ministry of Finance data Kenya is now entering a period of fiscal through reduced tax exemp ons, strengthened consolida on. Fiscal policy has switched from tax administra on, and a crack-down on evasion. s mula ng the economy to rebuilding fiscal buffers. Emphasis will be on increasing revenues Kenya will be hard pressed to achieve its debt and ghtening control over recurrent spending. target while con nuing to implement planned Recurrent spending as a percent of GDP is expected infrastructure investments. Recurrent costs will to decline from 22.3 percent of GDP in 2010/11 remain high if the government wants to maintain to 20.5 percent of GDP in 2011/12. Expenditure exis ng infrastructure, deliver social services, and cuts are planned across a range of programs meet commitments associated with implemen ng and sectors including public administra on and the devolu on provisions of the new cons tu on. na onal security. Revenues are due to increase Keeping the overall administra on expenditure June 2011 | Edi on No. 4 8 The State of Kenya’s Economy constant in real terms is going to be especially a reduc on of the fiscal deficit to an average of challenging as government implements the 3.1 percent. cons tu onally mandated decentraliza on program. Addi onal fiscal pressure is expected in • The second scenario (baseline) assumes that 2012 in the run-up to the general elec ons. GDP growth con nues at 5 percent up to 2014. Under this scenario, the fiscal deficit will need The magnitude of adjustment will depend on to come to 3.9 percent. economic performance. Reducing the level of • In a high case scenario, where GDP growth public debt as share of GDP from 47.9 percent averages 6 percent star ng 2012, Kenya could in 2010/11 to 45 percent in 2013/14 will require afford to run a deficit of 4.4 percent, s ll 1.5 fiscal adjustment and consolida on. Currently, percent lower than the average of the last two the government years. is running a budget deficit of 1.4. External Posi on 6.1 percent of GDP. To achieve Currently, the the medium term government is running T he current account balance deteriorated between 2009 and 2010, and the overall balance shrunk (figure 11). Kenya’s current debt target of 45 a budget deficit of 6.1 account posi on worsened in 2010 as the deficit percent of GDP by 2014, the fiscal percent of GDP. To increased from US$ 1.6 billion in 2009 (5.5 percent deficit will have to achieve the medium of GDP) to US$ 2.3 billion in 2010 (7.9 percent of decline from its term debt target of 45 GDP). This was driven by a sharp rise in the import current level by percent of GDP by 2014, bill rather than by weak exports. Merchandise about 2 percent imports increased by 17.4 percent, exceeding the fiscal deficit will if growth stays have to decline from its total export growth which was 14.4 percent in at current levels. 2010. Trade in services was robust, increasing The magnitude current level by about 2 by 9.8 percent in 2010. But while the share of of the adjustment percent if growth stays merchandise exports in GDP increased from 15.3 that will be at current levels to 17.3 percent in 2010, the share of imports also needed depends increased significantly from 35 to 40.6 percent in on economic performance. 2010 (see Annex 4, table A14). The fiscal adjustment will be less severe if growth The current account deficit was financed by would accelerate to 6 percent but more painful large inflows in the capital and financial account. if growth slackens (figure 10): Kenya’s current account deficit is mainly financed by the financial account. The main sources of • In a low case scenario, it is assumed that the financial account were official flows, FDI, and domes c and external shocks would slow short term flows in excess of US$ 1.1 billion. Short growth to 3.7 percent (average of last term flows mainly consisted of por olio flows for decade). Even though the government will be investment in the stock market and government tempted to increase spending in response to securi es. The overall balance of payments for the shocks, debt targets could only be met with 2010 was a posi ve US$ 163 million (figure 11). June 2011 | Edi on No. 4 9 The State of Kenya’s Economy Figure 11: Kenya’s exports are weak - the current account deficit widened and the overall balance shrunk Source: World Bank calcula ons based on CBK The widening current account deficit was driven Sustained increases in fuel prices could further by imports of oil, machinery and equipment. increase the current account deficit and dampen Kenya is an oil impor ng country and the economic growth. Kenya’s record of maintaining demand normally mimics economic ac vity, a macroeconomic stability will be tested in 2011, increasing during mes of economic expansion as the government will need to respond to and contrac ng following internal or external shocks star ng from a weak reserve posi on and economic shocks. Oil imports are Kenya’s second with limited fiscal space. Should interna onal largest bill accoun ng for at least 22 percent of oil prices remain at an average of US$ 100 per total imports and rising to almost 25 percent in barrel throughout the year, the current account 2011 due to the sharp increase in interna onal will worsen by about US$ 800 million equivalent crude oil prices. Oil imports and machinery and (or 2.2 percent of GDP). However, if the supply transport equipment (which includes imported shock is more severe and oil price increase to an cars) account for more than 50 percent of the average of US$ 110 per barrel the import bill will value of Kenya’s imports (figure 12). increase by US$ 1.2 billion, widening the current Figure 12: Oil, machinery & transport equipment are account deficit by 3.3 percentage points from a driving Kenya’s exports baseline forcast of -8.6 to -11.9 percent of GDP in 2011. Higher oil prices will directly feed into infla on and could trigger further exchange rate fluctua ons, crea ng macro instability in the economy and dampening economic growth. Figure 13 shows the possible balance of payments scenarios under different oil prices assump ons. Source: World Bank calcula ons based on CBK June 2011 | Edi on No. 4 10 The State of Kenya’s Economy Figure 13: Rising oil prices have a nega ve impact on In view of these recent developments, the World Kenya’s external posi on Bank projects a growth rate of 4.8 percent in 2011 increasing to 5.0 percent in 2012 (table 1). The growth forecast for 2011 has been lowered by half a percentage point in light of the nega ve shocks to the economy. Both public and private consump on growth will dampen as infla on starts to bite and as the government embarks on fiscal consolida on to bring the debt back to sustainable levels. In the near term, infla on is expected to remain in the double digit range, and Source: CBK and World Bank Simula ons it will depress the growth of private consump on. Public consump on will remain subdued as the 2. S ll at the Tipping Point? government reduces the recurrent component of Outlook for 2011 and Beyond the fiscal s mulus it has been implemen ng over the last two years. However, capital investments in 2.1 Growth Expecta ons roads and energy already planned and commi ed T he last Kenya Economic Update argued that Kenya could be at a pping point to sustained growth, driven by structural changes in Kenya, under Vision 2030 will con nue to drive growth. Early indicators point to robust growth in the a recovering global economy, and high growth first quarter of 2011. First quarter results for the in Africa. Over the last months, Kenya has been commercial banks and electricity consump on confronted with a number of external shocks and indicate that the economy is s ll expanding at there is also a risk of domes c shocks, especially a strong pace. Looking ahead, Kenya’s exports poor rains and poli cal instability. The ICC process should also benefit from posi ve trends in global has increased poli cal risk and uncertainty, growth. Business confidence in Kenya remains implementa on of the cons tu on is delayed, strong and foreign private investment flows are and external shocks are pu ng macroeconomic expected to con nue. The EAC and the larger stability to test. COMESA market together account for about 40 Table 1. S ll at the pping point? Growth scenarios for 2011 and beyond Growth (%) Scenarios Past performance 3.7 Average growth for the last decade (2000-2009) 4.2 Low growth scenario for 2011 4.8 Baseline growth forecast for 2011 2011 and 2012 5.0 Baseline growth forecast for 2012 5.5 High growth scenario for 2011/12 Aspira on 6.0+ Required to reach US$ 1000 income per capita and become a middle income country by 2019 Source: World Bank, KEU team June 2011 | Edi on No. 4 11 The State of Kenya’s Economy Table 2: Kenya’s key macroeconomic indicators (real growth rate) 2007 2008 2009 2010 2011 2012 (base case) (base case) GDP 7.0 1.6 2.6 5.6 4.8 5.0 Private Consump on 7.3 -1.3 4.4 6.6 3.9 3.9 Government Consump on 3.5 2.6 5.7 8.9 3.4 3.4 Investment 13.6 9.5 -0.2 7.3 12.2 12.1 Exports 6.6 7.3 -9.1 16.5 8.9 6.7 Imports -11.1 -6.6 -0.4 -3.8 -8.6 -6.7 Source: CBK, KNBS, World Bank es mates 2.2 Risks to the Forecast percent of Kenya’s trade (and absorb a large share of its manufacturing exports). These markets are expected to con nue to grow strongly in 2011, S erious vulnerabili es persist, both globally and domes cally, which could adversely impact the economy in the short-run. The dry “La well above the expected average for Sub-Sahara nina” condi ons will most likely dampen growth Africa (5.1 - 5.3 percent). Growth in the EAC in agriculture, contribu ng to food shortages countries is expected to exceed 6.5 percent in that could add to infla onary pressures. The 2011 except in Burundi (see table 2 for Kenya’s meteorological department has forecast that key macroeconomic indicators). much of the country will record below normal rainfall during the crucial March to May plan ng In the external sector, the ongoing global season. The severity of the shor all is s ll being recovery should benefit Kenya’s agricultural assessed, but food prices have been increasing in exports and tourism. Global growth is expected the first part of 2011, partly because producers to weaken somewhat in 2011, before picking up an cipate future shortages. in 2012. Real global GDP is es mated to have expanded by 3.7 percent in 2010, once again Prices and poli cs can impact growth nega vely. led by strong domes c demand in developing The vola lity of interna onal oil prices, poli cal countries. Restructuring and right-sizing in the ac vity leading up to next year’s general elec ons banking and construc on sectors, combined with and infla onary pressures in the economy in 2011 necessary fiscal and household consolida on, will will reduce growth. Oil prices are projected to be con nue to depress growth in many high-income above US$ 100 per barrel for 2011, compared to economies as well as in Eastern Europe and an average of US$ 79.5 per barrel in 2010. The Central Asian countries. At the same me, growth increased oil prices alone will increase the current is projected to slow in other developing countries account deficit by an addi onal 2 percent of GDP in 2011 due to emerging capacity constraints. in 2011 (figure 13) and will contribute to keeping Overall global GDP is expected to grow in the the infla on rate in the 9-12 percent range for range of 3.3 - 3.5 percent in 2011, before picking the rest of the year. Poli cal risk in the run-up to up to 3.5 - 3.6 percent in 2012. the 2012 general elec ons and the uncertainty June 2011 | Edi on No. 4 12 The State of Kenya’s Economy shrouding the ICC process may depress investor Kenya can achieve Middle Income Country status confidence. Past experience, especially 2002 in this decade if higher growth is achieved and and 2008, has shown that economic momentum sustained. Kenya aspires to become a Middle slows down as poli cal uncertainty increases. Income Country, reaching US$ 1,000 income per capita, by 2030. This could be achieved by In a severe shocks scenario growth would 2019 with a growth rate of 6 percent. However, moderate to 4.2 percent. Should the current if Kenya con nues to grow at the same rate as shocks prove more severe and persist for most in the last decade, (average of 3.7 percent) this of 2011, the impact on Kenya’s economy could target would be realized only by 2037. result in a growth rate of only 4.2 percent, more than a full percentage point below our high case 3. New Products and New Markets es mate of 5.5 percent (figure 14). If the shocks turned out to be more moderate but persistent, Kenya’s growth rate might be in the range of 4.8 K enya’s exports rely heavily on three commodi es: tea, hor culture, and tourism. Kenya’s current exports can be classified in percent. four broad categories – tradi onal agricultural Figure 14: In 2011, the economy is expected to grow at 4.8 % but, with shocks,it could moderate to 4.2% exports (tea, coffee), nontradi onal agricultural exports (hor culture), services (mainly tourism) and manufacturing. While Kenya has primarily tradi onally depended on tea for export earnings (19 percent of export earnings), both hor culture (17 percent) and tourism (17 percent) have become significant in recent years. Total manufacturing has been growing and is currently 30 percent of exports. Kenya needs to expand its exports, and diversify its exports base. As an oil impor ng country, Kenya will remain vulnerable to nega ve terms Source: World Bank calcula ons based on KNBS data of trade shocks unless it manages to diversify In the medium term, Kenya should be able to its exports into high value manufactures and a ract higher levels of FDI. With the largest and services. Kenya was one of the worst affected most developed economy in East Africa, a rising countries by recent terms of trade shocks in middle class and a sizeable popula on (40 million Africa (-3 percent, see figure 15). Only the people), Kenya has the opportunity to capitalize heavily import dependent Seychelles and Lesotho on its infrastructure investments and its sound have been worse affected. Expansion of exports economic management to expand its export base will require a strong push into new markets for both regionally and globally. Investor confidence the first three sub sectors. Diversifica on efforts has been reinforced by the passing of the new should be focused on expanding manufacturing. cons tu on, though some investors may choose to postpone investments un l a er the 2012 elec ons. June 2011 | Edi on No. 4 13 The State of Kenya’s Economy Figure 15: Kenya’s main exports remain tea, hor culture, and tourism – which make it vulnerable to external shocks Source: UN COMTRADE; KNBS; CBK, World Bank Africa Chief Economist’s office Figure 16: New markets - Africa overtakes Europe Source: World Bank calcula ons based on UN COMTRADE data 3.1 New Markets K enya’s exports markets are changing and the trend is likely to con nue. During the last decade, several European countries have been excep on is the USA to which Kenya has increased its exports substan ally (figure 16). overtaken by Kenya’s trading partners in the Asian countries are emerging as new markets Eastern African region. Uganda has overtaken for agriculture exports. Pakistan, Egypt, and the United Kingdom as Kenya’s number one Afghanistan are key des na ons for Kenya’s tea trading partner. Germany and France dropped, and also the countries where export growth while Somalia, Sudan and Democra c Republic of has been highest. By contrast, the share of Congo (DRC) are now the among Kenya’s top 10 tea exported to Europe (United Kingdom and export des na ons. In the western world, the Germany) has declined (figure 17). June 2011 | Edi on No. 4 14 The State of Kenya’s Economy Figure 17: The transforma on of Kenya’s tea exports - Manufacturing exports are growing from a small United Kingdom has been overtaken by Pakistan and Egypt base. Export trends for the decade show that chemicals, apparel, as well as machinery and transport equipment are claiming a larger share of the export basket. Since the 1990s, exports of chemicals almost tripled from an average of US$ 80 million to 230 million while apparel exports increased more than sevenfold from US$ 20 million to US$ 150 million. The biggest growth was in machinery and transport equipment, which grew 11-fold from US$ 10 million to 110 million (figure 19). Kenya’s exports are also more Source: World Bank calcula ons based on UN COMTRADE data diversified than those of other EAC countries and even of Mozambique, Egypt, and Syria. However, New markets are also emerging for the these three broad categories of goods cons tute manufacturing sector. Kenya has increased its only 14.5 percent of Kenya’s current exports. machinery and transport exports in the EAC region. It has also taken advantage of trade Kenyan has the opportunity to build on the preferences extended to African countries by the shi in Kenya’s products and markets. The USA under the AGOA program to greatly expand government can’t pick winners but it can create a its apparel exports (figure 19). Kenya’s exports more enabling environment to catalyze the growth have also achieved a first breakthrough in Asia, of manufactured exports. Africa will con nue to especially India and Thailand in chemicals (figure play a dominant role in Kenya’s trade. Deepening 19) which can become a base for future export regional integra on and elimina ng non tariff growth beyond the limited confines of the EAC barriers to trade will provide the required s mulus and COMESA region. for Kenya’s manufactures. Kenya also requires Figure 18: Tex les, chemicals and machines have the 3.2 New Products highest export poten al K enya has the poten al to diversify its export base. World Bank analysis shows that Kenya has the poten al to diversify exports and increase earnings to reduce the rising trade deficit. Figure 18 shows that Kenya’s compe veness (Revealed Compara ve Advantage, RCA) in tex les and apparel, chemicals, and machinery has improved over the last decade. For example, the RCA index for tex les increased from 106 to 146, and for chemicals from 73 to 91 between 2000 and 2009. But perhaps the most remarkable increase occurred for machinery and transport equipment, whose index increased from 19 to 54 during the Note: Changes in Revealed Compara ve Advantage, which meas- ures export opportuni es by sector period. Source: BACI in CEPII and Computa ons by Laterite consultants June 2011 | Edi on No. 4 15 The State of Kenya’s Economy Figure 19: New products - exponen al export growth in some manufactured products, but from a very low base Source: World Bank calcula ons based on UN COMTRADE to strengthen its posi on as the hub support Kenya’s drive to find new for the larger East African region export markets in the Indian Ocean by upgrading its infrastructure and and the Middle East. Given its central crea ng a good business environment. The government loca on 500 km from the coast, This would also posi on Kenya globally can’t pick winners Nairobi has a natural advantage and generate addi onal exports in but it can create in producing industrials goods services and manufacturing. a more enabling and manufactures for domes c environment consump on and for regional The best way to start making Kenya to catalyze markets. However, for export-led globally compe ve is to strengthen growth to take root, Kenya will have its coastal hub and to modernize the the growth of to reach out to world markets and port of Mombasa. A second industrial manufactured locate industrial produc on closer hub nearer the coast would further exports to them. June 2011 | Edi on No. 4 16 Making the Most of Kenya’s The State of Kenya’s Economy Demographic Change and Rapid Urbaniza on K enya is going through demographic and geographic transi ons which are mutually reinforcing, and which will have profound economic consequences in the coming decade. By 2030 Kenya’s popula on will exceed 60 million, and new genera ons will have fewer children and will live longer. A majority of the popula on will be ac ve, and many former rural residents will have migrated to urban centers in search of economic opportuni es. To make the most of these transi ons, Kenya needs the economy to create employment opportuni es and the urbaniza on process to be suitably managed. In this regard, it is me for Kenya to consider a mul ple-hub urban model ini ally centered on Nairobi and Mombasa: Nairobi as the industrial and services hub for the domes c and regional markets, and Mombasa as a coastal industrial hub to cater for emerging global markets. Kenyans can also leverage the ongoing devolu on process to ra onalize the urban governance framework, to improve the management of ci es, and ensure that rural residents con nue to benefit from quality social services. 4. Demographic Change: More People, Living Longer K enya’s popula on is growing fast, increasingly so in ci es. It has doubled over the last twenty five years to about 40 million people, and rapid Figure 20: Kenya today and tomorrow – double the popula on but not many more children popula on growth is set to con nue over the next forty years. Each year the country gains some 1 million new ci zens, or some 3,000 people every day. At this rate, Kenya’s popula on will reach about 63 million by 2030 and 85 million by 2050. Popula on growth goes hand in hand with deep structural demographic changes. At first glance, Kenya’s rapid popula on growth appears to be very steady. However, it occurred for different reasons over two different periods. Un l about 2000 it was driven by increasing numbers of children. That is no longer the case: the total fer lity rate (a measure of how many children are born to each woman¹) has fallen sharply from 8.1 children in 1978 to 4.6 children in 2008, and it is projected to decline to 3.6 children by 2030. Based on these trends, the total number of children aged 0 to 14 is expected to increase by ‘only’ 30 percent by 2050, from 18 million to 25 million. But the total popula on will nonetheless more than double, due to several-fold increases of adult popula on Source: World Bank calcula ons based on United Na ons, 2009, groups (see figure 20). World Popula on Prospects ¹ The total fer lity rate of a popula on is the average number of children that would be born to a woman over her life me if: (i) she were to experience the exact current age-specific fer lity rates through her life me, and (ii) she were to survive from birth through the end of her reproduc ve life. The rate is obtained by summing the single-year age-specific rates at a given me. June 2011 | Edi on No. 4 18 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Kenya’s popula on will con nue to rise rapidly The demographic transi on will go together for two reasons. First, due to high fer lity in with a geographic transforma on. Firstly, previous decades, there are many more families in countries with larger popula ons tend to have Kenya today. So even though families are smaller, larger ci es. Secondly, urbaniza on and the type the total number of children con nues to grow. of demographic transforma on experienced Second, Kenyans are living longer. Life expectancy by Kenya reinforce each other: fer lity tends to is projected to increase from 54 years today to 68 be lower in urban areas (table 3) and for young years by 2050. As a result of these trends, the people with no or few children it is easier to fastest growing popula on groups in Kenya are migrate from rural to urban areas. This helps to those between 15 to 64 years. Incidentally, these both accelerate the demographic transforma on are exactly the popula on groups that work. and to amplify the demographic dividend. From only 22 million working-age people today, Table 3: Fer lity rates in Kenya - a rural-urban divide Kenya will have about 56 million working-age people by 2050. Loca on / Region Fer lity rate Urban 2.9 This demographic transforma on has profound Rural 5.2 economic consequences. As demographic Province transi on proceeds, there will be a drama c Nairobi 2.8 improvement in the “dependency ra o”: the Central 3.4 working-age popula on will grow much faster Coast 4.8 than the young and elderly popula on groups Eastern 4.4 that depend on them. This implies that Kenya Nyanza 5.4 can reap a demographic dividend and accelerate Ri Valley 4.7 economic growth (box 2), especially by 2015, Western 5.6 when this gap starts to widen. North Eastern 5.9 Source: KDHS, 2008/09; Note: Fer lity rate (also “total fer lity rate”) is broadly defined as the average number of children per woman Box 2: The demographic dividend The demographic dividend is defined as the accelera on of economic growth, which results from the increase in the labor force and a rela ve decline in dependents (children or elderly). This happens when people start to live longer and when families have fewer children than previous genera ons. Economic growth accelerates because it is working age groups, not the children or elderly, that work, save, and invest. More specifically, one can expect three posi ve effects: • If the share of the working-age popula on is increasing, any growth of output per worker will mean higher growth of income per capita. • More people of working age generate more savers, and thus a higher household’s savings rate; and if higher savings are translated into higher investment, more jobs will be created. • A lower share of young-age dependents in popula on makes it easier to increase expenditure on educa on and health per child, leading to higher produc vity of the new cohorts entering the labor market. Source: KEU team June 2011 | Edi on No. 4 19 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on 5. Geographic Change: Figure 22: Richer countries are more urbanized From Rural to Urban K enya is s ll a predominantly rural country but is urbanizing rapidly. Seven out of ten Kenyans live in rural areas. Agriculture remains a key contributor to growth and employs more than a third of adults. At the same me, the country is urbanizing rapidly. Every year some 250,000 Kenyans are moving to ci es and formerly rural areas are becoming increasingly urban. Twenty years ago Kenya’s urbaniza on level was only 18 percent. By 2020, 40 percent of Kenyans will live in ci es and, in 2033 Kenya will reach another pping point because half of its popula on will Note: African countries are represented by the green dots. then be living in urban areas. Source: World Bank calcula ons based on World Urbaniza on Prospects and Penn World Table. Today, some 30 percent of Kenyans already live Rural-to-urban migra ons will con nue and in urban areas (figure 21).² This is slightly above by 2030, 30 million Kenyans (48 percent) are the EAC average, but below the average for Sub- expected to reside in urban areas. The process Saharan Africa (40 percent) and the world (50 of urbaniza on takes place as people migrate percent). Globally, urbaniza on, and GDP are from rural areas to ci es and towns in search of strongly correlated, and based on this rela onship opportuni es. Those who migrate to urban areas alone, one would expect a country with Kenya’s do so in spite of the hardships they o en face in income per capita level to have an urbaniza on leaving behind their friends and family, because level of 35 percent (figure 22). of the possibili es that life in towns and ci es offers. As a consequence of this process, ci es Figure 21: Urbaniza on - a fact of life in Kenya and beyond are populated largely by people who have come from elsewhere. This is most evident in Nairobi, where half of all residents and nearly 3 out of 4 adults were born somewhere else, before moving to Nairobi. Rapid urbaniza on, if not managed well, leads to slums, higher crime, and more conges on. Migrants from rural areas o en have no choice but to se le in slums, the only housing they can afford close to their places of employment (see case studies in box 3). For instance, in Nairobi alone there are some 80 to 90 of these Source: World Bank calcula ons based on United Na ons, 2009, World Popula on Prospects; World Bank/KNBS es mates for informal communi es with a total popula on Kenya conserva vely es mated at around 1 million ² This is based on preliminary census data and has been analyzed in partnership with KNBS. The defini ons used are comparable to that used by most countries of the world (see Annex 3). June 2011 | Edi on No. 4 20 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Box 3 – Life in the city is hard but it offers opportuni es Box 3: Life in the city is hard, but it offers opportuni es Extreme poverty and despera on drove Josephine Isava from rural Kakamega to Nairobi. As a child she didn’t go to school, working instead to help her widowed mother who bore eleven children, of which only Josephine and two sisters survived. At 16 years she got married―an a empt, for the most part, to cope with the impoverishment―but was neglected by her husband at his father’s homestead while he worked in Nairobi. Le alone, Josephine was severely mistreated by her in-laws, many mes thrown out of the house. In despera on, and now with a young child and a mother who had since passed on, she set off in 1978 and found her husband in Kangemi, but he deserted her as soon as she arrived. To survive, she built herself a small shelter/kiosk on Kaptagat road. This road has remained her steadfast lifeline despite trauma c, forced demoli ons and evic ons, including homeless periods with her children. Her husband returned to her in 1979 when he lost his job and le again several years later in 1993 when he found employment again. During her thirty years in Kangemi, Josephine has strengthened her business, educated her six children, in surprisingly good schools (Loresho Primary and Pumwani Secondary), formed strong community rela onships, and built herself a three-roomed home. Josephine does not think that she’ll ever go back upcountry. “I’ve no home there, nor can I afford to buy one”, she says. She’s also not sure that she would survive even if she got there. “It would be very difficult to find the supplies I need for my business there”, she explains, “and since people do not work there, where would I find customers with the money to buy my wares?” Ethnic clashes in Ri Valley in 1992 displaced Johana Mwangi and his family from his grandfather’s farm. Poverty followed as the family adjusted to rental housing, an uncertain livelihood, and town life in Molo. In 1996, with no funds for secondary school, Johana was taken as a young boy by a rela ve to Kikuyu (Nairobi), to work as a shop cleaner. Over the years he saved and slowly implemented a plan to own a business. He bought a sewing machine, then took a course in tailoring, and finally opened a workshop in 1999. It is nicely located on Kaptagat road, Kangemi, and for Kshs 2,200 a month he gets three iron sheets for a roof, a dirt floor, cardboard paper walls, and a 6x6 space. This business has enabled him to pay house rent in Kikuyu (a 10x10 corrugated iron sheet enclosure at 1,000 a month), to look a er his wife and child, and to send money each month to his parents and siblings whom he moved to Nyandarua in early 2010 following further ethnic clashes in Molo. Recently a fire swept through Kangemi in March 2011, destroying his shop, sewing machine, supplies, clients’ clothes and fabrics―including groomsmen suits just completed for a wedding that week―and his source of income for several weeks. Johana rebuilt the structure in April 2011, and has now started working again a er borrowing a sewing machine. Source: KEU team inhabitants, or a third of the city’s popula on. a million inhabitants. This dual dynamic has the Middle-class Kenyans and those moving up poten al to result in a phenomenon akin to that the economic ladder seek affordable housing observed in the USA of ‘abandoned’ city centers. outside of Nairobi in one of several satellite These are home to commuters during the day communi es—Thika, Ruiru, Kikuyu, Machakos, and only the poorest con nue to reside in them and Ngong—which together with other towns at night. within the metropolitan area account for up to June 2011 | Edi on No. 4 21 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Urbaniza on typically supports economic In the future, the rela onship between growth (figure 22). All fast-growing developing urbaniza on and economic growth will depend economies are also rapidly urbanizing and no on several factors. Urbaniza on will lead to country has reached middle-income status with higher growth if firms have a be er business low levels of urbaniza on. Economic ac vi es environment, are able to create more jobs, and located in the ci es and towns are on average can benefit from a sufficiently large pool of be er much more produc ve than those located in educated people who can migrate from the rural rural areas. So when more people live and work areas to take these jobs. Urbaniza on won’t in the ci es, this tends to help economic growth. yield substan al benefits, however, if migrants Economic growth, in turn, spurs urbaniza on with lower educa on leave rural areas for the city by increasing demand for goods and services by necessity, forced by a combina on of rapidly produced in urban areas, and by helping to create growing popula on and scarcity of agricultural urban jobs. Ci es and towns thrive when they land. can serve larger markets, internal and external. In the 13 countries which experienced GDP growth In Kenya, economic ac vity is largely concen- of more than 7 percent per annum during at least trated in two urban centers. Nairobi and Mom- 25 years, this growth was accompanied not only basa are home to only 10 percent of the popula- by decline in young-age dependency but also by on, but they generate 40 percent of the na onal rapid urbaniza on, crea ng a diverse por olio of wage earnings. By contrast about 70 percent of urban centers, and more equitable provision of the popula on resides in the rural areas but ac- social services throughout the country (see box 4 counts only for 45 percent of total wage earnings, to illustrate this for the Republic of Korea). reflec ng the rural-urban imbalance in economic opportuni es (figure 23). People and firms benefit from loca ng close to Figure 23: Two hubs - Kenya’s best jobs are in each other, and these “agglomera oneconomies” Nairobi and Mombasa materialize in urban areas. For a firm, loca ng near other producers of the same commodity or service helps to stay abreast of market informa on in nego a ng with customers and suppliers, and to access a larger pool of workers specializing in its field. For the workers, being in EAC and COMESA the area where a number of such producers are located increases chances of finding a good job. A large number of different industries located in Eldoret Kakamega the same place brings substan al benefits too. Kisumu Nakuru Nyeri Kericho Embu For example, a management consul ng company Kisii Thika Interna onal can benefit from loca ng near business schools, financial service providers, and manufacturers. Nairobi Urbaniza on helps to concentrate economic produc on and to bring these benefits about. It Malindi both contributes to and results from economic City’s share of na onal Mombasa wage earnings growth, which is pulling people into the ci es and making them more produc ve. Source: World Bank modeling based on KNBS, Sta s cal Abstract June 2011 | Edi on No. 4 22 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Box 4: Korea’s Urbaniza on: A Model for Kenya? Korea’s transforma on into an urban country In 1960 the Republic of Korea had a per capita income equivalent to roughly half Kenya’s today. 75 percent of Koreans lived in rural areas, more than a third of adults had no schooling, and fewer than 5 percent of children had been immunized against preventable diseases such as measles. But by 2000 more than 80 percent had urbanized, almost everyone was literate and immunized, and the Republic of Korea’s income had reached that of modern-day Portugal. A few ci es and towns in Korea’s urban system illustrate a well-developed por olio of places, with Seoul at the pinnacle of this hierarchy. Located 50 kilometers from the north/south border, it is the country’s capital and home to a quarter of its popula on (9.76 million people). It serves as the na on’s poli cal center and cultural heart. Similar to Nairobi, Seoul has specialized in business services, finance, insurance, real estate, and wholesaling and retailing. Overall, services account for 60 percent of its local economy. Next in the urban hierarchy are Pusan and Daegu. With a popula on of 3.7 million, Pusan is the country’s second largest city. Its seaport, one of the world’s largest, handles more than 6.5 million container ships a year. Daegu is a metropolitan area of 2.5 million dominated by tex le and clothing manufacturing, as well as automo ve parts’ manufacturing and assembly. Since 1970 the Gyeongbu Expressway has connected Pusan to Seoul through Daegu. About 20 flights operate daily between Seoul and Daegu, and since 2001 the two ci es have been linked by a high-speed train. At the bo om of the hierarchy, Jeongeup and Sunchang are close to the interface between rural and urban. So while Jeongeup has a rela vely large popula on (129,000), one in four of its inhabitants is a farmer. Likewise, Sunchang is a rural town, half of its 32,000 residents are farmers. While some areas have inevitably been le behind in this urbaniza on process, none has been le disadvantaged. Take the Eumseong county, for example, a largely rural area in Chungcheongbukdo province. As the Republic of Korea industrialized and urbanized, the county experienced a con nual ou low of people. Nonetheless, those remaining in Eumseong s ll got be er educa on and health services, as well as improved streets and sanita on. Between 1969 and 1990, middle and high school teachers tripled in Eumseong county from 1,000 to around 3,000. And the number of hospitals per million popula on in Chungcheongbukdo province doubled from around 400 in 1980 to 800 in 1990, while the water supply coverage increased from less than 30 percent to almost 60 percent. People le Eumseong, but the Korean government did not abandon the county; instead, it con nued to emphasize the universal provision of basic and social services. Source: Adapted from World Development Report 2009 June 2011 | Edi on No. 4 23 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on If the current pace of urbaniza on is maintained, By 2020 Kenya will have 37 ci es of over 100,000 Kenya’s urban popula on will have grown by residents, up from 21 today. Although 35 percent more than 7.5 million residents by 2020. Nairobi of Kenya’s urban popula on lives in Nairobi and and Mombasa will contribute a third of this future Mombasa, the smaller ci es and towns also have urban growth. Nairobi has grown over the years an essen al role to play. Some of the smaller to become one of the most prominent ci es in urban centers, for example, will grow eventually Africa, both poli cally and financially. By contrast and become local poles of ac vity, while those that Mombasa has not experienced the same degree of ring Nairobi, comprising “Metropolitan Nairobi”, dynamism and diversifica on; it has experienced will con nue to experience above-average growth a rela ve stagna on, masked to some extent by (see table 4). To ensure that Kenya’s larger ci es its privileged coastal posi on. are well managed and that the growth of small Table 4: Kenya’s rapidly growing towns Urban Popula on Town 2009 2020 1. Nairobi 3,134,000 5,193,000 2. Mombasa 938,000 1,555,000 3. Kisumu 388,000 644,000 4. Nakuru 308,000 510,000 5. Eldoret 289,000 480,000 6. Ruiru 239,000 396,000 7. Kikuyu 233,000 387,000 8. Kangundo-Tala 219,000 362,000 9. Naivasha 169,000 280,000 10. Machakos 150,000 249,000 11. Mavoko 137,000 227,000 12. Thika 137,000 227,000 13. Nyeri 119,000 198,000 14. Vihiga 119,000 197,000 15. Malindi 118,000 196,000 16. Garissa 116,000 193,000 17. Kitui 110,000 182,000 18. Karuri 108,000 179,000 19. Ngong 107,000 178,000 20. Kitale 106,000 176,000 21. Kericho 102,000 169,000 Other towns with more than 100,000 residents - 2,155,000 All other towns 4,199,000 4,805,000 TOTAL 11,545,000 19,135,000 Source: World Bank projec on based on KNBS, 2009 census Note: Urban es mates include core-and peri-urban residents. Garissa is among a number of loca ons in Kenya’s North Eastern province whose 2009 census data was noted by KNBS to have significant anomalies. June 2011 | Edi on No. 4 24 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on and medium towns can proceed smoothly, the government will have to deliberately facilitate and support the urbaniza on process. Nairobi has become an industry hub for the regional COMESA/EAC markets and is an emerging loca on for global services. The city has witnessed private sector growth over the last half century, with significant growth in new sectors over the last ten years. Although the original EAC (comprising Kenya, Tanzania, and Uganda as members at the me of independence) only lasted a few years, Kenya immediately became Nairobi has grown over the years to become one of the most prominent ci es in Africa, both poli cally and the region’s manufacturing hub as it started with financially. By contrast Mombasa (pictured above) has a more sophis cated economy and it proved not experienced the same degree of dynamism and more efficient to assemble goods in Nairobi for diversifica on; it has experienced a rela ve stagna on, transshipment to Uganda and Tanzania. masked to some extent by its privileged coastal posi on. Over the years, Nairobi’s private sector has However, looking forward, Nairobi’s interior grown and diversified. The Nairobi Stock loca on makes it difficult for the manufacturing Exchange has become the fourth largest in terms sector to fully take off, par cularly to reach out of trading volumes in Africa. Jomo Kenya a to global export markets. Most industries and Interna onal Airport (JKIA) is the seventh busiest manufacturing plants are located in or close to airport in Africa, serving as a regional hub Nairobi. While this loca on has the advantage and an important interna onal hub for flights of proximity to Kenya’s neighbors, this economic connec ng Nairobi with Europe, the Middle market is not sufficiently large enough to generate East, and Asia. JKIA is also the export point for global economies of scale unless Kenya can export Kenya’s important hor cultural industry and the globally from Nairobi. But Nairobi is located arrival point for most of Kenya’s bustling tourism more than 500 kilometers away from the coast, industry. Nairobi is home to Kenya’s financial and is connected to global markets through the and telecommunica ons sectors, which have rather inefficient port of Mombasa and by poor seen excep onal growth over the last several infrastructure (see box 5). Container imports years. Several large mul na onal corpora ons, through Mombasa port have risen 10 percent including Coca Cola, CISCO, and Google have every year since 2005, and the port has become recently relocated their regional opera ons a huge bo leneck for trade - even though it only here. Nairobi’s inland loca on provides a good handles about 2 percent of the volumes going loca on for manufacturing and industrial goods through the Singapore or Hong Kong ports. The to be exported to countries within the EAC, and situa on is par cularly acute for container traffic the larger COMESA countries like the Democra c as the poor organiza on of the port and the lack Republic of Congo, Ethiopia, and Southern of new investment result in increased vessel Sudan. delays, port conges on surcharges, and higher costs to customers. Increased imports volumes June 2011 | Edi on No. 4 25 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Box 5: Short routes, but long economic distance - the case of Kenya’s manufacturers The economic distance between Kenya’s industrial hub (Nairobi) and Japan is 47 days; and about 10 days to its EAC and COMESA export markerts. Kenya is the manufacturing hub for the EAC region. In 2010, for instance, 5,721 vehicles were assembled in Kenya. Kenyan firms import Completely Knocked Down Kits from Thailand and Japan, and combine them with tyres, springs, exhausts, ba eries, and other materials sourced locally to assemble the vehicles. These kits are imported through Mombasa port and transported by road to Nairobi for assembly. It takes a total of 35 days to import the vehicle kits from Japan to Mombasa, and another 11.5 days from the Mombasa port to Nairobi. The dwell me at the Mombasa port is 9 days (5.3 days at the port and 3.7 days at the Container Freight Services) and another 1.5 days at the Through Bill of Landing. The vehicle parts are then transported by road to the assembly plant in Nairobi (500 kilometers from Mombasa) which takes another 2 days. Between Mombasa and Nairobi, the goods encounter 12 police check points, 2 police road blocks, and 2 weigh bridges, which increases the transit me. The assembled vehicles are sold in the domes c market and exported to the EAC and COMESA markets. It takes 5 days to export them to Uganda (the largest market) and 10 days to export to Rwanda. Exports to Uganda and Rwanda are transported through the Northern transit corridor―Nairobi, Nakuru, Eldoret, Malaba, Kampala, Katuna, Gatuna, and Kigali―a distance of 1,250 kilometers. It takes about 2 days by road to get the goods to the Kenya-Uganda border (Malaba) and 8 hours to cross the border (5 hours on the Kenyan side, 3 hours in Uganda). Then, it takes another day to Kampala and 2 days to the Uganda-Rwanda border where the clearance is much faster, taking 1 hour (20 minutes on the Uganda side, 40 in Rwanda), followed by another day’s travel to Kigali. Transporters encounter a total of 18 police check points, 7 police road blocks, and 10 weigh bridges between Nairobi and Kigali. Although the weighing takes a few minutes, the queues to the weighbridge take me and unethical prac ces are s ll reported at all weighbridge sta ons. There is a railway line along the corridor― which would be more efficient― but its performance has been declining, and now handles only 6 percent off-take from the port. Source: KEU team based on interviews with manufacturers have placed addi onal stress on land transport, Figure 24: Kenya has the best market access in East par cularly on the Mombasa-Nairobi corridor, and and Central Africa especially because effec ve integrated rail and road links are lacking. The failure of the railway system has resulted in a large number of new truck movements in and around the port, contribu ng to the growing problem of truck conges on and parking, as well as to road deteriora on. Kenya can leverage its coastal loca on and proximity to global markets to increase export compe veness. Compared to the countries of East Africa, Kenya has a favorable loca on and be er access to global markets (figure 24). It is also fairly close to large emerging markets like India and Pakistan―with which it also has strong linguis c and ethnic es through its business elite of Asian descent―and is increasingly trading with Source: World Bank staff modified from World Development East Asia. Report 2009 June 2011 | Edi on No. 4 26 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on The port of Mombasa needs upgrading. A shi in of employment. Meanwhile, Nairobi’s vibrant private sector investment to Mombasa to reach growth would con nue, based on expansion out to global export markets will only occur if the of those areas where it is currently thriving, for government makes the necessary investments in example, banking and finance, ICT, construc on, infrastructure and improves management of the transporta on, and tourism, as well as in those port. The private sector is largely making money manufactures and industrial products des ned to from its produc vecapacityinNairobi,anditsability its neighbors for which its loca on will con nue to expand is constrained by the small size of the to provide it with a compara ve advantage. market. If the required infrastructure investments were made in Mombasa and the transit corridor Facilita ng the establishment of a coastal hub to Nairobi improved, manufacturing and industry will not be easy, but not doing so would reduce in Nairobi would benefit from lower import costs Kenya’s growth poten al. Crea ng a second which would expand exis ng profit margins. industrial hub is complicated by the very nature of Over the medium term, the new private sector agglomera on effects: firms tend to locate where operators could then exploit the opportunity other firms are (so once Nairobi was established offered by an efficiently opera ng Mombasa and grew, alterna ve growth poles had fewer port, and build a strong presence on the coast. chances to develop in coastal areas). But if Kenya Taking advantage of economies of scale and cost improves its overall investment climate and the effec ve sea transport connec vity between its two largest ci es, as they could, as a result, well as Mombasa’s produc ve infrastructure, export manufactures it will improve its chances to leverage global and industrial goods Nairobi is located manufacturing demand, including the compe on to the Middle East and more than 500 from Asian coastal urban agglomera ons. Asia. kilometers away from the coast, 6. Devolu on: Investment in the and is connected port of Mombasa, From Central to Local to global markets and in the transport corridor connec ng through the rather it to Nairobi and inefficient port of T he economic and social gains from urbaniza on will materialize only if Kenya’s main urban centers are well managed. Conversely, beyond, would have Mombasa and by poor governance and management would lead to important benefits poor infrastructure increased slumifica on, crime, and conges on. for the urban hubs Effec ve and efficient urban service delivery is along the northern corridor. In the short term, cri cal for economic growth. Ci es over a certain Mombasa would earn more revenue from size and density need: (i) mandated func ons; increased port opera ons. This would create (ii) adequate financing; (iii) efficient technical employment and could a ract new migrants. management; and (iv) poli cally accountable Nairobi’s manufacturers and industrialists would governance. Most commonly this is achieved benefit from lower input costs. Over the medium thorough rela vely autonomous structures that term, one would expect to see the agglomera on can collect revenues from urban residents and can effects of urbaniza on kick-in for Mombasa, use these to fund urban services. Interna onally, as the private sector perceives opportuni es na onal governments are increasingly taking for global exports and the benefits from a pool responsibility for ensuring urban governance of low-cost labor that has migrated in search structures are in place and operate effec vely. June 2011 | Edi on No. 4 27 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Experience has shown that second- But Kenya’s cons tu on does er governments are prone to not make it clear how urban under-resource and dis-empower areas outside Nairobi and third-level government, to the If Kenya improves its Mombasa are to be governed. detriment of urban service delivery. The majority of larger overall investment urban centers are located in In Kenya, public services are climate it will improve predominantly rural coun es. currently provided through a wall- its chances to leverage If urban service delivery is le to-wall system of municipal, town, global manufacturing to the responsibility of these and county councils.⁴ At least 7 demand, including county governments (without of the larger municipal councils the compe on from catering for urban governments have operated con nuously separately), Kenya will be out of Asian coastal urban since the 1950s when they were step with most other countries first established by the colonial agglomera ons in the world. The cons tu on administra on. These larger does provide for a na onal law municipal councils also provide some social on ‘ci es and urban areas’, but it is not clear what services (schools and health centers). However, it should cover. While this law could deal with the over me their capacity and mandates have classifica on of urban areas (for example, based dwindled due to poorly structured and weak on popula on and other criteria), and prescribe governance arrangements. governance arrangements, it is less clear whether it could empower urban governments and deal The new cons tu on sets the stage and creates with their resourcing. The fourth schedule of the an opportunity for a profound redefini on of cons tu on has already assigned urban powers urban governance arrangements. As of August and func ons to the coun es. These powers 2012, 47 coun es will be created and equipped would need to be delegated to urban governments with significant resources and responsibili es in order for them to operate effec vely. It would under the authority of county assemblies and be useful to clarify the legal posi on so that the execu ves. In addi on to own-revenues, which policy op ons permi ed under the cons tu on include all of the own-source revenues of Kenya’s become explicit. current local authori es, the new coun es will collec vely receive a minimum transfer equivalent There are two specific risks which could cripple to 15 percent of na onal revenue. Among the the development of Kenya’s ci es in years responsibili es of the county, the cons tu on lists to come. The first risk is that larger towns in a number of core urban government func ons predominantly rural coun es will have funding which include, among others, street ligh ng, solid for urban services reduced. The second risk is to waste management, markets, trade licenses, and the con nuity and viability of services currently storm water management. being provided in these towns if Kenya’s main ⁴ Larger towns and cities (including Nairobi and Mombasa) are serviced by municipal councils. Smaller towns have town councils, and the remaining urban settlements are serviced by 62 county councils. June 2011 | Edi on No. 4 28 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Figure 25: Despite rapid urbaniza on, most coun es are s ll predominantly rural Source: World Bank calcula on based on KNBS 2009 Popula on Census Report ci es are not adequately mandated, structured, Figure 26: Service provision has not kept pace with rapid urbaniza on and resourced to deliver them. Most of Kenya’s coun es are, and will remain for the foreseeable future, predominantly rural even as they will increasingly be home to large ci es. With the excep on of Nairobi, Mombasa, Kisumu, Kiambu, and Machakos, all other 42 coun es will be predominantly rural. Out of the total 47 coun es, 39 will have less than 40 percent urban residents and another 25 coun es will have less than 20 percent (figure 25). If municipal government is vested in coun es, Source: World Bank. A Bumpy Ride to Prosperity Infrastructure the risk is that urban needs will be overlooked for shared Growth (2011 forthcoming); figure is based on KNBS: Census 1999 and 2009. Note: Access to piped water includes and that the economic poten al of ci es will not ‘piped’ and ‘piped into dwelling’ census categories. be realized. While the bulk of own-revenues is generated from centers with the highest core urban rural cons tuencies. Interna onal experience popula ons,therewillbestrongpoli calincen ves suggests that poli cal compe on commonly for county councilors, hailing predominantly from arises between the representa ves in second and rural areas, to channel these resources toward third ers of government. If county assemblies June 2011 | Edi on No. 4 29 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on control the funding of urban governments, rural But the Nairobi greater metropolitan area includes councillors may use this power to starve their satellite ci es that together have a popula on urban ‘compe tors’. This would poten ally close to a million (mostly in Kiambu and Machakos leave ci es underfunded and weaken the coun es). For the Nairobi metropolitan area to accountability link between urban residents func on and operate as one large agglomera on, and their representa ves. Current trends show it would be ideal to have a structure which that already service permi ed these three coun es to coordinate provision in urban areas programs, investments, and even taxa on policies. has not kept pace with While Mombasa has a much smaller peri-urban rapid urbaniza on If county area, it will also want to coordinate its programs (figure 26). assemblies and policies with neighboring towns that will be poten al sites for new migrants once Mombasa’s Kenya’s larger ci es control the port infrastructure improves. will need governance funding of urban systems that address governments, rural Infrastructure connec ng rural and urban areas service delivery needs councillors may and social services in rural areas should also and are accountable. use this power to receive due a en on. Under arrangements of The cri cal policy choice starve their urban the new cons tu on, the county governments lies somewhere in a will probably have the incen ves to undertake spectrum between the ‘compe tors’ investments in the local infrastructure, but the two following extremes: (i) a model of independent na onal government needs clear mandate and and fully-autonomous urban governments budgetary alloca ons for investment in the linked directly to na onal government, and na onal roads. Responsibility for provision (ii) a model of urban governments controlled, of public educa on services remains with the empowered, resourced by, and repor ng to, na onal government, but health services have county governments. Interna onal experience been devolved to the county level. This raises some across the world is that second- er governments problems which need to be addressed. Currently generally address the needs of third- er every hospital serves several coun es. Thisprobably government poorly. A hybrid op on may be to creates economies of scale in provision of health combine both. For example, with half the urban services. However, this is also disadvantageous council members being directly elected and the for the coun es hos ng other half made up of the county members of hospitals: they have parliament from the urban area wards. In Kenya, as to bear the costs elsewhere, of serving people The transi ontocountyadministra oncouldalso from other coun es, economic ac vity have a nega ve impact on the development and poten ally leading management of the metropolitan areas around will remain to under-provision of Kenya’s two largest ci es. The boundaries of concentrated, but health services in some Nairobi and Mombasa coun es almost perfectly development can coun es. overlap with those of the current municipali es. s ll be inclusive June 2011 | Edi on No. 4 30 Special Focus – Making the Most of Kenya’s Demographic Change and Rapid Urbaniza on Finally, the new decentraliza on architecture will need to balance growth with equity. In Kenya, as elsewhere, economic ac vity will remain concentrated but development can s ll be inclusive. Kenya’s future economic growth will increasingly occur in urban centers. Rural areas can benefit directly from urban growth if they are connected to the growth poles where agricultural The rural popula on can also benefit indirectly if government products can be sold. The rural popula on can also expenditures―which will grow with economic success―are benefit indirectly if government expenditures― spread equitably to provide social services for all Kenyans. which will grow with economic success―are spread equitably to provide social services for all There is a very short window of opportunity to Kenyans. This would allow the popula on in rural get the decentraliza on architecture right. Most and economically less-ac ve parts of the country of the issues will need to be decided by mid-2011 to acquire skills and stay healthy. As they move to as the laws on ci es and urban areas and on public urban areas they will then be in a posi on to find or financial management are to be presented to to create be er jobs. These migrants also tend to parliament. The effects, however, could well be felt send remi ances back home and provide a bridge for years to come and will durably shape Kenya’s between rural and urban areas. economic geography. June 2011 | Edi on No. 4 31 ANNEXES Annexes Annex 1: Impact of Exchange Rate Changes on Kenya’s Domes c Oil Prices The interna onal oil prices peaked in July 2008 during the commodity price boom but dropped with the global economic crisis. In July 2008, the Murban crude oil was selling at US$ 137.35 per barrel transla ng to US$ 0.86 per litre of crude, while Kenyan pump price was retailing at US$ 1.55 and 1.46 per litre of petrol and diesel respec vely. With the global recovery, global oil prices have been increasing since 2009 and this has also translated into higher domes c prices. In April 2011, Murban oil was selling at US$ 112.42 per barrel equivalent to US$ 0.71 per litre of crude. The Kenyan pump prices per litre were US$ 1.28 for diesel and US$ 1.32 for petrol. Controlling for currency movements, these prices are s ll lower than their peak in 2008 in US dollar terms. The Murban crude oil is 18 percent lower than its peak of August 2008 while the Kenyan pump prices were on average 15 percent lower than their peak in August 2008. While the interna onal crude price dropped from its peak of July 2008, Kenyan prices did not decline propor onately. The interna onal price dropped by 70 percent between July and December 2008, while domes c prices declined by 30 percent in US dollar and only by 19 percent in domes c currency prices in the same period. The difference in between the 30 percent decline and 19 percent can be explained by exchange rate movements, while the gap between the 70 percent interna onal drop and the 30 percent domes c adjustment is a result of domes c distor ons and inefficiency at that par cular period (figure A1). Figure A1: The deprecia on of the Kenya Shilling is compounding the impact of the high global oil prices Source: World Bank calcula ons based on KNBS data June 2011 | Edi on No. 4 33 Annexes Annex 2: Analyzing Kenya’s Export Diversity Kenya’s exports are much more diversified than in other EAC countries and even against comparators such as Mozambique, Ethiopia, Egypt, Syria, and Guatemala. However, during 2000-2009 the export diversity of other EAC countries grew faster than Kenya’s diversity. Kenya has chosen the path of diversifica on over specializa on, and the average ubiquity of Kenyan exports is compara vely high given its level of diversifica on. Ubiquity measures how many other countries on average export the same products that Kenya exports - the lower the ubiquity the more unique a country’s exports. Figure A2: Comparing Kenya’s export diversity Source: Laterite Analysis June 2011 | Edi on No. 4 34 Annexes Annex 3: What is Rural and What is Urban? Interna onal Defini ons and trading centres with a minimum popula on of 2,000 and poten al for future growth. Since country characteris cs differ very substan ally from country to country, no single, universally In Kenya, the share of the popula on that is urban agreed defini on of urban and rural exists. What is has been calculated as the sum of the core urban and considered a village in India may be larger than most peri-urban popula ons. This defini on has also been towns in Botswana. In prac ce, therefore, countries used for this report. In 2009, the core urban share of adopt different defini ons of rural and urban. the popula on was 23.1 percent, while the peri-urban However, the United Na ons Sta s cs Division offers popula on was 6.8 percent. The na onal urban share broad guidance on how to dis nguish rural and urban of the Kenyan popula on is therefore 29.9 percent areas (see h p://unstats.un.org/unsd/demographic/ (KNBS 2009, Kenya Popula on and Housing Census, sconcerns/densurb/densurbmethods.htm). The Table 3). guidelines consider such dimensions as way of life assuming that urban areas offer higher living Zipf’s Law standards popula on density, access to services, share of popula on in agriculture, and size. Note Zipf’s law for ci es is one of the most conspicuous that the numbers presented on the UN website are empirical facts in economics and it has been used es mates, assuming that there is a certain degree of to verify the defini ons of Kenya’s urban centres. undercoun ng in most censuses. The World Bank is To visualize Zipf’s law, one could take a country (for currently using the UN Sta s cs Division defini ons instance, Kenya), ranking its metropolitan areas by and projec ons on the Open Data website (www. popula on size so that, for example, number 1 would data.workbank.org). be Nairobi, number 2 is Mombasa, etc. With this informa on, one could then draw a graph on the x- Kenya axis would be the logarithm of the rank (Nairobi has log rank 1, Mombasa has log rank 2), and on the y- The Kenya Na onal Bureau of Sta s cs is using axis would be the logarithm of the popula on of the two main classifica ons for urban areas in recent corresponding metropolitan area. For most countries censuses: the outcome is a straight line, and the more precisely metropolitan areas are defined (i.e. including not only 1. Core urban: Fully built up areas with increased or popula on of the ci es but also suburban areas, etc.), high popula on density. the closer is its slope to -1. 2. Peri-urban: Areas immediately surrounding core We test this regularity on a sample of Kenya’s largest urban concentra ons (in the periphery) that are 27 urban centers, first using the data on the core urban considered to be in a transi on between rural and popula on only, and then using the data on both core urban. The popula on density is lower than in urban and peri-urban popula ons (this sample of core urban areas, but substan ally higher than in urban centers is large enough to include more than most rural areas. half of the country’s peri-urban popula on). It turns out that the Zipf’s law holds much be er in the second In contrast, rural areas are defined as large isolated case (figures A3 and A4). This leads us to conclude that areas of open country where the main economic in interna onal standards, the popula on of Kenya’s ac vity is agriculture. urban agglomera ons should include its peri-urban popula on, implying that the country’s urbaniza on In the 1989, 1999, and 2009 censuses urban areas rate is 29.9 percent. have included all ci es, municipali es, town councils, urban councils, all district headquarters, and all town June 2011 | Edi on No. 4 35 Annexes Figure A3: Zipf’s law for Kenya’s core urban popula on Source: World Bank calcula ons based on 2009 na onal census data from KNBS Figure A4: Zipf’s law for Kenya’s core urban and peri-urban popula on Source: World Bank calcula ons based on 2009 na onal census data from KNBS June 2011 | Edi on No. 4 36 Annexes Annex 4: Data Tables and Figures Table A1: GDP Growth rates - Kenya and Sub-Saharan Africa % 2007 2008 2009 2010 2011 GDP growth rate Kenya 7.0 1.6 2.6 5.6 4.8 GDP growth rate SSA 6.5 5.2 1.6 4.7 5.3 GDP Per capita growth rate Kenya 4.4 -1.0 -0.1 3.1 2.3 GDP per Capita growth rate SSA 4.1 3.1 -0.3 2.7 3.3 Source: Global Economic Prospectus January 2011, KNBS Table A2: Kenya’s GDP per capita 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP/Capita (US$) 403 402 397 438 461 523 611 719 774 738 760 GDP growth rate % 0.6 4.5 0.5 2.9 5.1 5.9 6.3 7.0 1.6 2.6 5.6 Source: WDI & KNBS June 2011 | Edi on No. 4 37 Annexes Table A3: Kenya can become a Middle Income Country this decade Year GDP/Capita US$ (scenario GDP/Capita US$ (scenario 1: 6% growth rate) 2: 3.7% growth rate) 2009 738 738 2010 760 760 2011 782 765 2012 808 773 2013 835 782 2014 863 790 2015 891 799 2016 921 807 2017 951 816 2018 983 824 2019 1015 833 2020 1049 842 2021 1084 851 2022 1120 860 2023 1157 870 2024 1195 879 2025 1235 888 2026 1276 898 2027 1318 908 2028 1362 917 2029 1407 927 2030 1453 937 2031 1502 947 2032 1551 957 2033 1603 968 2034 1656 978 2035 1711 988 2036 1768 999 2037 1826 1010 Source: WDI and World Bank staff cacula ons June 2011 | Edi on No. 4 38 Annexes Table A4: Sectoral growth rates (%) Sector/ Year Share of GDP 2007 2008 2009 2010 Agriculture 24.7 2.1 -5.0 -1.4 6.3 Industry 15.3 7.1 4.8 3.4 5.3 Service 60 8.1 2.6 4.3 5.4 GDP 7.0 1.6 2.6 5.6 Source: KNBS Table A5: Quarterly GDP growth rates (%) Year Quarter GDP growth rate 2008 Q1 1.3 Q2 2.4 Q3 2.7 Q4 -0.1 2009 Q1 5.6 Q2 0.9 Q3 0.5 Q4 3.5 2010 Q1 4.4 Q2 4.7 Q3 6.1 Q4 6.9 Source: KNBS Table A6: GDP growth rates of other African countries (%) 2009 2010 2011 Ethiopia 8.7 9.0 9.0 Tanzania 6.0 7.0 7.2 Ghana 4.7 6.6 13.4 Rwanda 4.1 6.5 6.5 Uganda 7.1 6.3 6.5 Kenya 2.6 5.6 4.8 SSA average 1.7 4.7 5.3 South Africa -1.8 2.7 3.5 Source: Global Economic Prospectus January 2011 June 2011 | Edi on No. 4 39 Annexes Table A7: Kenya’s infla on (%) Overall Infla on Food Infla on Transport Infla on 2010 January 4.7 4.1 5.2 February 5.2 7.2 5.9 March 4.5 4.5 4.3 April 3.7 3.8 4.4 May 3.9 4.4 6 June 3.5 4.6 3.9 July 3.6 4.6 3.9 August 3.2 5.5 4.8 September 3.2 5.7 4.9 October 3.1 5.6 5.0 November 3.8 6.7 5.5 December 4.5 7.8 7.6 2011 January 5.4 8.6 8.4 February 6.5 9.8 13.1 March 9.2 15.1 15.9 April 12.1 19.1 20.4 Source: KNBS June 2011 | Edi on No. 4 40 Annexes Table A8: Kenya’s foreign exchange rates KSH/US$ KSH/Euro 2010 Jan 75.8 108.3 Feb 76.7 105.1 Mar 77.0 104.5 Apr 77.3 103.7 May 78.5 98.8 Jun 81.0 99.0 Jul 81.4 103.9 Aug 80.4 103.8 Sep 80.9 105.6 Oct 80.7 112.2 Nov 80.5 110.1 Dec 80.6 106.5 2011 Jan 81.0 108.2 Feb 81.5 111.3 Mar 84.3 117.9 April 83.9 121.1 Source: CBK Table A9: Capital markets indices Dow Jones Industrial Nairobi Stock Average Index Exchange Index 2010 Jan 10,067 3,565 Feb 10,325 3,629 March 10,850 4,073 April 11,009 4,233 May 10,137 4,242 June 10,144 4,339 July 10,466 4,439 Aug 10,151 4,455 Sept 10,860 4,630 Oct 11,118 4,640 Nov 11,092 4,528 Dec 11,578 4,396 2011 Jan 11,823 4,527 Feb 12,130 4,265 March 12,221 3,873 April 12,811 4,006 Source: CBK & Dow Jones Industrial Average June 2011 | Edi on No. 4 41 Annexes Table A10: Interest rates (%) Month Lending rates Central Bank Rate Jan-09 14.78 8.50 Feb-09 14.67 8.50 Mar-09 14.87 8.50 Apr-09 14.71 8.25 May-09 14.85 8.25 Jun-09 15.09 8.00 Jul-09 14.79 8.00 Aug-09 14.76 7.75 Sep-09 14.74 7.75 Oct-09 14.78 7.75 Nov-09 14.85 7.75 Dec-09 14.76 7.00 Jan-10 14.98 7.00 Feb-10 14.98 7.00 Mar-10 14.96 7.00 Apr-10 14.58 6.75 May-10 14.44 6.75 Jun-10 14.39 6.75 Jul-10 14.29 6.75 Aug-10 14.18 6.00 Sep-10 13.98 6.00 Oct-10 13.85 6.00 Nov-10 13.95 6.00 Dec-10 13.87 6.00 Jan-11 14.03 6.00 Feb-11 13.92 5.75 Source: CBK June 2011 | Edi on No. 4 42 Table A11: Credit distribu on to the private sector (KShs billion) e g e in rt & on & er s at re t ur g& n te ag riv ltu ac in c o po nica ce e sta in g& g e ds um es r s nt yoy l P dit uf ld ns an c le at hol ns bles in s he e rce th ta e r icu an e ui stru B n ra mu in uran a in r r y i n M a iv Co ra us vice B r Ot vi To Cr Ag M ad T m F s Re Pr use a c Pe row Tr co co in qu ho du se G Dec-06 16.7 0.5 -2.5 1.2 3.2 2.7 0.1 1.0 0.0 3.3 -0.4 6.7 1.1 14.3 Mar-07 19.4 1.3 0.0 2.7 2.4 0.8 3.6 1.4 0.0 5.3 1.8 3.1 -3.2 14.0 Jun-07 0.0 -4.9 -9.7 -4.1 0.1 -3.4 -1.6 -0.6 0.9 3.3 2.4 -3.6 21.1 10.0 Sep-07 27.8 -0.3 -2.0 2.2 -0.7 4.8 -1.6 0.7 0.5 14.8 -5.4 -1.5 16.2 16.2 Dec-07 45.9 -1.0 7.3 7.0 0.2 5.1 1.4 -2.0 1.3 11.6 8.9 4.1 2.1 22.6 Mar-08 11.7 2.4 -3.1 -6.0 -1.8 -6.2 -2.0 -0.9 -0.4 16.5 0.8 4.3 8.2 19.8 Jun-08 42.2 2.6 7.4 5.6 0.6 3.2 1.4 3.8 -0.3 3.0 5.4 9.1 5.5 29.6 Sep-08 61.6 -0.4 14.2 7.9 1.2 5.6 0.9 2.5 -0.7 10.3 4.9 9.2 5.9 35.2 Dec-08 28.5 2.9 5.9 26.3 1.0 7.2 -9.9 4.3 5.7 -24.8 4.5 -1.1 6.5 28.6 Mar-09 15.4 3.0 -0.8 -0.7 -0.9 - 1.0 -0.6 5.2 3.0 -4.8 2.3 -3.5 14.1 28.6 Jun-09 20.2 -1.4 -3.1 2.2 3.4 -1.5 2.8 4.3 8.1 -1.4 4.2 2.2 -9.5 22.5 Sep-09 1.8 5.6 1.8 8.9 -2.1 4.2 -1.3 3.1 15.9 18.4 2.2 -7.1 -16.1 10.6 Dec-09 52.4 0.4 -0.3 26.6 7.9 5.1 5.3 6.5 2.7 -12.1 6.5 -9.0 13.0 13.9 Mar-10 21.1 -1.1 4.7 -12.2 -9.9 1.9 4.3 0.9 5.8 24.6 3.2 4.2 -5.5 14.4 Jun-10 39.9 2.4 6.2 7.5 -4.8 0.6 -4.4 27.9 2.3 2.8 -4.2 8.8 -5.2 16.8 Sep-10 43.7 1.9 10.9 9.5 0.6 -6.4 -2.4 11.3 -0.2 -0.9 2.1 8.6 8.7 22.9 Dec-10 45.5 1.2 2.6 13.7 0.9 0.1 1.5 5.9 -1.5 6.5 5.4 4.2 5.2 20.3 Source: CBK June 2011 | Edi on No. 4 43 Annexes Annexes Table A12: Oil price movements 2010 Month Pump Prices - Petrol (Ksh/Lt) Murban oil price ($/barrel) Jan-10 86.24 77.50 Feb-10 86.78 74.20 Mar-10 88.52 78.30 Apr-10 90.64 84.80 May-10 92.40 77.90 Jun-10 92.17 74.80 Jul-10 92.23 73.00 Aug-10 92.86 74.60 Sep-10 96.16 75.90 Oct-10 96.73 81.50 Nov-10 98.79 85.65 Dec-10 94.05 91.85 Jan-11 95.67 94.8 Feb-11 98.08 101.27 Mar-11 102.44 111.63 Apr-11 111.17 116.62 Source: KNBS, World Bank Table A13: Kenya’s fiscal posi on % of GDP 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Revenue and Grants 23.3 23.2 23.6 26.5 26.9 26.8 27.0 Revenues 22.0 22.3 22.7 25.2 25.3 25.3 25.6 Tax Revenues 18.9 19.2 19.4 20.5 20.7 20.8 21.1 Income tax 8.4 8.5 8.7 9.3 9.4 9.4 9.5 Value-added tax 5.7 5.8 5.9 6.2 6.3 6.5 6.7 Import duty (net) 1.7 1.7 1.7 1.8 1.8 1.7 1.7 Excise duty 3.1 3.2 3.1 3.2 3.2 3.2 3.2 Nontax Revenue 3.0 3.1 3.4 4.7 4.6 4.5 4.5 Grants 1.3 0.9 0.9 1.3 1.6 1.5 1.4 Expenditure and Net Lending 27.3 27.7 30.2 32.7 31.7 31.5 30.7 Recurrent expenditure 20.6 20.0 21.0 22.3 20.5 19.9 19.7 Interest Payments (4+5) 2.4 2.2 2.6 2.7 2.8 2.7 2.6 Wages and Benefits (civil service) 7.4 7.1 7.2 7.5 7.2 7.0 7.0 Other 10.7 10.7 11.2 12.1 10.5 10.1 10.1 Development and Net Lending 6.7 7.6 8.9 10.1 10.8 11.2 10.7 Budget Deficit -3.4 -3.7 -6.5 -6.0 -5.0 -4.7 -3.9 Financing 3.1 4.1 6.5 6.0 5.0 4.7 3.9 Total Debt to GDP 34.6 41.7 45.8 47.9 47.6 47.1 46.0 Source: Ministry of Finance June 2011 | Edi on No. 4 44 Annexes Table A14: Balance of Payment (2007-2010) US$ billions 2007 2008 2009 2010 CURRENT ACCOUNT -1.1 -2.1 -1.6 -2.3 Exports (fob) 4.1 5.0 4.5 5.2 Imports (cif) 9.1 11.1 10.3 12.1 SERVICES 3.8 4.0 4.2 4.6 CAPITAL & FINANCIAL ACCOUNT 2.0 1.7 2.4 2.5 Capital Account 0.3 0.3 0.3 0.2 Financial Account 1.7 1.4 2.1 2.4 OVERALL BALANCE 0.9 -0.4 0.8 0.2 GDP 27.2 30.0 29.4 32.1 As % of GDP CURRENT ACCOUNT -4.1 -6.6 -5.5 7.9 Exports (fob) 15.2 16.6 15.3 17.3 Imports (cif) 33.3 38.3 35 40.6 SERVICES 14.1 13.3 14.2 14.3 Source:CBK June 2011 | Edi on No. 4 45 Annexes Table A15: Simula ng the effects of crude oil price increase on the current account US$ billions 2008 2010 2011 base 2011 SC1 2011 SC2 2011 SC3 1. CURRENT ACCOUNT -2.1 -2.3 -3.1 -3.3 -3.9 -4.2 1.1 Exports (fob) 5.0 5.2 5.6 5.6 5.6 5.6 1.2 Imports (cif) 11.1 12.1 13.5 13.7 14.3 14.7 Oil 3.1 2.7 3.1 3.3 3.9 4.3 Chemicals 1.4 1.6 1.8 1.8 1.8 1.8 Manufactured Goods 1.6 1.8 1.9 1.9 1.9 1.9 Machinery & Transport Equipment 3.1 3.8 4.2 4.2 4.2 4.2 Other 1.9 2.2 2.4 2.4 2.4 2.4 1.3 Services 4.0 4.6 4.9 4.9 4.9 4.9 2. CAPITAL & FINANCIAL ACCOUNT 1.7 2.5 2.8 2.8 2.8 2.8 2.1 Capital Account 0.3 0.2 0.1 0.1 0.1 0.1 2.2 Financial Account 1.4 2.4 2.7 2.7 2.7 2.7 3. OVERALL BALANCE -0.4 0.2 -0.2 -0.4 -1.0 -1.4 Memo Nominal GDP 30.0 32.1 35.6 35.6 35.6 35.6 Oil Price (US$/Barrel) 79.95 79.95 85.00 100.00 110.00 as % of GDP 1. CURRENT ACCOUNT -6.6 -7.9 -8.6 -9.2 -10.8 -11.9 1.1 Exports (fob) 16.7 17.3 15.7 15.7 15.7 15.7 1.2 Imports (cif) 38.3 40.6 38.0 38.6 40.2 41.3 Oil 11.6 9.3 8.8 9.4 11.0 12.1 Chemicals 4.8 5.0 5.1 5.1 5.1 5.1 Manufactured Goods 5.3 6.5 5.4 5.4 5.4 5.4 Machinery & Transport Equipment 10.2 12.8 11.9 11.9 1.9 11.9 Other 6.4 7.0 6.8 6.8 6.8 6.8 2. SERVICES 13.3 14.3 13.7 13.7 13.7 13.7 3. CAPITAL & FINANCIAL ACCOUNT 5.6 7.8 8.0 8.0 8.0 8.0 3.1 Capital Account 1.0 0.5 0.4 0.4 0.4 0.4 3.2 Financial Account 4.6 7.3 7.6 7.6 7.6 7.6 4. OVERALL BALANCE -1.5 0.5 -0.6 -1.2 -2.8 -3.9 Source: CBK and World Bank staff calcula ons June 2011 | Edi on No. 4 46 Annexes Table A16: Kenya’s exports of selected commodi es 2000 2010 Commodity Value US$ millions Volume ‘000 tonnes Value US$ millions Volume ‘000 tonnes Coffee 154 87.0 209 44.3 Tea 463 217.3 1159 410.0 Hor culture 254 170.0 818 342.9 Source: CBK Table A17: Kenya’s top foreign exchange earners Category Average 2004-2009 US$ millions Tea 853 Hor culture 759 Tourism 737 Chemicals 288 Semi processed goods 229 Mineral fuels 228 Apparel 218 Other foods 179 Machinery & Transport equipment 137 Source: UN COMTRADE, CBK & KNBS Table A18: Chemical exports, period average US$ millions Partner 1992-2000 2001-2009 World 86.1 216.1 Tanzania 32.1 39.4 Uganda 24.4 53.5 India 3.3 20.3 Ethiopia (excludes Eritrea) 4.8 10.7 Congo, Dem. Rep. 1.9 10.8 Thailand 0.0 17.0 Other 19.6 64.5 Source: UN COMTRADE June 2011 | Edi on No. 4 47 Annexes Table A19: Other manufactures exports, period average US$ millions Partner 1992-2000 2001-2009 World 271.7 481.6 Uganda 79.0 109.7 Tanzania 50.3 88.4 United Arab Emirates 53.5 14.9 Rwanda 11.3 23.0 Congo, Dem. Rep. 7.2 37.3 United Kingdom 7.4 28.3 Sudan 3.3 20.0 Other 59.8 160.0 Source: UN COMTRADE Table A20: Apparel exports, period average US$ millions Partner 1992-2000 2001-2009 World 19.7 152.5 United States 2.3 113.8 Uganda 5.7 8.2 Tanzania 1.8 6.7 Sudan 1.4 4.4 Congo, Dem. Rep. 1.2 4.1 Other 7.3 15.4 Source: UN COMTRADE Table A21: Machinery and Transport Equipment exports, period average US$ millions Partner 1992-2000 2001-2009 World 10.8 110.5 Uganda 3.3 26.0 Tanzania 3.1 26.0 Sudan 0.3 14.5 Rwanda 0.6 5.4 Other 3.4 38.6 Source: UN COMTRADE June 2011 | Edi on No. 4 48 Annexes Table A22: Sample of other manufactured exports Commodity Period average 1997-2009 US$ millions Iron and steel 73 Plas cs and ar cles thereof 63 Printed books, newspapers, pictures 44 Natural/cultured pearls, precision stone 42 Paper & paperboard; art of paper pulp 37 Ar cles of iron or steel 31 Aluminum and ar cles thereof 30 Copper and ar cles thereof 26 Footwear, gaiters and the like; par 25 Furniture; bedding, ma ress, ma 21 Glass and glassware 20 Rubber and ar cles thereof. 15 Miscellaneous ar cles of base meta 14 Op cal, photo, cine 14 Miscellaneous manufactured ar cles 14 Wood and ar cles of wood 13 Source: UN COMTRADE Table A23: Maize produc on 2009 and 2010 2009 2010 Province % increase Bags (90 Kg) Bags (90 Kg) HA ‘000 millions yield HA ‘000 millions yield in maize Central 123 1.2 9.4 176 1.4 8.0 21 Coast 118 1.4 12.0 137 1.96 15.5 38 Eastern 465 6.0 13.0 455 3.8 8.3 -38 NEP 2 0.001 0.5 4 0.009 2.1 812 Nairobi 0.3 0.003 12.0 0.7 0.014 19.0 349 Ri Valley 618 14.2 23.1 675 21.1 36.5 48 Western 227 4.5 20.0 233 5.1 22.0 14 Nyanza 296 5.05 17.0 327 5.1 17.3 0 Total 1,850 32.4 17.5 2,008 38.5 19.2 19 Source: Ministry of Agriculture June 2011 | Edi on No. 4 49 Annexes Table A24: Price comparison of selected commodi es Units of Average Price : Average Price : Commodity % Change Measure April 2010 April 2011 Potatoes (Irish) 1 Kg 34.45 64.31 86.66 Cooking Fat 1 Kg 149.75 229.65 53.36 Kerosene 1 litre 60.20 91.91 52.69 Cooking Oil 1 litre 150.80 216.53 43.59 Diesel 1 litre 78.13 108.29 38.61 Household Soap/Bar Soap 800 g 68.79 90.91 32.16 Petrol 1 litre 87.86 112.1 27.59 Source: KNBS Figure A5: Break down of overall infla on: April 2011 Source: KNBS June 2011 | Edi on No. 4 50