October 2018 | Edition No. 18 Private Sector-led growth Private GDP Sector-led growth Pro-Poor Growth GDP Big4 Growth Pro-Poor Big4 Policies Policies Taxation Growth Taxation Fiscal Consolidation Fiscal Consolidation Private Sector-led Private Sector-led Growth Growth In Search of Fiscal Space Government Spending and Taxation: Who Bene ts? In Search of Fiscal Space Government Spending and Taxation: Who Benefits? © 2018. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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TABLE OF CONTENTS ABBREVIATIONS........................................................................................................................................................................................................................................................... i FOREWORD...................................................................................................................................................................................................................................................................... ii ACKNOWLEDGEMENTS.......................................................................................................................................................................................................................................... iii EXECUTIVE SUMMARY............................................................................................................................................................................................................................................ v PART 1: THE STATE OF KENYA’S ECONOMY 1. Recent Economic Developments ................................................................................................................................................................................ 2 1.1. Global economic growth remains strong but is expected to level off in the near term............................................................................... 2 1.2. Led by a recovery in agriculture, a rebound in Kenya’s economic activity is underway in 2018 ............................................................. 3 1.3. Private consumption and investment are driving the recover y................................................................................................................................... 4 1.4. Given the narrowing of the fiscal space, the government has commenced fiscal consolidation ......................................................... 6 1.5. The macroeconomic environment remains stable, however private sector credit growth remains anemic ................................. 8 1.6. Despite rising oil prices, strong remittance inflows contributed to a narrower current account deficit............................................ 10 2. Outlook................................................................................................................................................................................................................................. 12 2.1. The ongoing recovery in economic activity is projected to continue over the medium term ............................................................... 12 2.2. Recovery in private demand could support growth while the government pursues needed fiscal restraint ............................... 12 3. Risks are tilted to the downside.................................................................................................................................................................................. 14 3.1. Domestic risks .............................................................................................................................................................................................................................................. 14 3.2. External risks ................................................................................................................................................................................................................................................. 14 4. Policy options to support growth and achievement of the Big 4 Agenda.................................................................................................. 15 4.1. Fiscal consolidation can be growth friendly while safeguarding macroeconomic stability ...................................................................... 15 4.2. Accelerate progress in structural reforms to advance the Big 4 agenda ................................................................................................................ 17 PART 2: SPECIAL FOCUS 5. Introduction........................................................................................................................................................................................................................ 20 5.1. Background.................................................................................................................................................................................................................................................... 20 5.2. Commitment to Equity (CEQ) framework .................................................................................................................................................................................. 20 6. Government Social Sector Spending........................................................................................................................................................................ 23 6.1. Is government social sector spending pro-poor?.................................................................................................................................................................. 23 6.2. Cash Transfers ............................................................................................................................................................................................................................................... 23 6.3. Public Education Spending ................................................................................................................................................................................................................. 24 6.4. Public Health Spending ......................................................................................................................................................................................................................... 26 6.5. Benchmarking Kenya’s Social Spending ..................................................................................................................................................................................... 27 7. Taxes in Kenya.................................................................................................................................................................................................................... 28 7.1. How does Kenya compare to her peers?..................................................................................................................................................................................... 28 7.2. Direct Taxes – Personal Income Tax................................................................................................................................................................................................. 30 7.3. Indirect Taxes................................................................................................................................................................................................................................................. 30 8. Effects on Poverty and Inequality............................................................................................................................................................................... 33 9. Summary and Policy Implications.............................................................................................................................................................................. 35 REFERENCES ................................................................................................................................................................................................................................................................... 37 STATISTICAL TABLES ................................................................................................................................................................................................................................................................... 41 SPECIAL FOCUS: ANNEX ......................................................................................................................................................................................................................................................... 69 LIST OF FIGURES Figure 1: Global growth pick-up is broad-based ........................................................................................................................................................................................ 2 Figure 2: Growth in the EAC countries decelerated in 2017, but is still above the SSA’s average ............................................................................... 2 Figure 3: A rebound in economic activity is underway in 2018........................................................................................................................................................ 3 Figure 4: The rebound is driven by recovery in agriculture ................................................................................................................................................................. 3 Figure 5: Leading indicators show recovery of agriculture in 2018 ............................................................................................................................................... 3 Figure 6: Industrial activity picked up after significant headwinds in 2017............................................................................................................................... 3 Figure 7: Leading indicators in manufacturing shows the sector’s resilience in 2018 ....................................................................................................... 4 Figure 8: The services sector’s contribution to GDP growth remained resilient in H1 2018 .......................................................................................... 4 Figure 9: Private consumption is aiding rebound in 2018.................................................................................................................................................................... 5 Figure 10: The recent trends in the Purchasing Managers’ Index (PMI) indicates recovery in manufacturing ...................................................... 5 Figure 11: Private investment contribution to GDP is recovering ...................................................................................................................................................... 5 Figure 12: With higher import leakage, the contribution from net exports is negative......................................................................................................... 5 Figure 13: Starting in 2017/18, fiscal consolidation is underway........................................................................................................................................................... 6 Figure 14: Government spending has been elevated in recent years................................................................................................................................................ 6 Figure 15: Revenue growth remains weak........................................................................................................................................................................................................... 7 Figure 16: The decline in tax revenue is largely driven by challenges in income tax and VAT collection.................................................................... 7 Figure 17: Public debt moderated from a rapid rise in previous years............................................................................................................................................... 8 Figure 18: Debt slowdown was driven by a decrease in the primary balance............................................................................................................................. 8 Figure 19: Inflation remains within the target range..................................................................................................................................................................................... 8 Figure 20: Inflation is picking up across the EAC economies in line with rising energy prices.......................................................................................... 8 Figure 21: Energy prices are exerting upward pressure on headline inflation.............................................................................................................................. 9 Figure 22: The stability in exchange rate continues to provide a nominal anchor to inflationary expectations.................................................... 9 Figure 23: Although still weak, private sector credit growth has risen recently........................................................................................................................... 9 Figure 24: Synchronized collapse of credit to the private sector in the EAC region.................................................................................................................. 9 Figure 25: Interbank rates and volumes remain volatile............................................................................................................................................................................ 10 Figure 26: Higher non-performing loans constrain lending conditions.......................................................................................................................................... 10 Figure 27: Notwithstanding rising oil prices, the current account deficit narrowed............................................................................................................... 11 Figure 28: Improved remittance inflows contributed to the narrowing of the current account deficit...................................................................... 11 Figure 29: Capital inflows have helped to finance the current account deficit and accumulate reserves................................................................ 11 Figure 30: Foreign portfolio flows have favored government bonds over equities in recent months......................................................................... 11 Figure 31: Growth is projected to remain robust over the medium-term...................................................................................................................................... 12 Figure 32: The ongoing fiscal consolidation is expected to continue into the medium term.......................................................................................... 13 Figure 33: The share of expenditure shifted slightly towards the Big 4 sectors (health and agriculture)................................................................... 13 Figure 34: Four income concepts in the CEQ framework ........................................................................................................................................................................ 21 Figure 35: Progressivity and taxes and transfers (diagrammatic representation) ....................................................................................................................... 22 Figure 34: Lorenz and concentration curves (ranked by real market income per adult) for market income and cash transfer programs and share in total expenditure by quintile........................................................................................................................................................... 24 Figure 35: Distribution of recurrent public education spending by education level............................................................................................................... 25 Figure 36: Distribution of school-age children and gross enrollment, 2015/16 ........................................................................................................................ 25 Figure 37: Per capita market income and net benefit of public education expenditure...................................................................................................... 26 Figure 38: Uptake of outpatient, inpatient, and preventive care by age group and quintile, 2015/16........................................................................ 26 Figure 39: Provider choice for outpatient care by quintile and locality, 2015/16....................................................................................................................... 27 Figure 40: Incidence of outpatient visits, public expenditure on outpatient visits, and user fees by facility............................................................ 27 Figure 41: Social sector spending as a percent of GDP for selected countries............................................................................................................................ 27 Figure 42: Government revenue as a percent of GDP for selected countries that have completed the CEQ......................................................... 28 Figure 43: Total revenue and share of taxes of total revenue against GDP per capita (2011 PPPs, log scale) ......................................................... 28 Figure 44: Share of direct and indirect taxes in GDP against GDP per capita (2011 PPPs, log scale) ............................................................................ 29 Figure 45: Lorenz and concentration curves for per capita market income and direct taxes on individual income and share in total expenditure by quintile........................................................................................................................................................................................................... 30 Figure 46: Lorenz and concentration curves for market income and VAT under different assumptions about exempt items and share in total expenditure by quintile.............................................................................................................................................................................. 31 Figure 47: Share of expenditure in total consumption of items differentiated by type of VAT...................................................................................... 32 Figure 48: Lorenz and concentration curves for market income and excise taxes and share in total expenditure by quintile ��������������� 33 Figure 49: Combined effects of taxes and transfers on inequality – Gini index and income shares of top 10 percent and bottom 40 percent................................................................................................................................................................................................................................. 33 Figure 50: Poverty headcount ratios (using the World Bank’s $1.25 and $2.50-poverty lines based on 2005 PPPs) across countries and income concepts.................................................................................................................................................................................................... 34 Figure 51: Density distribution of poverty effects in going from market to disposable and from disposable to consumable income (based on the World Bank’s $1.25-poverty line using 2005 PPPs).......................................................................................................... 35 Figure 52: Gini coefficient by CEQ income concepts and country................................................................................................................................................. 35 LIST OF TABLES Table 1: Medium term growth outlook (annual percent change, unless indicated otherwise)............................................................................... 12 Table 2: Progress in the structural reform agenda to advance the Big 4................................................................................................................................ 18 Table 3: Tax revenue by source, 2015/16.................................................................................................................................................................................................... 70 Table 4: Personal income tax rates, 2016 tax calendar year............................................................................................................................................................. 70 Table 5: Simulation results for personal income tax – taxpayers and average tax rate by bracket........................................................................ 70 Table 6: Description of four main cash transfer programs............................................................................................................................................................... 71 Table 7: Excise tax revenue by item, 2015 and 2016............................................................................................................................................................................ 71 Table 8: Tuition, gross, and net benefits of public education expenditure, 2015/16...................................................................................................... 71 LIST OF BOXES Box B.1: Commitment to Equity Framework ........................................................................................................................................................................................... 21 Box B.2: Measuring progressivity and redistributive effects: basic concepts and definitions ................................................................................... 22 Box B.3: Can VAT be progressive?..................................................................................................................................................................................................................... 32 ABBREVIATIONS CEQ Commitment to Equity CT Cash Transfers CT-HSNP Cash Transfers for Hunger Safety Net Program CT-OVC Cash Transfers for Orphans & Vulnerable Children CT-PwSD Cash Transfers for Persons with Severe Disabilities CBR Central Bank Rate CBK Central Bank of Kenya DSA Debt Sustainability Analysis EAC East African Community EMDE Emerging Markets and Developing Economies EU European Union FPE Free Primary Education FY Fiscal Year GDP Gross Domestic Product GoK Government of Kenya H1, H2 First, Second Half ICT Information Communication Technology IFMIS Integrated Financial Management Information System LMICs Lower Middle Income Countries KEU Kenya Economic Update KMRC Kenya Mortgage Refinance Company KHBIS Kenya Integrated Household Budget Survey KNBS Kenya National Bureau of Statistics MFMod Macroeconomic and Fiscal Model NSE Nairobi Security Exchange NPL Non-Performing Loans NSNP Kenya National Safety Net Program NSSF National Social Security Fund OPCT Older Persons Cash Transfer PPP Public Private Partnership PMTs Proxy-Means Tests PIT Personal Income Tax PAYE Pay As You Earn PMI Purchasing Managers' Index Q1, Q2, Q3, Q4 Quarter One, Two, Three, Four SRC Salaries and Remuneration Commission SMEs Small and Medium Enterprises SSA Sub-Saharan Africa SGR Standard Gauge Railway UHC Universal Health Care UK United Kingdom UFS Urban Food Subsidy VAT Value Added Tax y-o-y Year on Year i October 2018 | Edition No. 18 FOREWORD In December 2017, the government announced its Big 4 Developments Agenda, aimed at increasing delivery of affordable housing, universal health coverage, raising the share of manufacturing in the economy and improving food and nutritional security. Nonetheless, against the backdrop of fiscal consolidation, it will be important to be careful on which expenditures are contained so that the government’s inclusive growth agenda is not jeopardized. This 18th Edition of the Kenya Economic Update seeks to contribute to this discussion. The report has three key messages. First, the Kenyan economy is on a rebound in 2018. Reflecting improved rains, better business sentiment and easing of political uncertainty, real GDP growth is estimated to rebound from 4.9 percent in 2017 to 5.7 percent in 2018 and rise gradually to 6.0 percent by 2020 as the output gap closes. This growth trajectory lays a solid foundation within which the government could accelerate poverty reduction especially if accompanied by pro-poor and inclusive growth policy measures. The downside risks to this outlook arise from subdued private sector credit growth that could curtail private investment; fiscal slippages that could compromise macroeconomic stability; and an uptick in oil prices and tightening global financial markets, which could exert undue pressures to the current account balance. Second, there is need to re-ignite private sector led growth and ensure that fiscal consolidation is growth friendly. Although private sector investment is recovering, it is well below levels needed to achieve the Big 4 Development Agenda goals. Boosting private sector investment is more important, given the waning contribution of public investment to growth due to fiscal consolidation. Furthermore, with the majority of government expenditure cuts falling on development spending, the structure of fiscal consolidation could compromise the growth potential of the economy. Additional macroeconomic and structural reforms could help crowd in the private sector and support achievement of the Big 4. For instance, it is critical to address bottlenecks against private sector credit growth, including removal of interest rates caps. Third, the special focus section examines distributional consequences of government spending and taxes. It finds that cash transfer programs are well-targeted because a large fraction of the benefits is captured by the poor. Nonetheless, cash transfer schemes in Kenya cover only a small portion of the population. Hence, these programs could be scaled up to increase their poverty-reducing effect. However, enhanced revenue mobilization would be needed to increase coverage significantly. The World Bank remains committed to working with key Kenyan stakeholders to identify policy and structural issues that will enhance inclusive growth and attainment of the Big 4 development agenda. The Kenya Economic Update offers a forum for such policy discussion aimed at fostering growth, reduce poverty and improve shared prosperity in Kenya. C. Felipe Jaramillo Country Director for Kenya World Bank October 2018 | Edition No. 18 ii ACKNOWLEDGEMENTS The production of the eighteenth edition of the Kenya Economic Update would not be possible without the assistance of many people, whom we gratefully acknowledge. The report was prepared by a team led by Allen Dennis and Peter W Chacha. Part One – The State of Kenya’s Economy was written by Christine Awiti, Allen Dennis, Celina Mutie, Sarah Sanya, Angélique Umutesi, and Peter W Chacha. Part Two – Fiscal Incidence Analysis was written by Christine Awiti, Utz Pape and Simon Lange. The team would like to thank Anne Khatimba for providing logistical support, Keziah Muthembwa and Vera Rosauer for managing communication and dissemination, and Robert Waiharo for design and layout of the report. We are also grateful to Paul Clark for excellent editorial support. The report benefitted from excellent comments from Derek H C Chen, Roselyn Misati, Anne Kamau, and Bethuel K. Kinuthia. The team also received overall guidance from Abebe Adugna (Practice Manager, Macroeconomic Trade and Investment), Phillip Schuler (Lead Economist for Kenya, Rwanda, Uganda, and Eritrea), Johan Mistiaen (Program Leader for Kenya, Rwanda, Uganda, and Eritrea), and Felipe Jaramillo (Country Director for Kenya, Rwanda, Uganda, and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of this report. We are grateful to Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya (CBK), and the National Treasury for most of the data used in this report. The preliminary findings in this report were shared with the National Treasury and Ministry of Planning, and the CBK. Furthermore, in preparation for this report, the team solicited views from a broad range of private sector participants. iii October 2018 | Edition No. 18 EXECUTIVE SUMMARY 1. The Kenyan Economy is on a rebound in 2018. 4. Growth is projected to remain robust over the Reflecting improved rains, better business sentiment medium term. GDP growth is projected at 5.8 percent and easing of political uncertainty, economic activity in 2019 and 6.0 percent in 2020. The gradual pick-up is is rebounding after the slowdown in activity in 2017. underpinned by the current slack in the economy with According to official statistics, the economy expanded the output gap expected to close over the medium term. from 4.7 percent in H1 of 2017 to 6.0 percent in H1 of In particular, growth forecast is supported by projected 2018 supported by improved harvest in agriculture, recovery in agriculture and domestic demand. Further, the steady recovery in industrial activity, and still robust external balance position is expected to remain favorable, performance in the services sector. As a result, real GDP thereby supporting macroeconomic stability. This forecast growth is projected to reach 5.7 percent in 2018, an remains largely consistent with those in the April 2018 upward revision of 0.2 percentage points from the April Economic Update, with a slight downward revision of 0.1 2018 Economic Update. percentage points for 2019 and 2020. Growth could have been higher in the absence of interest caps that remain tied 2. Growth in private consumption and investment to the policy rate, hence constraining the effectiveness of are driving the rebound. Private consumption picked monetary policy to influence private sector credit access. up in 2018 fueled by rising household incomes from improved agricultural harvests, lower food prices, and 5. Nonetheless, there are downside risks to the outlook strong remittance inflows. A recovery in private sector relating to both domestic and external developments. investment activity is also underway, partly reflected in On the domestic front, subdued growth in private sector increased imports of raw materials and chemicals and more credit, a recurrence of adverse drought shocks, and fiscal positive investor sentiment with the Purchasing Managers’ slippages leading to macroeconomic instability could Index remaining in expansionary territory (above the 50- dampen growth prospects. On the external front, an mark) for H1 2018 at 55.1 points compared to 49.7 points unanticipated spike in oil prices, uncertainty and rising over the same period in 2017. The recovery in private sector trade tensions, and unanticipated tightening of global activity (consumption and investment) is expected to off-set financial market conditions due to ongoing normalization potential drag in growth due to unwinding of fiscal stimulus of monetary policy in advanced economies may result at a time when fiscal consolidation is gathering momentum. in reversal of capital flows from emerging and frontier Net exports continued to weigh on growth owing to faster markets, including Kenya. Were any of these to materialize, expansion in imports relative to Kenya’s exports. this could lead to a dimmer outlook. 3. The macroeconomic environment remains broadly 6. Macroeconomic policy and structural reforms are stable. Inflation remains within the government’s target needed to boost inclusive growth and advance the band of 5±2.5 percent. Headline inflation stood at an government’s Big 4 agenda. Support from the public and average rate of 4.4 percent in H1 2018 as lower food prices more importantly the private sector will be required to offset the effect of rising oil prices resulting in benign achieve the Big 4. Macro policies could include recalibrating inflationary pressures. This has provided policy space the quality of fiscal consolidation, improving debt for a more accommodative monetary policy stance to management and safeguarding macroeconomic stability. support growth. Nonetheless, at 4.3 percent in August Structural reforms could seek to boost private investment 2018, private sector credit growth remains subdued and including through improving private sector credit access, well below its historical average of about 19 percent. particularly to micro and small-scale enterprises. The Notwithstanding a recent surge in oil prices, the current following areas, while not exhaustive, requires special account deficit narrowed from 6.7 percent in 2017 to 5.3 focus from policy makers. percent in July 2018. This was adequately financed by a surplus in the financial account resulting in accumulation 7. First, fiscal consolidation needs to be recalibrated of official foreign reserves to 5.6 months of import cover as towards recurrent spending. The quality of fiscal at September 2018. consolidation matters for safeguarding the Kenyan October 2018 | Edition No. 18 iv Executive Summary economy’s long-term growth potential. A path where much require some level of expenditure reprioritization. It of the burden of fiscal consolidation is disproportionately would be equally important for there to be improvement shouldered by development spending undermines the in efficiency of spending. For instance, in the agriculture underlying growth potential of the Kenyan economy. sector, a number of studies show that the lack of extension In this regard, policy could take bold steps to recalibrate services is undermining productivity in the sector. However, the balance between development and recurrent the budget for agriculture continues to significantly expenditures, with the latter bearing a higher share of underfund extension services. Furthermore, the efficiency the expenditure containment. Specific areas that could of agricultural spending in input subsidy program and be considered to rein in recurrent spending include: producer subsidies (Strategic food reserves) will need to lowering of transfers to state owned enterprises, be scrutinized with a view to improve accountability and cleaning and regular audit of the payroll register, keeping transparency since they bear important market distortions wages, salaries and allowance adjustments in line with and productivity consequences. recommendations from the Salaries and Remuneration Commission (SRC), and maintaining frugality in operations 11. Fifth and lastly, advancing the structural reforms and maintenance expenses. could help crowd in the private sector to achieve the Big 4. Since the announcement of the Big 4, the government 8. Second, reverse the downward trend in revenue has made progress within the affordable housing pillar by mobilization. Raising revenue mobilization is an essential completing the legal and regulatory framework for KMRC, ingredient of fiscal consolidation. Domestic revenue waiver of stamp duty for first time home buyers and the mobilization measures could focus on rationalizing introduction of standardized forms to register a change on tax expenditures and putting in place a governance a property. Nonetheless, there is need for conceited effort framework that checks the creeping-up of tax exemptions to create the incentive structure in agriculture, universal (World Bank, 2017). Further, the tax base needs to be health coverage and manufacturing. For example, in the broadened, as contemplated in the draft income tax bill. agriculture sector, policy could focus at improving small Moreover, enhanced administrative measures such as scale farmer input access (higher yielding seeds and better interconnectedness between various government fertilizer), approve warehouse receipt system and access data management systems with iTAX (such as IFMIS and to financing. other third-party systems) could help boost efficiency of tax collection. 12. In the special focus section, the fiscal incident analysis examines the distributional consequences 9. Third, improve debt management by rebalancing of Kenya’s spending and taxation. This analysis is an the mix of expensive and shorter maturity commercial important input for designing pro-poor policies and loans. This could be done through taking advantage of influencing the rate at which economic growth translates concessional debt, which is more affordable and with into poverty reduction. The Kenya Economic Update longer maturity profiles. Furthermore, develop and deepen Edition 16 outlined options to enhance Domestic Revenue the local bond market, including initiatives to attract Mobilization. The Fiscal Incidence Analysis complements foreign investors to the local currency bond market. This the DRM analysis by looking into the equity implications could boost availability of low cost debt refinancing. Kenya of government spending and taxation policy measures. attracts far fewer foreign investors into its local currency The analysis covers government expenditure on cash bond market relative to Nigeria, Egypt, Ghana and South transfer programs, education and health while revenue Africa, even though its local currency bond market raising measures such as PAYE, VAT and excise taxes are has grown very rapidly. Developing the local currency examined on the revenue front. The findings from this bond market could spur significant interest from foreign analysis shows that: investors and potentially reduce country borrowing costs and extend the maturity profiles of local currency bonds. 13. Direct cash transfer programs are well-targeted, progressive and pro-poor. The analysis finds that these 10. Fourth, reprioritize and enhance efficiency of programs are mostly well-targeted, progressive and pro- government spending to create more room for the poor. Overall, more than 60 percent of the benefits are Big 4 priority areas. For the Big 4 to succeed, this will captured by the poorest 40 percent of the population. v October 2018 | Edition No. 18 Executive Summary Nonetheless, the programs reach only a small fraction of of VAT (with or without exemptions) is distributed almost the population, resulting in a modest effect on poverty proportionally to market income. The average share of VAT and inequality. A cross- country comparison suggests in total household expenditure is 8.4 percent if exempt that while government spending in cash transfers may be items are assumed to be zero rated and 9.0 percent if they progressive, increasing revenue mobilization is essential are assumed to carry 16 percent VAT. This suggests that for the coverage to significantly increase. exemptions on VAT could be benefitting the poor only marginally. Regarding excise taxes in Kenya, they are, with 14. Public education spending is progressive in absolute the exception of tobacco products, largely progressive. terms, but progressivity declines with increasing levels The bottom 40 percent, which account for 14.3 percent of of education. A disproportionately larger share of children market income, account for only 6.6 percent of all excise from poor households benefit from spending on public taxes, rendering the overall tax highly progressive. education, in contrast with children of higher income households where the uptake of private primary education 18. There are three key policy recommendations from is higher. Nonetheless, the net benefits of spending at this analysis. First, the government could consider higher levels of the education system increasingly benefit expanding direct cash transfer programs. Cash transfer the better-off. programs are well-targeted so that a large fraction of the benefits are captured by the poor. These programs 15. Public health spending on outpatient care in could further be expanded in order to increase their lower-level facilities is progressive. Conditional on poverty-reducing effect. However, this will require uptake, public health spending on outpatient care is pro- enhancing revenue mobilization for the coverage to poor while the associated user fees and over the counter increase significantly. purchases are regressive. This higher uptake among the poor of outpatient care in low-level facilities compensates 19. Second, exemptions granted within Kenya’s VAT for lower unit costs at this level relative to government regime appear to benefit the poor only marginally. The hospitals and lower uptake of outpatient care overall, variation in consumption shares of exempt and zero-rated resulting in a progressive impact of public spending on items across the welfare distribution is small. A review of outpatient care. the VAT law might help remove exemptions and increase revenue that could then be spent in well-targeted and 16. On taxes, personal income tax is found to be progressive cash transfer programs. However, a more progressive. The poorest 40 percent of Kenya’s population detailed follow-up analysis of exemptions and zero-rates account for, on average, 14.3 percent of market income would be necessary to determine item-level incidence. but less than one percent of direct taxes. In contrast, 80 percent of the tax incidence is borne by the richest ten 20. Third and finally, shifting public resources from percent of the population. This result is driven by both the higher-level health facilities to lower-level facilities is progressivity of the tax system and limited access to formal likely to benefit the poor. Conditional on uptake, public sector jobs among the poor. health spending on outpatient care is pro-poor while the associated user fees and over the counter purchases are 17. Value Added Tax (VAT) is mildly progressive (close regressive. The results suggest that redirecting spending to neutral) while excise taxes are largely progressive. The from higher-level public health facilities to primary care analysis finds that VAT is mildly progressive with respect facilities has the potential to benefit the poor and might to consumption but close to being neutral. The burden increase access. October 2018 | Edition No. 18 vi RECENT ECONOMIC TRENDS AND OUTLOOK A rebound in economic activity is underway The rebound is driven by recovery in 2018 in agriculture 8 Contribution to GDP growth 8 6.1 6.0 6.0 6 5.9 5.9 5.7 6 5.7 5.8 5.8 5.7 Percentage points 5.4 5.0 GDP growth (% y-o-y) 4.9 4.7 4.6 4 2.6 3.1 2.9 4 3.4 3.2 3.2 3.3 2 1.3 1.0 0.8 1.5 2 1.1 1.6 1.5 0.7 0.6 0.8 1.3 0.5 0.2 0.5 0 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 0 2011 2012 2013 2014 2015 2016 2017 2018e Agriculture Industry Services Taxes GDP growth Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Note: “e” denotes an is an estimate The services contribution to GDP growth The recent trend in the Purchasing Manager’s Index (PMI) remained resilient indicates recovery in manufacturing Contribution to GDP growth 60 4 PMI Index (3 month moving average) 3 55 1.2 1.3 1.6 1.4 Percentage points 0.8 1.0 0.8 2 50 0.7 0.5 0.6 0.7 0.5 0.6 0.3 0.5 0.6 0.5 0.2 0.1 1 0.5 0.1 0.3 0.3 0.4 0.4 0.4 0.4 45 0.3 0.5 0.5 0.5 0.6 0.5 0.5 0.5 0.1 0.2 0.2 0 -0.1 0.1 0.2 0.1 H1 H2 H1 H2 H1 H2 H1 40 2015 2016 2017 2018 -1 Accomodation and restaurant Transport and storage Information and communication 35 Financial and insurance Real estate Other services Services Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank Private consumption is aiding rebound Private investment contribution to GDP in 2018 is recovering 10 4 8 2 6 Percentage points 4 0 Percentage points 2 -2 0 -2 -4 -4 -6 -6 2012 2013 2014 2015 2016 2017 2018e 2012 2013 2014 2015 2016 2017 2018e Private Gross Fixed Investment Government Investment Private Consumption Net exports Government Investment Private Gross Fixed Investment Government Consumption GDP Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Note: ”e” denotes an estimate Note: ”e” denotes an estimate vii October 2018 | Edition No. 18 RECENT ECONOMIC TRENDS AND OUTLOOK Inflation remains well within Energy prices are exerting upward pressure the target range on headline inflation 15.0 120 12.5 100 Share of overall in ation (%) 10.0 80 Upper bound Percent 7.5 60 5.0 40 Lower bound 2.5 20 0.0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Overall in ation Upper bound Lower bound Core in ation Food In ation Energy In ation Core In ation Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Notwithstanding rising oil prices, the current account Capital inflows have helped to finance the current account deficit narrowed deficit and accumulate reserves 15 12 10 5 8 Percent of GDP 0 Percent of GDP -5.2 -5.3 4 -5 -6.7 -6.7 -8.8 -10.4 -10 0 -15 -20 -4 2013 2014 2015 2016 2017 2018-June* -25 2013 2014 2015 2016 2017 2018-July* Direct Investment Portfolio Investment Services trade Goods trade Income Net Errors and Omissions General Government Non nancial corporations and NPISHs Current Account Net Errors and Omissions Source: Central Bank of Kenya Source: Central Bank of Kenya Notes: * indicates an estimate Notes: * indicates an estimate The ongoing fiscal consolidation is expected to continue Growth is projected to remain robust into the medium term over the medium-term 2016/17 2017/18* 2018/19e 2019/20f 2020/21f 2021/22f 8 0 5.9 5.8 6.0 -2 6 5.7 GDP growth (% y-o-y) 4.9 -3.0 Percent of GDP -3.4 -4 -4.3 4 -6 -5.8 -6.9 2 -8 -9.1 0 -10 2016 2017 2018e 2019f 2020f Source: The National Treasury Source: World Bank Notes: * indicates preliminary results ,”e” denotes an estimate, “f” denotes forecast Notes: “e” denotes an estimate, “f” denotes forecast. October 2018 | Edition No. 18 viii Part 1: The State of Kenya’s Economy Photo: © Sambrian Mbaabu, World Bank The State of Kenya’s Economy 1. Recent Economic Developments 1.1. Global economic growth remains strong and South Africa) complemented a still robust growth in but is expected to level off in the near term the non-resource rich countries owing to strong public- 1.1.1. After a strong pick-up in 2017, growth in the sector investment in infrastructure. Growth in the resource global economy has eased, though still robust. Global rich economies was boosted by the steady recovery in oil, GDP growth expanded from 2.4 percent in 2016 to 3.0 metal and mineral prices. The region’s growth is projected percent in 2017, driven by a synchronized recovery in both to accelerate to 3.5 percent in 2019 and 3.6 percent in the advanced and emerging market economies. In 2018, 2020, supported by still strong commodity prices. growth is projected to reach 3.1 percent before easing to 2.9 percent in 2019. The leveling-off is driven by the closure of 1.1.3. After decelerating in 2017 (though above the output gaps in advanced economies, moderation in trade SSA average), growth in the East African Community and investment, and a gradual tightening of financing (EAC) is expected to recover in 2018. In 2017, growth conditions due to ongoing withdrawal of accommodative in the EAC economies dampened on account of adverse monetary policy in advanced economies. Growth in major effects of drought and lower credit to the private sector, advanced economies is expected to decelerate from 2.3 which grew at an average of 5.4 percent (Figure 2). percent in 2017 to 2.2 percent in 2018, while growth in Nonetheless, there was substantial heterogeneity in Emerging and Developing Economies (EMDEs) will pick-up growth across member states1. For instance, Kenya and to 4.5 percent in 2018 (Figure 1). However, global growth Uganda lagged the regional average with a slower growth optimism is constrained by rising trade tensions likely to rate estimated at 4.9 percent and 4.0 percent, respectively, have a negative impact on confidence, asset prices, global while Tanzania and Rwanda grew by 6.4 percent and 6.1 trade and investments. percent, respectively in 2017. In Tanzania, growth was driven by a bumper harvest in the second half of the year 1.1.2. A cyclical upswing is underway in sub-Saharan while in Rwanda, improved weather and a rebound in Africa (SSA). Supported by a strong recovery in the exports explained accelerated growth. In 2018, average economies of commodity-exporting countries, growth growth for the region is projected to reach 6.1 percent, in the SSA region rebounded from a 22-year low of 1.3 driven by a rebound in agricultural activity on the back percent in 2016 to 2.4 percent in 2017 and is projected to of favorable weather conditions and a pick-up in private reach 3.1 percent in 2018 (Figure 2). The recovery in growth sector credit growth. from the larger resource rich exporters (Angola, Nigeria, Figure 1: Global growth pick-up is broad-based Figure 2: Growth in the EAC countries decelerated in 2017, but is still above the SSA’s average 10 6 4.7 8 8.0 7.0 4 6.9 6.4 GDP growth (%) 6 6.0 2.9 2 2.0 4 1.5 3.7 2 0 2013 2014 2015 2016 2017 2018e 2019f 2020f 0 2013 2014 2015 2016 2017 2018e 2019f 2020f -2 USA World EMDE Euro Area Uganda Tanzania Kenya Rwanda EAC Average SSA Source: World Bank Source: World Bank (MFmod) Notes: “e” denotes an estimate Notes: “e” denotes an estimate 1 The average excludes the Republic of Burundi. 2 October 2018 | Edition No. 18 The State of Kenya’s Economy 1.2. Led by a recovery in agriculture, a rebound percent of Kenya’s exports. Reflecting favorable rains, the in Kenya’s economic activity is underway sector recovered to an average growth rate of 5.4 percent in 2018 in H1 of 2018 compared to 0.8 percent in H1 of 2017. 1.2.1. Kenya’s economy is rebounding after the This expansion in output enabled the agriculture sector slowdown in activity in 2017. Reflecting improved to contribute 1.3 percentage points to GDP growth in rains, better business sentiment and easing of political H1 2018 compared to a meager 0.2 percentage points in uncertainty, a rebound in economic activity is taking 2017, when the effects of last year’s drought was in full root in 2018 (Figure 3). The economy expanded from 4.7 force (Figure 4). The current recovery in the agriculture percent in H1 of 2017 to 6.0 percent in H1 of 2018. Growth sector is broad-based, reflected in the expansion of output was supported by a strong rebound in agricultural output, of key food and cash crops such as tea, horticulture and steadily recovering industrial activity, and still robust sugarcane (Figure 5). performance in the services sector. 1.2.3. Manufacturing is recovering, though activity 1.2.2. Favorable weather conditions and timely remains sluggish. The overall industrial sector receipt of the long rains in 2018 have contributed to (manufacturing, electricity and water and construction) a strong rebound in agricultural output. Agriculture accounts for approximately 9.3 percent of GDP and accounts for about 26 percent of GDP directly and some approximately 19.6 percent of formal sector jobs. Growth 25 percent of GDP indirectly through its backward and in manufacturing recovered from 0.5 percent in H1 forward linkages to other sectors of the economy. It also of 2017 to 2.7 percent in H1 of 2018 but remains weak accounts for up to 60 percent of employment and 60 compared to a three-year average of 3.6 percent over Figure 3: A rebound in economic activity is underway in 2018 Figure 4: The rebound is driven by recovery in agriculture 8 Contribution to GDP growth 8 6.1 5.8 6.0 6.0 6 5.9 5.9 5.7 6 5.7 5.8 5.7 Percentage points 5.4 5.0 GDP growth (% y-o-y) 4.9 4.7 4.6 4 2.6 3.1 2.9 4 3.4 3.2 3.2 3.3 2 1.3 1.0 0.8 1.5 2 1.1 1.6 1.5 0.7 0.6 0.8 1.3 0.5 0.2 0.5 0 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 0 2011 2012 2013 2014 2015 2016 2017 2018e Agriculture Industry Services Taxes GDP growth Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an estimate Figure 5: Leading indicators show recovery of agriculture Figure 6: Industrial activity picked up after significant in 2018 headwinds in 2017 80 Contribution to GDP growth 2.0 60 Year-to date production growth (%) 1.5 40 1.5 1.3 Percentage points 1.1 20 1.0 1.0 0.8 0.8 0.6 0.7 0 0.4 0.6 0.6 0.2 0.3 0.5 0.3 0.3 0.4 20 0.1 0.5 0.2 0.5 0.3 0.3 0.3 0.2 0.3 0.1 0.1 0.1 40 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 60 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 -0.5 Cane Tea Co ee Minning & quarrying Manufacturing Electricity & water supply Construction Industry Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank October 2018 | Edition No. 18 3 The State of Kenya’s Economy the 2013-2016 period (Figure 6). Recovery is supported transportation sub-sectors eased relative to 2017. In by both increased food manufacturing (i.e. wheat and particular, growth in accommodation and restaurants maize flour, canned fruits, soft drinks and sugar) and in (tourism) decelerated from 19.6 percent in H1 of 2017 to non-food manufacturers such as leather, galvanized sheet 14.3 percent in H1 of 2018, while growth in transport and (Figure 7) and chemicals. The pick-up in private sector storage services eased from 8.7 percent in H1 2017 to 7.5 activity is underpinned by positive investor sentiment, percent in H1 2018. Growth in the ICT and real estate sub- evidenced by the Purchasing Managers’ Index remaining sectors remained solid, spurred by the dynamism in mobile in expansionary territory (i.e. above the 50-mark) for H1 technology and steady growth in the residential real 2018 at 55.0, compared to the same period in 2017, where estate market. However, reflecting ongoing challenges in it was in contractionary territory (averaging 49.7). the banking sector, including from the interest rate caps, growth in financial services decelerated from 4.1 percent 1.2.4. Performance in other industrial sub-sectors in H1 of 2017 to 2.5 percent in H1 of 2018. remains strong. Supported by stronger private sector investment in real estate, as well as ongoing government 1.3. Private consumption and investment are driving the recovery spending on infrastructure, growth in the construction sub-sector was an impressive 6.6 percent in H1 of 2018. 1.3.1. Favorable agricultural harvests, low The positive performance is reflected in the increase in inflation and remittance inflows are supportive of the real value of approved buildings, consumption of the recent pick-up in private consumption. Private cement, clinker, iron and steel bars. In addition, the repair consumption remains the largest demand component of roads damaged by floods (especially in major cities) of GDP, accounting for some 75 percent of total GDP. In during the long rains in 2018 is expected to contribute to 2017, household consumption, particularly for poorer a healthy outcome in 2018. The abundant rainfall has also households, took a hit from escalating food prices, albeit contributed to the growth in water supply to 6.9 percent in mitigated by government interventions through subsidies H1 of 2018 compared to 6.1 percent in H1 of 2017, thereby and duty-free imports of grain and sugar. Though private increasing electricity generation from hydropower, which consumption data for 2018 is not yet available, given is cheapest energy source within Kenya’s energy mix the backdrop of improved agricultural harvests, lower (thermal, geothermal and wind). food prices, strong remittance inflows, and improved employment opportunities from a recovering economy, 1.2.5. Services sector growth has remained resilient, private consumption is likely to be more robust in 2018 despite mixed performance across the sub-sectors. The than in 2017. Nonetheless, the introduction of VAT at 8 services sector grew at an average of 6.9 percent in H1 percent on petroleum products and a specific excise 2018 compared to 7.5 percent in H1 of 2017. However, tax on sugar confectionary are likely to be passed on performance across the main sub-sectors was mixed to final consumer prices, moderating growth in private (Figure 8). While wholesale and retail trade registered consumption in 2018. strong growth, activity in the accommodation and Figure 7: Leading indicators in manufacturing shows the Figure 8: The services sector’s contribution to GDP growth sector’s resilience in 2018 remained resilient in H1 2018 60 Contribution to GDP growth 4 6 m-o-m production growth rate (%) 40 3 1.2 1.3 1.6 1.4 Percentage points 20 0.8 1.0 0.8 2 0.7 0.5 0.6 0.7 0.5 0.6 0.3 0.5 0.6 0.5 0.2 0.1 0 1 0.5 0.1 0.3 0.3 0.4 0.4 0.4 0.4 0.3 0.5 0.5 0.5 0.6 0.5 0.5 0.5 0.1 0.2 0.2 0 -0.1 0.1 0.2 0.1 -20 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 -40 -1 Accomodation and restaurant Transport and storage Information and communication Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Financial and insurance Real estate Other services Cement Soft drinks Galvanized sheets Services Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank 4 October 2018 | Edition No. 18 The State of Kenya’s Economy 1.3.2. Private investment is recovering but is well 1.3.3. The need to boost private investment is all below levels needed to achieve the Big 4. Thanks to the more important, given the waning contribution of the reduction in political uncertainty and subsequent public investment to growth due to fiscal consolidation. rise in business confidence (as evidenced in the PMI The public sector’s contribution to GDP growth more than improvement) and pent-up investment demand, a pick- doubled, rising from 1.1 percentage points in 2013 to 2.5 up in private investment is underway in 2018 (Figure 9, percentage points of GDP in 2017. However, in FY17/18 Figure 10). This is in contrast with 2017, when much of the expansionary fiscal stance screeched to a halt, with the growth in investment came from the public sector, as government spending growing at only 0.1 percent private investment was shackled by political uncertainty, compared to an average of 17.1 percent in the previous four low access to credit and a slowdown in economic activity years. This was mainly because of a 20 percent contraction (Figure 11). The uptick of private investment in 2018 is in development spending, due in part to the completion reflected in increased imports of raw materials, chemicals, of the SGR phase one, delays in exchequer releases and machinery and equipment, and recovering credit growth low execution of the development budget. With most in H1 2018 relative to H1 2017. Nonetheless, private cuts in government expenditure falling on development investment remains well below optimal levels, as reflected spending, for gross fixed capital formation to remain in the low credit growth, sluggish manufacturing activity healthy, thereby underpinning the growth potential of and low productivity in the agriculture sector. Hence, the Kenyan economy, there is an even important need for there is an urgent need to accelerate the pace of recovery private investment growth to accelerate. in private investment, particularly in areas that support inclusive growth, such as the Big 4 sectors (agriculture, housing, health care and manufacturing). Figure 9: Private consumption is aiding rebound in 2018 Figure 10: The recent trends in the Purchasing Managers’ Index (PMI) indicates recovery in manufacturing 10 60 8 PMI Index (3 month moving average) 6 Percentage points 55 4 2 50 0 -2 45 -4 -6 40 2012 2013 2014 2015 2016 2017 2018e Private Gross Fixed Investment Government Investment Private Consumption Net exports 35 Government Consumption GDP Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank Figure 11: Private investment contribution to GDP is recovering Figure 12: With higher import leakage, the contribution from net exports is negative 4 2 2 4-year moving average (%) 0 Percentage points 0 -2 -4 -2 -6 2012 2013 2014 2015 2016 2017 2018e -4 2010 2011 2012 2013 2014 2015 2016 2017 2018e Government Investment Private Gross Fixed Investment Imports Exports Net exports Source: World Bank Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an Notes: “e” denotes an estimate estimate October 2018 | Edition No. 18 5 The State of Kenya’s Economy 1.3.4. The contribution of net exports to growth Development expenditure, contracted by 20.1 percent in remains negative. For H1 of 2018, net exports served as FY17/18. As a share of GDP it fell from 8.0 percent in FY a drag to growth owing to a strong pick-up in imports 2016/17 to 5.5 percent of GDP in FY 2017/18 (or by 2.5 that more than offset the recovery in Kenya’s tea and percentage points). This decline in development spending horticultural exports, and tourism receipts (Figure 12). The was adequate to account for the full fiscal consolidation. faster growth in imports is driven by recovery in domestic The completion of SGR phase one, delays in the release demand. On exports, while agricultural exports, which of development funding and delayed implementation are mostly destined for advanced economies expanded, following a prolonged electioneering period occasioned manufactured exports, which are mostly destined to low absorption of the development budget2. With the EAC countries, have remained weak. The decline in overwhelming majority cuts to government expenditure manufactured exports has persisted since 2005. falling on development spending, the quality of fiscal consolidation over the past year is not growth friendly. 1.4. Given the narrowing of the fiscal space, the government has commenced fiscal 1.4.3. The slowdown in recurrent expenditures also consolidation contributed to fiscal consolidation. Unlike the large 1.4.1. Fiscal consolidation is gathering momentum contraction in development spending, the pace of growth with a significant reduction in the overall fiscal of recurrent spending eased to 8.9 percent in FY17/18 deficit. Reflecting government’s commitment to fiscal compared to an average of 16.1 percent in the previous consolidation, the overall fiscal deficit (including grants) three years. However, with nominal GDP growing faster decreased by 2.2 percentage points to 6.9 percent of GDP than growth in recurrent spending, as a share of GDP in FY 2017/18 (Figure 13). This represents the fastest recurrent spending decreased by about 0.9 percentage pace of fiscal consolidation since 2010, surpassing points of GDP to 14.5 percent of GDP in FY 2017/18, the targeted budget deficit of 7.2 percent of GDP. The notwithstanding transitional fiscal pressures in 2017/18 tighter fiscal stance was achieved, notwithstanding a including additional general election expenses and food significant underperformance of revenues, through a subsidies. Despite the slowdown, recurrent spending significant slowdown in government spending (spending still accounted for more than 94.0 percent of total tax increased by only 0.1 percent). Indeed, as a share of GDP revenue - leaving limited room for the use of domestic total expenditures fell by about 3.7 percentage points resources to finance development expenditure (Figure from 27.5 percent of GDP in FY 2016/17 to 23.9 percent in 14). The difficulty in reining in recurrent spending, in part FY 2017/18. reflects structural rigidities from higher debt servicing payments (about 24 percent of tax revenues) and still 1.4.2. The largest share of fiscal consolidation was high contribution of wages and salaries (40-50 percent shouldered by a contraction in development spending. of revenues). Similarly, at the county level, recurrent Figure 13: Starting in 2017/18, fiscal consolidation is underway Figure 14: Government spending has been elevated in recent years 2013/14 2014/15 2015/16 2016/17 2017/18* 30 0 3.9 3.7 4.1 3.8 2.9 2 3.3 3.5 3.5 20 2.7 Percent of GDP 5.1 4.4 3.7 4.7 5.5 4.3 Percent of GDP 4 6.7 7.5 7.6 10 6.6 6.5 6 6.1 8.8 6.3 7.0 8.0 5.5 6.9 7.3 0 8 8.1 2013/14 2014/15 2015/16 2016/17 2017/18* Development and Net Lending Other recurrent 9.1 Wages and salaries Interest payments 10 County allocation Source: The National Treasury Source: The National Treasury Notes: * indicates preliminary results Notes: * indicates preliminary results 2 Office of the Controller of Budget, National Government Budget Implementation Review Report, PP. 65 6 October 2018 | Edition No. 18 The State of Kenya’s Economy expenditure accounted for a larger share of total county percent in FY 2017/18. Income tax contributed to most of revenue (67.7 percent as at the end of Q3 2017/18), mainly that reduction (0.9 percent of GDP), accounting for almost driven by personnel emoluments. 53 percent of the decline (Figure 16). In addition, excise duty, VAT and import duty contributed about 0.3, 0.4 and 1.4.4. In contrast to expenditures, domestic revenue 0.1 percentage points of GDP reduction, respectively mobilization significantly underperformed, thereby over the two periods. Given the continuous revenue mitigating the extent of fiscal consolidation. Total decline at a time when nominal GDP is growing, the revenue as a share of GDP fell to its lowest level in a ability to raise more revenue could have plateaued and decade. Tax revenue fell to 15.4 percent of GDP in 2017/18, significant structural reforms may be needed to reverse from 17.1 percent of GDP in 2016/17. This is attributed to this worrying trend. underperformance in both income tax and VAT – Kenya’s largest sources of tax revenue, accounting for over 70 1.4.6. The upward trend in Kenya’s overall public debt percent of tax revenue (Figure 15). Underperformance in moderated in FY17/18. After a steady climb from about income tax collection could also be associated with lower 42.1 percent of GDP in June 2013 to 57.5 percent of GDP profitability in the corporate and the banking sector, as at June 2017, debt moderated to 57.0 percent of GDP and inefficiencies in remitting income tax by state-run as of June 2018 (Figure 17). The drop is partly attributed corporations experiencing cash flow difficulties. Further, to a narrowing of the fiscal deficit in FY2017/18 but also the recent administrative measures to support domestic due to resilient growth in real GDP and a relatively stable revenue mobilization including integration of iTax and exchange rate. The drop in primary deficit from an average IFMIS, roll out of integrated customs management, and of 5.0 percent of GDP in 2015-16 to an average of about expansion of tax bases are yet to yield the envisioned 3.0 percent in 2017-18 (Figure 18) contributed by slowing revenue increases. the pace of debt accumulation compared to recent years. Resilient GDP growth contributed to a decline in debt 1.4.5. The slower buoyancy of tax revenue relative by some 3 percentage points of GDP and revaluation by to nominal GDP suggests that the factors associated some 4 percentage points. However, interest payments’ with the shortfall are structural. A buoyant tax system contribution to debt stock increased from an average has an elasticity with respect to growth in nominal GDP of 2.9 percent of GDP in 2015-2016 to an average of 3.4 of at least one. However, the buoyancy of Kenya’s main percentage points of GDP over the 2017-2018 period. tax categories, namely income tax and VAT, is much Kenya’s debt remains below the low-income countries weaker. Tax revenue as a percent of GDP dropped from Debt Sustainability Analysis (DSA)3 debt thresholds of 74 18.1 percent in FY 2013/14 to 17.1 percent in FY 2016/17 percent of GDP in present value terms. and preliminary results show this ratio dropping to 15.4 Figure 15: Revenue growth remains weak Figure 16: The decline in tax revenue is largely driven by challenges in income tax and VAT collection 20 18 17.1 0.3 1.3 17 0.9 1.3 1.2 16 1.2 2.0 2.0 2.1 16 0.4 Tax-revenue in % of GDP 2.2 1.1 0.1 0.1 15.4 1.3 1.3 1.3 1.1 1.8 15 Percent of GDP 12 1.2 4.6 4.5 4.4 4.4 14 4.0 8 13 12 4 8.9 8.7 8.6 8.2 7.2 11 10 0 2016/17 Excise Income VAT Import Other 2017/18 2013/14 2014/15 2015/16 2016/17 2017/18* Duty tax Duty Revenues Income tax Value Added tax Other revenue Excise duty Import duty (net) Negative Postive Source: The National Treasury Source: The National Treasury Notes: * indicates preliminary results Notes: * indicates preliminary results 3 The thresholds are set based on the country’s CPIA score. Kenya’s score places it at medium range with debt-to-GDP threshold of 74 percent as an indicator of solvency. October 2018 | Edition No. 18 7 The State of Kenya’s Economy Figure 17: Public debt moderated from a rapid rise Figure 18: Debt slowdown was driven by a decrease in the in previous years primary balance 60 57.5 57.0 12 55.5 10 47.8 48.8 8 43.1 42.1 40.6 6 Public debt dynamics(% of GDP) 39.7 40.7 40 4.2% 4 3.1% Percent of GDP 2.7% 2.6% 2.2% 2 1.5% 1.4% 0 -1.8% -2 -0.6% 20 -4 -6 -8 0 2010 2011 2012 2013 2014 2015 2016 2017 Jun 2018e 2008/09 2011/12 2014/15 2017/18* Primary bal. Seignorage Growth e ect Interest Domestic External Total public debt (Gross) Revaluation Residual Change in debt_t Source: The National Treasury Source: The National Treasury and World Bank computations Notes: * indicates preliminary results 1.4.7. The composition of Kenya’s debt remains 1.5. The macroeconomic environment remains balanced between external and domestic sources. As stable, however private sector credit of June 2018, the total debt stock had risen to Ksh 5.0 growth remains anemic trillion from Ksh 4.9 trillion. The split between external and 1.5.1. Although still within the government’s target domestic debt in the total debt stock was about 51:49. band of 5±2.5 percent, inflation is picking up gradually. However, reflecting higher domestic interest rates, debt With inflation averaging 4.2 percent in H1 of 2018, servicing charges on the domestic debt stock is about inflationary pressures were broadly muted compared to three time higher than from the external debt stock. At an average of 9.8 percent in H1 of 2017 due to lower food 28.9 percent of GDP in June 2018, external debt was prices (Figure 19). Nonetheless, Kenya’s inflation, like most 1.0 percentage point lower compared to June 2017, of its EAC counterparts (Figure 20), is gradually picking however, domestic debt increased by 0.4 percentage up due to base effects and the uptick in international oil points to reach 28.0 percent in June 2018. The share prices. In addition, the phasing out of food subsidies and of multilateral debt to total external debt declined exemptions of VAT on petroleum products is also exerting by 5.0 percentage points to 32.0 percent in June 2018 upward pressures on domestic inflation. However, core compared to the same period in 2017, while bilateral inflation, which excludes food and energy prices, has debt’s share contracted by 2.3 percentage points to remained below 5 percent since Q4 of 2016, reflecting 30.2 percent in June 2018. However, the share of non- an economy where underlying demand pressures are still concessional (commercial debt) external debt rose by 7.4 benign (Figure 21). The stability in nominal exchange rate percentage points to 36 percent in June 2018. (Figure 22) continues to anchor inflationary expectations. Figure 19: Inflation remains within the target range Figure 20: Inflation is picking up across the EAC economies in line with rising energy prices 15.0 14 12.5 10 10.0 Percent Upper bound Percent 7.5 6 5.0 Lower bound 2 2.5 0.0 -2 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Overall in ation Upper bound Lower bound Core in ation Rwanda Uganda Kenya Tanzania Sources: Kenya National Bureau of Statistics Sources: Kenya National Bureau of Statistics, National Institute of Statistics Rwanda, Uganda Bureau of Statistics and Tanzania National Bureau of Statistics 8 October 2018 | Edition No. 18 The State of Kenya’s Economy Figure 21: Energy prices are exerting upward pressure on Figure 22: The stability in exchange rate continues to provide headline inflation a nominal anchor to inflationary expectations 120 Exchange rate KSh/US$ 100 Share of overall in ation (%) 80 100 60 40 20 0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 80 Food In ation Energy In ation Core In ation Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Sources: Kenya National Bureau of Statistics and World Bank Sources: Central Bank of Kenya 1.5.2. Private sector credit growth has picked up in 1.5.3. The removal of the floor could increase banks recent months, but still remains subdued. Like most profitability without necessarily increasing lending to EAC member states, Kenya’s private sector credit growth SMEs. The proposed amendments to interest rate caps, collapsed from its peak of about 25 percent in mid-2014 in place since September 2016, retains the ceiling on to a low of 1.4 percent in July 2017 with credit contraction loans (set at policy rate plus 4 percent) but eliminates in key sectors of the economy (agriculture, private the floor on deposits (set at 70 percent of the policy rate). households, and transport and communication). More This partial modification lowers the cost of funding for recently, private sector credit growth has risen from 2.0 banks thereby, improving profitability. Whether this will percent in March to 4.3 percent in August 2018, signifying translate to higher lending will however be dependent a slow but steady pick-up (Figure 23). Nonetheless, even on the “risk-free” rate of government securities. To the though picking up, private sector credit growth remains extent that yields on government securities remain high well below its historical average of about 19 percent. While more banks will continue to be incentivized to lend to the the slowdown in credit growth to private sector cannot be government rather than customers perceived to be riskier attributable to one single event (Figure 24), interest rate (e.g. SMEs), and with lower cost of funds for the banks, caps have derailed the recovery of credit growth in Kenya return on equity could be higher. However, were yields relative to the rebound witnessed elsewhere in the region, on government securities to decline, the combination especially in the last quarter of 2017. of greater spreads from the lower funding costs and diminished attractiveness of government securities could re-ignite lending to the private sector. Figure 23: Although still weak, private sector credit growth has Figure 24: Synchronized collapse of credit to the private sector risen recently in the EAC region 60 35 30 40 25 Year-on-year growth (%) 20 Percent 20 15 10 0 5 0 -20 -5 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Private sector credit Government (Net) Uganda Rwanda Tanzania Kenya Source: Central Bank of Kenya Source: Central Bank of Kenya, National Bank of Rwanda, Bank of Uganda and Bank of Tanzania October 2018 | Edition No. 18 9 The State of Kenya’s Economy 1.5.4. However, with interest rate caps remaining 1.5.6. Capital adequacy ratios and profitability and still tied to the policy rate the effectiveness of across the banking system remain high, but the level monetary policy to influence credit access remains of non-performing loans is elevated. High levels of constrained. With the lending rate cap still linked non-performing loans (12.7 percent in August 2018)5 to the policy rate, monetary policy creates perverse continue to constrain lending in 2018. This spans incentives for using the Central Bank Policy Rate (CBR) across all the main sectors, namely trade, personal & to influence economic activity4. For eighteen months after households, manufacturing, and real estate (Figure 26). the introduction of interest rate caps (September 2016 to Notwithstanding concerning levels of NPLs, capital February 2018), the policy rate remained unchanged at adequacy ratios remain high at 17.9 percent in August 10.0 percent despite core inflation falling to its lowest 2018. While headwinds from the low-growth environment level of 3.2 percent in October 2017. In March 2018, the in 2017 affected profitability, return on assets remained policy rate was lowered at 9.5 percent and again to 9.0 sizeable at 2.8 percent in June 2018. Nonetheless, risks are percent in August 2018 to ease liquidity conditions. The inherently high for smaller banks whose business model is monetary easing in context of interest rate caps could challenged in the context of interest rate caps. have adverse impact on lending to SMEs due to lower margins for Banks. 1.6. Despite rising oil prices, strong remittance inflows contributed to a narrower current account deficit 1.5.5. Reflecting challenges among banks to price risk, there is a growing shift in lending from the private 1.6.1. Notwithstanding rising oil prices, the current sector to the government. Growth in credit to government account deficit narrowed in the first half of 2018. In the increased from an average of 8.8 percent in H1 of 2017 to year to July 2018, the current account deficit narrowed 20.6 percent in H1 of 2018, while average growth in credit to 5.3 percent of GDP compared to June 2017 (Figure to the private sector rose marginally from 2.7 percent to 27) due to stronger diaspora remittance inflows and a 2.8 percent over the same horizon. Furthermore, liquidity recovery in tourism receipts. The trade deficit increased in segmentation in the banking system and intermittent H1 of 2018 as the rise in the import bill outpaced increases volatility in interbank market activity (rates and transaction in exports. Over the same period, exports of tea and volumes) have further constrained the supply of credit to horticulture grew at 15.4 and 14.8 percent respectively the private sector (Figure 25). For example, the difference in June 2018 benefiting from a broad pick-up in global in quoted interbank rates on the same day has been as commodity prices. Reflecting the challenges underlying high as 8 percent, with small banks facing much higher the competitiveness of Kenya’s manufacturing sector, borrowing rates. manufacturing exports contracted by 4.8 percent in June 2018, though less than the 14 percent contraction in June Figure 25: Interbank rates and volumes remain volatile Figure 26: Higher non-performing loans constrain lending conditions 30 50,000 100 45,000 82.1 80 77.3 25 40,000 Ksh. Billions 60 35,000 20 45.7 46.2 Intebank volume 42.7 39.6 38.3 30,000 40 Percent 34.6 24.4 15 25,000 19.5 17.7 20 17.1 20,000 9.0 10.8 6.1 5.7 7.2 9.0 4.4 5.1 1.8 2.3 10 0 15,000 Trade Personal/Household Manufacturing Real Estate Building & Construction Communication Agriculture Energy and water Hotels Financial Services Mining & Quarying Transport & Tourism, restaurant & 10,000 5 5,000 0 0 2015 -06 -02 2015 -12 -15 2016 -07 -05 2017 -01 -25 2017 -08 -16 2018 -03 -06 2018 -09 -24 Volume (RHS) CBR (LHS) Interbank rate (LHS) Dec-17 Mar-18 Source: Central Bank of Kenya Source: Central Bank of Kenya 4 For instance, under the new regime, a lowering of the policy rate - an action often taken by Central Banks globally if they want to stimulate economic activity - could lead to the opposite effect since the lowering of the cap further narrows the spread between yields on risk free government securities and the maximum allowed lending rates. 5 See Monetary Policy Committee Meeting Statement (25/09/2018)- Central Bank of Kenya: https://www.centralbank.go.ke/uploads/mpc_press_release/2061124567_MPC%20 Press%20Release%20-%20Meeting%20of%20September%2025,%202018.pdf 10 October 2018 | Edition No. 18 The State of Kenya’s Economy Figure 27: Notwithstanding rising oil prices, the current account Figure 28: Improved remittance inflows contributed to the deficit narrowed narrowing of the current account deficit 15 3,000 10 2,500 5 0 2,000 Percent of GDP US $ miillion -5.2 -5.3 -5 -6.7 -6.7 -8.8 1,500 -10.4 -10 -15 1,000 -20 500 -25 2013 2014 2015 2016 2017 2018-July* Services trade Goods trade Income Net Errors and Omissions 0 Current Account Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Feb-17 Oct-17 Jun-18 Source: Central Bank of Kenya Source: Central Bank of Kenya Notes: * indicates preliminary results 2017. The weakness in the trade balance was mitigated by Resilient capital inflows reflect ongoing foreign investor a strong surplus in the secondary income account due to confidence in the Kenyan economy and global search for a steady rise in remittance inflows (Figure 28). yield amongst investors. 1.6.2. The financial account recorded a surplus — 1.6.3. Amidst softening foreign investor sentiment sufficient to finance the current account deficit and towards EMDEs in 2018, stock market performance accumulate reserves. The financial account improved to has weakened. Foreign equity outflows from the Nairobi 6.5 percent of GDP in the year to June 2018, compared to Securities Exchange (NSE) increased sharply due to 6.1 percent of GDP in June 2017 (Figure 29). In terms of the uncertainty associated with the 2017 general elections breakdown of capital flows, net foreign direct investment but recovered towards the end of the year. However, inflows improved slightly in part reflecting the recovery of equity outflows picked up again in 2018 with the NSE the global economy. The Eurobond proceeds supported index declining by about 11.4 percent from 3,711.9 in portfolio inflows while nonfinancial corporates borrowing December 2017 to 3,203.4 in August 2018 as foreign from abroad remained steady. Official foreign exchange investors continued to take a net selling position (Figure reserves increased from US$ 7,898.9 million (5.4 months 30). Recent equity outflows at the NSE are consistent with of import cover) in September 2017 to US$ 8,507.2 recent declines in emerging market stock valuations and million (5.6 months of import cover) in September 2018, compounded by the impact of interest rate caps on the providing a comfortable buffer against external shocks. valuation of bank stocks. Figure 29: Capital inflows have helped to finance the current Figure 30: Foreign portfolio flows have favored government account deficit and accumulate reserves bonds over equities in recent months 12 120000 5500 5000 100000 8 Percent of GDP 4500 NSE 20 Share Index Ksh Million 80000 4 4000 60000 3500 0 3000 40000 2500 -4 2013 2014 2015 2016 2017 2018-June* 20000 2000 Direct Investment Portfolio Investment General Government Non nancial corporations and NPISHs Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-17 Jul-18 Net Errors and Omissions NSE Index (Jan 1966=100) Foreign ownership of Treasury bonds Source: Central Bank of Kenya Source: Central Bank of Kenya Notes: * indicates preliminary results October 2018 | Edition No. 18 11 The State of Kenya’s Economy 2. Outlook 2.1. The ongoing recovery in economic output gap is expected to close over the medium term. In activity is projected to continue over the general, this forecast remains largely unchanged from the medium term April 2018 Economic Update. The upgrade in growth for 2.1.1. The strong pick-up in economic activity that 2018 reflects a stronger than earlier projected rebound in started in the first half of 2018 is expected to continue agricultural output. over the medium term. GDP growth is projected at 5.7 percent in 2018, rising to 5.8 and 6.0 percent, 2.1.2. Near term growth is expected to be strong. respectively for 2019 and 2020 (Table 1, Figure 31). Growth in the second half of 2018 is supported by The pickup is underpinned by the current slack in the recovery in agriculture owing to favorable rains and economy with an estimated negative output gap of stronger domestic demand, particularly from the recovery about -0.6 percent of GDP. As the economy rebounds the in private consumption and investment. Further, the external balance position is expected to remain favorable, Figure 31: Growth is projected to remain robust over the thereby supporting macroeconomic stability. However, medium-term partially mitigating the strength of the rebound will be 8 the drag from fiscal consolidation, the recent uptick in oil prices and sub-optimal private sector credit growth (even 5.9 6.0 6 5.7 5.8 if better than in previous years). GDP growth (% y-o-y) 4.9 2.2. Recovery in private demand could support 4 growth while the government pursues needed fiscal restraint 2 2.2.1. A moderate recovery in private consumption is expected to make up for easing government 0 consumption. The baseline assumes that favorable 2016 2017 2018e 2019f 2020f agricultural harvests, low inflation, and a gradual pick-up in Source: World Bank Notes: “e” denotes an estimate, “f” denotes forecast credit to the private sector lends support to strong private consumption. In addition, while growth in the global Table 1: Medium term growth outlook (annual percent change, unless indicated otherwise) 2015 2016 2017 2018e 2019f 2020f Real GDP growth, at constant market prices 5.7 5.9 4.9 5.7 5.8 6.0 Private Consumption 5.2 4.7 7.0 5.9 6.0 6.0 Government Consumption 13.7 8.5 8.4 8.5 4.2 3.5 Gross Fixed Capital Investment 5.3 -9.4 6.3 7.8 10.2 11.5 Exports, Goods and Services 6.2 -2.6 -6.2 4.9 6.8 7.1 Imports, Goods and Services 1.2 -6.3 8.4 8.7 8.9 9.0 Real GDP growth, at constant factor prices 6.1 6.0 4.9 5.7 5.8 6.0 Agriculture 5.3 4.7 1.6 4.1 4.2 4.4 Industry 7.3 5.7 3.6 4.1 4.1 5.2 Services 6.0 6.7 6.9 7.0 7.1 7.0 Inflation (Consumer Price Index) 6.6 6.3 8.0 5.2 6.0 6.5 Current Account Balance (% of GDP) -6.7 -5.2 -6.7 -6.5 -7.0 -7.7 Fiscal Balance (% of GDP) -7.7 -8.2 -8.0 -6.3 -5.0 -3.8 Debt (% of GDP) 52.1 56.5 57.3 57.1 56.1 53.3 Primary Balance (% of GDP) -4.6 -4.8 -4.3 -1.8 -0.4 0.4 Sources: World Bank and the National Treasury Notes: “e” denotes an estimate, “f” denotes forecast * Fiscal Balance is sourced from National Treasury and presented as Fiscal Years 12 October 2018 | Edition No. 18 The State of Kenya’s Economy economy remains strong, remittances to the Kenyan 2.2.3. The medium term fiscal framework underpins economy are projected to be robust, thereby lending a tightening fiscal stance. The government projects a further support to household consumption. The pick- decrease in overall fiscal deficit from 6.9 percent of GDP up in private consumption is expected to complement in 2017/18 to 5.7 percent of GDP in 2018/19, and a further marginal growth in government consumption (salaries reduction to 4.3 percent of GDP in 2019/2020 (Figure 32). and wages, goods and services, transfers), translating to Despite a marginal pick-up in 2018/19, total expenditure is overall growth in final consumption. Nevertheless, on the projected to stabilize at 23.9 percent of GDP in the medium downside, the recent VAT (of 8%) on petroleum products term, supported by a 1.2 percentage points of GDP combined with global oil prices expected to continue its decrease in recurrent expenditure, and a 0.2 percentage steady pick-up and with the pass-through of these prices point reduction in development spending. Furthermore, dampening real household income, the lift to private budget allocations indicate a shift in resources from consumption would be moderate over the medium term. infrastructure to human capital development (Figure 33). Finally, tax revenue is projected to rebound to 18.2 percent 2.2.2. The recovery in private investment is expected of GDP in 2018/19, mainly due to recovery in economic to continue. The unwinding of pent-up investment that activity, rationalization of tax exemptions, enhanced commenced in 2018 is projected to continue into the administrative measures for effective tax collection, and medium term. Our baseline assumes the recovery in measures for expanding the tax base. private investment will be sufficient to offset a slowdown in public investment and to add to a buildup in capital 2.2.4. Within the context of medium term fiscal stock thereby enhancing Kenya’s potential output. consolidation, government spending is expected Government investment spending is expected to to be reprioritized towards the Big 4. Reflecting the decelerate in line with planned fiscal consolidation. The government’s commitment to implement the Big 4 associated reduction of government domestic borrowing agenda, the FY2018/19 budget allocated about 17 should translate into lower yields on government bonds, percent of total public expenditure (or 4.7 percent of thereby incentivizing commercial banks to crowd in GDP) in support of these goals. For instance, to boost private investment. The completion of major infrastructure food and nutrition security, an additional Ksh 18.1 billion projects (e.g. SGR) and reforms to improve the business was allocated for strategic food reserves, cereal and regulatory environment, and government efforts to attract crop enhancement, ongoing irrigation projects, fertilizer the private sector to participate in the Big 4 (e.g. through subsidy, crop insurance schemes, as well as Fall Army PPPs in health, and agriculture) should help boost private worm mitigation. In manufacturing, an additional Ksh investment. Nonetheless with the cap on interest rates 2.4 billion was set aside to support leather industrial still in play and yields on risk-free government securities parks, textiles, and dairy. To promote universal health care still elevated, credit is unlikely to reach optimal levels, in (UHC), Ksh 55.6 billion was allocated for free maternal particular credit to SMEs. healthcare, health insurance subsidy, leasing of medical Figure 32: The ongoing fiscal consolidation is expected to Figure 33: The share of expenditure shifted slightly towards the continue into the medium term Big 4 sectors (health and agriculture) 2016/17 2017/18* 2018/19e 2019/20f 2020/21f 2021/22f Change in sectoral allocations (2018/19 versus 2017/18) 0 Education 1.0 Health 0.8 -2 Agriculture, rural and urban development 0.2 -3.0 General economic and commercial a air 0.1 Percent of GDP -3.4 -4 National security -0.1 -4.3 Environment protection, water and natural resources -0.2 -6 Social protection, culture and recreation -0.3 -5.8 Public administration and international relations -1.2 -6.9 Governance, justice, law and order -1.4 -8 Energy, Infrastructure and ICT -1.8 -9.1 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -10 Source: The National Treasury Source: The National Treasury Notes: * indicates preliminary results, ”e” denotes an estimate “f” denotes forecast. October 2018 | Edition No. 18 13 The State of Kenya’s Economy equipment, free primary healthcare, referral hospitals, exports (tea, coffee, horticulture) hold steady. We also intern doctors, and nurses. Finally, Ksh 24.4 billion was project receipts from tourism to continue to recover as allocated to affordable housing (police and civil servants) there remains further scope for tourist arrivals to increase including the restructuring of the Kenya Urban Support to peaks attained prior to travel advisory warnings. Program to provide trunk infrastructure (water, sewerage However, the trade balance is expected to remain negative and electricity) to crowd in private sector investment in while the current account deficit is projected to widen affordable housing. from 6.5 percent in 2018 to 7.0 and 7.7 percent of GDP, respectively in 2019 and 2020. The projected widening of 2.2.5. The external sector position is expected to the current account deficit will be driven by a high import remain favorable and supportive of macroeconomic bill arising from high oil prices as well as a general pick-up stability over the medium term. Exports are projected in domestic demand. Our baseline assumes that capital to improve marginally over the medium term as growth inflows will be sufficient to finance the projected current in Kenya’s trading partners improves and prices of its main account deficit. 3. Risks are tilted to the downside 3.1. Domestic risks 3.1.3. A recurrence of adverse drought conditions could impact agricultural output, presenting a 3.1.1. Subdued growth of credit to the private downside risk to growth prospects. The projections sector, if persistent, could curtail medium term growth assume that Kenya will receive normal rains for 2018 prospects. Our baseline assumes a strong pickup in and over the medium term, which should auger well for domestic demand supported by sufficient credit flow to expansion in agricultural activity and output. However, if the private sector. However, if the expected credit growth severe drought conditions recur, that poses a downside recovery does not materialize, then the projected growth risk to agricultural output and medium-term growth. in the economy could be curtailed6. A lack of access Nevertheless, the risk of this occurring is assessed low to credit for the private sector presents a significant based on recent forecast for normal weather conditions downside risk to growth prospects since it could soften by the Kenya Meteorological Service. the projected uptick in domestic demand, and derail business expansion plans, particularly in terms of funding 3.2. External risks for micro, small and medium-sized enterprises. 3.2.1. Unanticipated tightening of global financial 3.1.2. Slippages from the projected fiscal conditions as a result of normalization of monetary consolidation path could derail attainment of the policy in advanced economies represents a risk to needed fiscal space to fund the Big 4 agenda and financial flows to Kenya. Our baseline assumes an orderly potentially compromise macro-stability. The baseline adjustment to higher interest rates in advanced economies. assumes that the government will adhere to its medium However, in recent months capital outflows from term fiscal consolidation targets. However, fiscal slippages emerging markets have led to significant depreciations present a significant downside risk to the outlook because of local currencies in emerging markets (Argentina, continued government borrowing is likely to outcompete Turkey, Venezuela). In contrast, the Kenyan shilling has the private sector in access to credit, which could remained relatively stable and official foreign reserves adversely impact private sector investment, and could remains ample (5.6 months of import cover in September possibly lead to costly servicing of government domestic 2018). Nonetheless, with continued jitteriness among debt, erosion of fiscal buffers, and a reversal of the gains global investors, emerging and frontier markets including in macroeconomic stability. Further, fiscal slippages could Kenya remain vulnerable to changing sentiments and compromise macroeconomic stability, thereby restricting contagion. Kenya’s vulnerabilities could intensify given the government resources and its ability to catalyze the Big 4 upcoming bullet payments for its Eurobonds and other as well as disincentivizing the private sector to invest in commercial syndicated loans. These vulnerabilities could support of the Big 4. be compounded, if there are significant slippages from 6 Abiad, A.D., Dell’Ariccia,G and Li, G.B., (2011), Creditless Recoveries, IMF Working Paper No 11/58 (Washington DC: International Monetary Fund). 14 October 2018 | Edition No. 18 The State of Kenya’s Economy its medium term fiscal consolidation pathway. However, major trading partners. Escalating trade tensions given a comfortable level of official reserves cover and the between larger trading powers, mounting geopolitical recent commencement of fiscal consolidation, these risks risks in the middle East, and the exit of the UK from the are assessed low. EU remain risks to the recovery in the global economy. Weaker global growth is likely to adversely impact Kenya’s 3.2.2. A faster and unexpected increase in oil prices exports, reduce remittance inflows and tourist arrivals, presents a downside risk to the projected growth. The thereby dampening growth prospects in Kenya beyond baseline takes into account the recent steady pick-up our projected baseline. in oil prices. However, if a sharper and unexpected rise in oil prices occurs, this presents a significant downside 3.2.4. On the upside, several factors not considered risk as it could exert pressure on Kenya’s terms of trade, in our baseline assumptions could surprise with an compelling both energy prices and inflation to rise. Higher upswing to projected growth. These include fast- inflation could also erode purchasing power and dampen tracked structural reforms in support of the Big 4 agenda, domestic demand and overall growth. stronger than anticipated recovery in credit to private sector and an even stronger recovery in the global 3.2.3. Uncertainty and rising trade tensions could economy than expected. weaken growth both globally and amongst Kenya’s 4. Policy options to support growth and achievement of the Big 4 Agenda 4.1.0. Further macroeconomic policy and structural economy’s long-term growth potential. A path where much reforms are needed to boost inclusive growth and of the burden of fiscal consolidation is disproportionately advance the government’s Big 4 agenda. Thanks to shouldered by development spending, as is the case robust growth over the past decade, Kenya has made in Kenya, undermines the underlying growth potential good progress in alleviating poverty, with the share of of the Kenyan economy. In this regard, there is a need those living below $1.90/day (international poverty line) to recalibrate the balance between development and declining by about ten percentage points between 2005/6 recurrent expenditures, with the latter bearing a higher and 2015/16. Nonetheless, at 36.8 percent, poverty levels share of the expenditure containment. Specific measures still remain elevated and is twice the average of poverty that could be considered to rein in recurrent spending head count in low and middle-income countries (LMICs). include: lowering of transfers to state owned enterprises, Deep macro and structural reforms can help speed-up cleaning and regular audit of the payroll register, keeping the pace of poverty alleviation. Macro policies could wages, salaries and allowance adjustments in line with include recalibrating the quality of fiscal consolidation recommendations from the SRC, and maintaining frugality and improving debt management to safeguard in operations and maintenance expenses7. macroeconomic stability. Structural reforms could seek to boost private investment including through improving 4.1.2. There is an urgent need to reverse the private sector credit access, particularly to micro and small- downward trend in revenue mobilization. Raising scale enterprises. revenue mobilization is an essential ingredient of fiscal consolidation8. As a share of GDP, revenue mobilization 4.1. Fiscal consolidation can be growth fell to a decade low in FY 2017/18. Domestic revenue friendly while safeguarding mobilization measures could focus on rationalizing macroeconomic stability tax expenditures and putting in place a governance 4.1.1. Fiscal consolidation needs to be recalibrated framework that checks the creeping-up of tax exemptions towards recurrent spending. The quality of fiscal (World Bank, 2017). Further, the tax base needs to be consolidation matters for safeguarding the Kenyan broadened, as contemplated in the draft income tax bill. 7 Comprehensive Public Expenditure Review 2018 (Forthcoming). 8 Nauschnigg (2006) October 2018 | Edition No. 18 15 The State of Kenya’s Economy Moreover, enhanced administrative measures such as efficiency of input subsidy program and producer subsidy better interconnectedness between various government (Strategic food reserves) also needs to be scrutinized with data management systems with ITAX (such as IFMIS and a view to improve accountability and transparency since other third-party systems) could help boost efficiency they bear important market distortions and productivity of tax collection. For example, implementing GEOCRIS, a consequences (Mason, N. et al. 2015; Opiyo, J. et al. 2015). system that uses geo-spatial technology to locate property, could help boost real estate taxes, and a wider rollout of 4.1.4. Increasing the level of budgetary execution the electronic cargo tracking system could boost VAT and remains key to realizing optimal returns to investment customs duties. in the Big 4 projects. On average, over the period 2014- 2016, expenditure out-turns have underperformed its 4.1.3. Reprioritize and enhance efficiency of allocated budget by 15 and 27 percent, respectively for the government spending to create more room for the agriculture and health sectors10. Some of the constraints Big 4. For the Big 4 to succeed, some level of expenditure explaining lower absorption include limited capacity in reprioritization will be required. Based on the FY2018/19 the implementing units, lack of synchronized planning budget, the share of expenditure has shifted slightly in and budget execution, and slower release of funds by the favor of health (0.8 percentage points) agriculture (0.2 exchequer. Addressing weak implementation capacity and percentage points) relative to their shares in FY 2017/18 putting in place mechanisms for faster disbursement of (Figure 33). While this is commendable, achieving the funds, while improving planning and budgeting remains Big 4 agenda would require much more expenditure re- key in raising absorption and achieving the intended allocation to these critical sectors. It would be equally objectives under the Big 4. important for there to be improvement in efficiency of spending. For instance, in the agriculture sector, 4.1.5. Improve debt management. Debt management recent public expenditure review shows that the lack could be improved by rebalancing the mix of expensive and of extension officers is undermining productivity in the shorter maturity commercial debt with concessional debt sector9. However, the budget for agriculture continues to that is more affordable and with longer maturity profiles. significantly underfund extension services. Similarly, with 98 Policies to develop and deepen the local bond market as percent of farming being rain-fed, there needs to be more well as to attract foreign investors to the local currency investment in support of small-scale irrigation facilities. The bond market could boost availability of low cost debt Increase the share of manufacturing from 9.2 percent to 15 percent of GDP by 2022 and enhance Food and Nutrition Security (FNS) Photo: © Dennis Nthiga and Ethan Liku/World Bank 9 Agriculture Public Expenditure Review (Forthcoming). 10 Comprehensive Public Expenditure Review 2018 (Forthcoming). 16 October 2018 | Edition No. 18 The State of Kenya’s Economy refinancing. Kenya attracts far fewer foreign investors into calls for a policy and institutional reform agenda that will its local currency bond market relative to Nigeria, Egypt, incentivize private investment as well as public investment Ghana and South Africa, even though its local currency towards supporting the Big 4. In the previous Economic bond market has grown very rapidly. Developing the local Update (KEU 17), a number of structural reforms needed currency bond market could spur significant interest from to accelerate achievement of the Big 4 objectives were foreign investors and potentially reduce country borrowing highlighted. Various government publications also indicate costs, extend the maturity profiles of local currency bonds, needed policy reforms to advance the Big 4. The table and reduce exposure to foreign exchange risk. below reflects some of the key reforms. 4.1.6. A deeper set of micro reforms are needed 4.2.2. While progress is being made, there is significant to tackle bottlenecks to credit access. These could scope to fast-track the policy and institutional reform include strengthening credit scoring, improving pricing agenda that can help accelerate progress towards transparency and strengthening consumer protection. the Big 4. Since the announcement of the Big 4, some Credit reporting can have a significant impact on the progress has been made in improving the policy ability of commercial banks to differentiate between risky environment (Table 2). Completed measures include the and safe borrowers thereby counteracting high uniform legal framework for KMRC, removal of stamp duties for first interest rates charged to borrowers11. In addition, reforms time home buyers, and the introduction of standardized that strengthen consumer protection and increase forms to register a change on a property. Nonetheless, financial literacy are key to tackling predatory lending. there remains several areas where progress is limited and will require a further push to advance the incentive 4.2. Accelerate progress in structural reforms to structure in the economy to support the Big 4. These advance the Big 4 agenda include, for example in the agriculture sector, the need to 4.2.1. Advancing the structural reforms can help improve small scale farmer input access (higher yielding crowd in the private sector to achieve the Big 4 agenda. seeds and fertilizer) and financing. Given the ambitious, Government spending alone, while important, will not be yet achievable, goals of the Big 4, it will be important to sufficient to advance the Big 4 in a significant way. This accelerate the pace of reforms in these areas (Table 2). Provide 500,000 affordable houses by 2022 and achieve 100 percent Universal Health Coverage (UHC) Photo: © Sambrian Mbaabu/World Bank and Karibu Homes 11 Chi, G. and Zhang, Z. (2017): Multi-Criteria Credit Rating Model for Small Enterprise using a Nonparametric Method. October 2018 | Edition No. 18 17 The State of Kenya’s Economy Table 2: Progress in the structural reform agenda to advance the Big 4 Incomplete Progress on Structural Policy and institutional Reforms that can help Completed Limited Advance the Big 4 Progress Progress Affordable Housing Complete the legal and regulatory framework for KMRC X Waive stamp duty for first time home buyers X Pass amendments to the Sectional Properties Act to allow for sub division of plots X Standardize forms to register a change on property X Eliminate minimal prices for professional services in housing X Agriculture Approve new seed legislation to allow equal access to public germplasm by X public and private seed companies Increase the use of e-vouchers to target small holder farmers for fertilizer subsidies X Approve warehouse receipt system X Increase allocation of resources for better water harvesting that benefits small- X scale farmers Multiplicity of taxes across counties X Universal Health Care Approve Health Financing Policy X Implement action plan to reduce NHIF administrative costs X Increase the Share of Manufacturing Finalization of intellectual property rights policy X Anti-counterfeit measures X Finalize Kenya Investment Policy X Legal framework for Micro Small Enterprises Authority X Finalize a framework document for national-county investment coordination X Finalize and enact the National Waste Management Bill 2017 and the National X Water Policy Sources: World Bank compilation 18 October 2018 | Edition No. 18 Part 2: Special Focus FISCAL INCIDENCE ANALYSIS Photo: © Gift Kuto Special Focus 5. Introduction 5.1. Background into poverty reduction. By design, the analysis covers only spending, transfers and taxes that can reasonably 5.1.1. Kenya has been able to reduce the share of be mapped to individual households through the recent people living below the national poverty line by more Kenya Household Integrated Budget Survey (KHIBS) data than ten percentage points between 2005/06 and of 2015/16. This analysis covers spending on education, 2015/16, consistent with the overall robust economic public health and transfers as well as taxes (PAYE, VAT, growth observed. The national poverty headcount rate excise taxes). dropped from 46.8 percent in 2005/06 to 36.1 percent in 2015/16, which corresponds to an annualized rate of 5.2. Commitment to Equity (CEQ) framework poverty reduction of 2.6 percent. Despite this successful reduction in the incidence of poverty, the absolute 5.2.1. The Commitment to Equity (CEQ) framework number of poor declined only marginally, from 16.6 is a popular approach for analyzing the fiscal incidence million in 2005/06 to 16.4 million ten years later, due to of a government’s system of expenditures and taxation growth of the population. (Lustig & Higgins, 2013; and Box 1). The framework is premised on the notion that in analyzing the impacts 5.1.2. Inequality in Kenya has declined at the national of taxes and transfers on poverty and inequality, it is level between 2005/06 and 2015/16, in line with a pro- important to consider taxation and expenditure jointly. poor pattern of economic growth contributing to the It can be applied in both country-specific cases or across observed poverty reduction. The Gini index fell from 0.45 countries, with the advantage that in the latter, it provides in 2005/06 to 0.39 in 2015/16, indicating that Kenya made comparable estimates of the impact of fiscal policy on considerable progress in terms of reducing inequality. inequality and poverty. The advantages of the framework The Gini index in rural areas declined from 0.37 to 0.33, include comparable results estimates and consideration a significant improvement for an indicator that is usually of as much of the spending and transfers system that very stable over time. This suggests that redistribution can reasonably be assigned to individual households. contributed positively to the substantial poverty reduction Nonetheless, CEQ assessments such as the one presented observed in Kenya’s rural areas during this period. The in this study have important limitations (Box 1). level of inequality in Kenya is moderate and comparable to inequality in Tanzania, Uganda, and Ghana. 5.2.2. Despite limitations, the CEQ framework is broad in scope and can serve as a baseline from which 5.1.3. This study deploys the fiscal incidence more narrow questions about fiscal incidence of the analysis to assess the distributional consequences government’s spending and taxes can be addressed. of government spending (education and health), CEQ assessments are typically broad in scope, covering all transfers, and taxes. The analysis of fiscal incidence taxes and transfers that can be plausibly allocated directly and distributional consequences of the government’s to households. In addition, they can be used as a baseline spending, transfers and taxes could be an important for further analysis such as simulation of alternative VAT input for designing pro-poor policies and potentially for regimes or changes to the parameters of transfer schemes. influencing the rate at which economic growth translates 20 October 2018 | Edition No. 18 Special Focus Box B.1: Commitment to Equity Framework Four income concepts in the CEQ framework + In-kind + Direct cash transfers + Indirect (free or and near Disposable subsidies subsidized Market cash transfers income income (assumed to be government Pre-tax wages equivalent to services) Consumable Final and salaries, consumption income Income income from expenditure capital, private when - Direct taxes - Indirect transfers... income data is (e.g. personal taxes - Co-payments, unavailable or income (VAT, user fees unreliable) taxes) excise) Source: Based on Lustig and Higgins (2013). At the core of the CEQ method is the construction of income concepts and the analysis of their respective distributions. Starting from market or pre-fiscal income, the burden and benefits of distinct components of the tax and transfer system will be added consecutively to obtain disposable income, consumable income, and final income (Figure 34). In brief, disposable income is market income less personal income taxes and employee contributions to social security plus direct cash and near-cash benefits (e.g. transfers from conditional or unconditional cash transfer programs, free food programs). Consumable income is disposable income plus indirect subsidies less indirect taxes (e.g. VAT). Final income is consumable income plus in- kind transfers (e.g. free or subsidized government services) less co-payments and user-fees. Once these income variables are constructed, the analysis tracks changes in poverty and inequality measures across the several types of income. Note that this assessment uses consumption as the underlying welfare indicator, not income. This assessment is based on the 2015/16 KIHBS as well as administrative data from various sources. Implementing a CEQ assessment requires a comprehensive household survey as well as administrative data on taxes and transfers at the time of data collection. The CEQ framework stipulates various methods of assigning burdens and benefits to sample households (Lustig & Higgins, 2013). There are important limitations of the analysis that are common in this type of analysis. First, the analysis does not consider behavioral, life-cycle, or general equilibrium effects. Furthermore, the analysis provides information about the average incidence, not the incidence at the margin. Tax shifting and labor supply assumptions are strong as they imply that both consumer demand and labor supply are perfectly inelastic. Second, as in much of the literature on poverty analysis and inequality, the analysis ignores the intra-household distribution of consumption. Third, the analysis does not consider differences in the quality of education or health care services delivered by the government across income groups. Fourth, this analysis does not consider certain tax and spending items that are material to the government budget. These include taxation of corporate income and international trade, property taxes, and infrastructure spending, which are difficult to assign to individual households because of their public good nature. October 2018 | Edition No. 18 21 Special Focus Box B.2: Measuring progressivity and redistributive effects: basic concepts and definitions When are taxes and transfers progressive? A common way to measure the progressivity of a tax (transfer) is by comparing the cumulative distribution also known as cumulative concentration shares of their burden (benefit) with the cumulative distribution of market income. This is known as the tax (transfer) redistribution approach (Duclos & Araar, 2006). In the case of spending, it is also useful to compare the cumulative distribution of benefits with the cumulative shares of total population. To illustrate, Figure A presents a Lorenz curve where the population is ranked along the horizontal axis using market (sometimes called original or reference) income, and the cumulative shares of taxes paid or transfers received is plotted along the vertical axis. The latter are concentration curves. The report uses the following classification of taxes and transfers when referring to whether taxes or government spending are progressive or not: a tax (transfer) whose concentration curve lies everywhere below (above) the Lorenz curve for market income is globally progressive. A transfer whose concentration curve lies everywhere above the diagonal is globally progressive in absolute terms. Such a transfer is also referred to as ‘pro-poor.’ A tax (transfer) whose concentration curve coincides with the Lorenz curve of market income is neutral. And, finally, a tax (transfer) whose concentration curve lies everywhere above (below) the Lorenz curve is globally regressive. Figure A: Progressivity and taxes and transfers (diagrammatic representation) 1 Transfer: progressive in absolute terms (pro-poor) 45 degree line: per capita tax/ transfer equal for everyone (poll tax/transfer) Cumulative proportion of income, taxes and transfers Tax: regressive Transfer: progressive Tax: progressive Transfer: regressive Pre-tax:/pre-transfer income Lorenz curve transfer or tax: neutral ( at) 0 Cumulative proportion of population (ordered by pre-tax/pre-transfers income) 1 Source: Lustig and Higgins (2013). 22 October 2018 | Edition No. 18 Special Focus 6. Government Social Sector Spending 6.1. Is government social sector spending CT-PwSD aim at reducing poverty among specific pro-poor? demographic groups, namely the elderly and persons with 6.1.1. Spending on education, health and social severe disabilities. The CT-HSNP aims to reduce hunger protection account for about a third of total expenditure. and vulnerability in specific geographic areas and the Of the three types of social sector spending analyzed in CT-OVC aims to build human capital among orphans and this study, spending on education accounts for a large vulnerable children and to encourage civil registration. In fraction of total government spending at 20.3 percent 2013, the Kenya National Safety Net Program (NSNP) was of total expenditure in FY2015/16. Spending on health established to improve and coordinate social protection accounted for 6.4 percent of total expenditure, while social delivery providing a common operating framework for protection spending accounted for about 6.4 percent of the government’s cash transfer programs including a total expenditure. The three sectors combined accounted unified beneficiary registry. for 31.4 percent of total government expenditure in FY2015/16. 6.2.2. Cash transfer programs differ in terms of coverage, payouts, and their targeting mechanism. Three 6.1.2. Devolution of certain functions means that of the four programs considered here are unrestricted in spending on health and education vary at the national terms of their geographic coverage. The HSNP is targeted and county level. In FY2015/16 spending on education exclusively at households in Mandera, Marsabit, Turkana, at the national level accounted for 17.6 percent of total and Wajir. Both the HSNP and the CT-OVC use proxy- spending, while spending at the county level was about means tests (PMTs) for targeting while the OPCT and the 6.8 percent of total county spending. Devolution of early CT-PwSD are targeted based on a combination of poverty childhood education, with all other levels of education status and demographic characteristics, and old-age and executed at the national level, explains the large variation disability status, respectively. Payout amounts are similar in education spending. Similarly, a fully devolved health in all four programs (Table 4), ranging from Ksh 2,000 function meant that health spending at the county level monthly per household for the CT-OVC, the OPCT, and the accounted for 22.3 percent of total county spending in CT-PwSD, to Ksh 2,550 per month for the HSNP. FY2015/16. Health spending at the national level was about 1.9 percent of total government spending. 6.2.3. All four cash transfer programs are progressive and pro-poor. The four cash transfer programs appear 6.1.3. The Government of Kenya (GoK) recently well-targeted to the poor. Overall, 60.2 percent of the introduced a series of direct cash transfer (CT) programs benefits are captured by the poorest 40 percent of the whose fiscal incidence is analyzed here. The direct cash population (Figure 34a). There is some variation across transfer programs considered here are the Cash Transfer programs. CT-HSNP, which uses a combination of for Hunger Safety Net Program (CT-HSNP), the Cash geographic targeting and a PMT, directs 74.3 percent of Transfer for Orphans & Vulnerable Children (CT-OVC), the benefits distributed to the poorest 40 percent and the Older Persons Cash Transfer (OPCT), and the Cash is thus the best-targeted program among the four. It is Transfer for Persons with Severe Disabilities (CT-PwSD). followed by the CT-PwSD with 64.5 percent targeted to Transfer programs not considered in this analysis include the Urban Food Subsidy (UFS) program and bursary fund the bottom 40 percent, the OPCT with 60.8 percent, and programs. The following section assesses the distributional finally the CT-OVC with 51.6 percent. consequences of Kenya’s spending and taxes. 6.2.4. The targeting performance of Kenya’s cash 6.2. Cash Transfers transfer programs is comparable or slightly better 6.2.1. Cash transfer programs have different than the targeting performance of similar programs objectives but are unified administratively under a elsewhere. One study that assembles a dataset of 122 common operating framework. The OPCT and the interventions finds that the mean and median among October 2018 | Edition No. 18 23 Special Focus Figure 34: Lorenz and concentration curves (ranked by real market income per adult) for market income and cash transfer programs and share in total expenditure by quintile (a) Lorenz- and concentration curves for cash transfer receipts (b) Share of cash transfer receipts in total expenditure by quintile and market income (%) 100 5 80 4 Cumulative share (%) Percent 60 3 40 2 20 1 0 0 0 20 40 60 80 100 All Bottom 20% 2 3 4 Top 20% Percentiles of market income (%) By quintile Per capita market income All CT programs OPCT All CT programs OPCT CT-HSNP CT-OVC CT-PwSD CT-HSNP CT-OVC CT-PwSD 45-degree line Source: World Bank based on KIHBS 2015/16 and administrative data. 68 programs for which this indicator is available are 59.2 education have recently been devolved to the counties, and 52.5 percent captured by the bottom 40 percent, while public primary, secondary, and tertiary education respectively, and a similar–56.3 and 61.8 percent–among remains under the national government. Public primary the eight programs in that sample that are based on PMTs and public secondary account for 42.2 percent and (Coady, Grosh, & Hoddinott, 2004). Hence, the targeting 32.2 percent of total recurrent spending on education, performance of Kenya’s cash transfer programs seems respectively (Figure 35). Tertiary education also accounts typical or even slightly above-average among programs for a significant portion, around 14.8 percent. of this type. 6.3.2. Public education spending is expected to be 6.2.5. Because of its size, the OPCT is the most pro-poor in Kenya for three reasons. The first is related to important program for the poor. Because the OPCT was demographics: the share of school-age children is higher the largest program in terms of coverage in 2016 and among the poor, with nearly half of all children between given its good targeting performance, the transfers appear the ages of 6 and 17 among the bottom 40 percent to have a greater impact on poor household income than (Figure 36). Even without differences in public school the other CT programs. Transfers account for, on average, enrollment, the poor would therefore stand to benefit almost two percent of total household expenditure disproportionately from public education spending. among the poorest quintile, decreasing to 1.0 and 0.6 Second, the poor are more likely to be enrolled in public percent among the second and third quintiles (Figure schools than their wealthier counterparts, particularly at 34b). The HSNP program is also marginally significant to the primary level (Figure 36a). The trend towards higher the poor with an average budget share of around one uptake of private education at the primary level is well percent among the poorest 20 percent. Overall and on documented and has been linked to the introduction average, cash transfers account for close to 1.5 percent of of Free Primary Education (FPE) in 2003. Differences in household expenditure across the entire population and overall enrollment rates only materialize at post-primary 3.8 percent among the bottom 20 percent. levels, especially in tertiary education (World Bank, 2018b). The final reason relates to school financing. Public primary 6.3. Public Education Spending education is fully subsidized while post-primary education 6.3.1. Close to three quarters of the Government’s often requires substantial co-payments, even for public recurrent public education spending is directed to provision (World Bank, 2018b). This arrangement is primary and secondary education. Kenya’s education expected to further increase the effect of higher uptake of system comprises eight years of primary, four years of primary public education among the poor and to mitigate secondary, and four years of tertiary education. Early the benefits of public secondary that would otherwise childhood education and some aspects of vocational accrue to richer families. 24 October 2018 | Edition No. 18 Special Focus Figure 35: Distribution of recurrent public education spending by education level (a) Distribution of recurrent public education spending by level (b) Share of children age 6-17 by quintile 3.3% 14.8% 3.0% 42.2% 12.8% 24.9% 18.2% General administration and planning Primary education Bottom 20% Teacher education 23.1% Special education 21.1% 2 32.2% Early childhood education 3 Secondary education 4 0.3% Technical education 3.9% University education Top 20% 0.3% Source: World Bank based on education sector reports (panel (a)) and KIHBS 2015/16 (panel (b)). 6.3.3. While enrollment rates are declining, public 6.3.4. The combined net benefits of public education (per-student) spending is increasing across the expenditure are progressive in absolute terms but education system. Kenya spends significant public become regressive at higher levels of education. The resources on all major levels of the education system. More bottom 40 percent capture 14.3 percent of per capita than 40 percent of total recurrent spending is allocated to market income but 51.7 percent of the net benefits primary, more than 30 percent to secondary, and about 15 of public education spending (Figure 37). This result percent to university education (Figure 35a). However, the is driven by early childhood education and primary total number of students enrolled decreases drastically education spending, of which the poorest 40 percent across these levels, partly due to the 8-4-4 structure with capture 67.8 and 58.2 percent, respectively. While public its focus on eight years of primary education and partly spending on early childhood education and primary because of decreasing enrollment rates. This results in and special education are progressive in absolute terms, escalating levels of per student spending: the average net spending on secondary public education and technical benefit to public primary school students is around Ksh and teacher education is progressive only in relative 14,600, increasing sharply to Ksh 24,500 in secondary, and terms. Spending on public universities, on the other hand, Ksh 53,000 in university. is regressive, due to low levels of enrollment among the poor (World Bank, 2018b). Figure 36: Distribution of school-age children and gross enrollment, 2015/16 (a) Gross enrollment ratios in primary by type of provider (b) Gross enrollment ratios in secondary by type of provider 120 120% 100 100% 80 80% 60 60% 40 40% 20 20% 0 0% All Bottom 20% 2 3 4 Top 20% All Bottom 20% 2 3 4 Top 20% By quintile By quintile Public Private Pubilc Private Source: World Bank based on KIHBS 2015/16. October 2018 | Edition No. 18 25 Special Focus Figure 37: Per capita market income and net benefit of public health centers and dispensaries, but not for government education expenditure hospitals (Figure 38). Reliance on public services is high in 100 rural areas and less so in urban areas. 80 6.4.2. Public spending on outpatient care in lower- Cumulative share (%) 60 level facilities is pro-poor, while user fees and over-the- counter purchases associated with outpatient care in 40 public facilities are regressive. The overall incidence of 20 public spending on outpatient care is nearly neutral: the bottom 40 percent account for 36.6 percent of 0 0 20 40 60 80 100 the benefits (Figure 40a). The result follows from a Percentiles of market income (%) Per capita market income All Early childhood Primary and special combination of effects. The poor are less likely to consult Secondary Technical and teacher University 45 -degree line health providers. But conditional on uptake, they are Source: World Bank based on KIHBS 2015/16 and administrative data. more likely to consult public facilities, particularly lower- level facilities such as dispensaries and health centers. 6.4. Public Health Spending Consequently, the bottom 40 percent capture 41.2 and 6.4.1. While the poor are less likely to seek health 50.3 percent of the gross benefits associated with health services in general, they are more likely to consult centers and dispensaries but only 30.6 percent of the with public providers. As in the case of public education gross benefits associated with government hospitals. spending, there are several factors that determine the Globally, public spending on outpatient care in health incidence of public health spending in Kenya. One is centers and dispensaries is progressive in absolute terms simply the difference in the propensity to seek care. The while public spending on outpatient care in government poor are typically less likely to seek care and this holds hospitals is still progressive. However, the poorest 40 for all types of care; curative outpatient visits, inpatient percent have a share of 16.1 percent in market income but care and preventive care. The sole exception is preventive account for 25.9 percent of all fees and over-the-counter care for children below 15 years–across all age groups purchases associated with public outpatient health (Figure 38c). But conditional on uptake, the poor are more services (Figure 40b). likely to consult government-run facilities. This is true for Figure 38: Uptake of outpatient, inpatient, and preventive care by age group and quintile, 2015/16 (a) Outpatient care (last four weeks) (b) Inpatient care (previous year) (c) Preventive care (last four weeks) 50 7 15 6 40 5 10 30 4 Percent Percent Percent 3 20 5 2 10 1 0 0 0 0-4 5-9 10-14 15-24 25-34 35-44 45-54 55-64 65+ 0-4 5-9 10 -14 15 -24 25-34 35-44 45-54 55-64 65+ 0-4 5-9 10 -14 15 -24 25 - 34 35 - 44 45 - 54 55 - 64 65+ Total Bottom 40% Top 20% Total Bottom 40% Top 20% Total Bottom 40% Top 20% Source: World Bank based on KIHBS 2015/16. 26 October 2018 | Edition No. 18 Special Focus Figure 39: Provider choice for outpatient care by quintile and locality, 2015/16 100% 15.3% 14.7% 15.2% 16.5% 14.8% 15.0% 14.8% 16.4% 80% 14.6% 15.4% 17.7% 23.0% 24.0% 23.6% 33.1% 37.0% 60% 28.2% 27.6% 19.5% 27.6% 21.9% 20.6% 16.6% 7.0% 40% 18.0% 20.2% 20.9% 19.0% 14.0% 18.5% 13.0% 19.5% 20% 21.8% 22.3% 23.1% 22.3% 25.5% 20.8% 20.4% 20.4% 0% Total Bottom 20% 2 3 4 Top 20% Rural Urban Gov. hospital Gov. health center Gov. dispensary Private hospital/clinic Other Source: World Bank based on KIHBS 2015/16. Figure 40: Incidence of outpatient visits, public expenditure on outpatient visits, and user fees by facility (a) Incidence of outpatient visits and gross benefits of public (b) Incidence of user fees (fees and over-the-counter purchases) expenditure on outpatient visits by facility 100 100 80 80 Cumultative share (%) Cumulative share (%) 60 60 40 40 20 20 0 0 0 20 40 60 80 100 0 20 40 60 80 100 Percentiles of market income (%) Percentiles of market income (%) Market income Government hospitals Government health centers Market income Co-payments and 45-degree line Government dispensaries Total bene t (weighted by cost) 45-degree line over-the-counter purchases in government facilities Source: World Bank based on KIHBS 2015/16 and information tabulated in Flessa, et al (2011). 6.5. Benchmarking Kenya’s Social Spending education is the sector with the highest spending in Ethiopia, Tanzania, Kenya and Uganda. Kenya had the 6.5.1. Across the main neighboring countries, highest expenditure on education at 4.8 percent of GDP, spending on direct transfers, education and health followed by Ethiopia and Tanzania at 4.6 percent of GDP were found to be broadly progressive. Fiscal Incidence each. Education expenditure in Uganda was less than half Analysis using the CEQ methodology was carried out for of the other three EAC countries at 2.4 percent of GDP Ethiopia (2011), Tanzania (2011/12) and Uganda (2012/13). (Figure 41). The analyses find that government social sector spending on direct transfers and in-kind spending are broadly Figure 41: Social sector spending as a percent of GDP for selected countries progressive, poverty reducing and have a positive but 16 only small effect on inequality. However, subsidies such as electricity subsidies in Ethiopia and Tanzania are found to 12 be regressive, with most of the benefits accruing to richer Percent of GDP households who are more likely to use electricity. For all 8 three countries, like in Kenya, direct transfers are found to be progressive when they are well targeted. 4 6.5.2. Education sector spending was the most pro- 0 poor for those neighboring countries. Just as enrollment South Africa Brazil Mexico Kenya Ghana Ethiopia Tanzania Uganda (2010) (2009) (2010) (2015/16) (2013) (2011) (2011/12) (2012/13) rates for poor households are high at lower levels, so are Education Health Direct transfers the drop-out rates at higher levels of education. Secondly, Source: The CEQ Institute and World Bank calculations October 2018 | Edition No. 18 27 Special Focus 6.5.3. In general, social spending in middle income of GDP. Comparatively, Kenya’s tax to GDP ratio was 16.7 countries tends to reduce market income inequality percent in FY2015/16, with indirect taxes accounting substantially if direct transfers are well targeted. The for 8.3 percent of GDP (Figure 42). This suggests that CEQ analysis for South Africa found social sector spending while government spending on social protection on direct and in-kind transfers to be progressive, with the is progressive, increasing revenue mobilization and direct transfer programs being large and well targeted. expanding the tax base is essential before coverage can Similarly, social sector spending in Mexico was found be increased significantly. to be progressive with the expansion of direct transfer programs found to be pro-poor. This is also the case in Figure 42: Government revenue as a percent of GDP for selected countries that have completed the CEQ Brazil where direct transfer programs such as Bolsa Familia Government Revenues 40 are progressive. 30 6.5.4. Even though social sector spending is usually largely progressive, scaling up coverage requires a 20 higher revenue base. The CEQ fiscal analysis on Mexico notes that benefits gained from tax exemptions are muted 10 in comparison to foregone benefits from expenditure. In contrast, the combined redistributive effects from revenue 0 and spending in South Africa has had a positive effect on Brazil South Africa Tanzania (2009) (2010) (2011/12) Mexico (2010) Ghana (2013) Kenya (2015/16) Ethiopia Uganda (2011) (2012/13) inequality. South Africa’s tax revenue in 2010 was 25.4 Direct taxes Constructed Indirect taxes Constructed Total Revenues percent of GDP, with indirect taxes making up 10.4 percent Source: CEQ Institute and World Bank 7. Taxes in Kenya 7.1. How does Kenya compare to her peers? government revenue, pointing to the importance of taxes 7.1.1. In 2015/16, Kenya’s total government revenue relative to other sources of revenue (Figure 43b). was in line with peer countries, but with a relatively higher share of tax revenues. A cross-country sample 7.1.2. Both direct and indirect taxes account for of 31 low- and middle-income countries reveals that about eight percent of GDP. Kenya has come to rely on revenues as a percent of GDP averages 23 percent. direct taxes more than other countries at similar levels In Kenya, however, total revenue represented only 18 of economic development while the proportion of tax percent of GDP, which is more typical of lower-income revenue raised from indirect taxes is comparable to countries (Figure 43a). Taxes accounted for 90 percent of regional peers (Figure 44). In 2015/16, direct taxes were Figure 43: Total revenue and share of taxes of total revenue against GDP per capita (2011 PPPs, log scale) (a) Total revenue as percent of GDP (b) Taxes as percent of total government revenue 100% 40% Kenya South Africa South Africa 80% 30% Tanzania Ghana 60% Ghana 20% Tanzania 40% Kenya 10% 20% 0% 0% 1,000 10,000 1,000 10,000 GDP per capita (2011 PPPs, log scale) GDP per capita (2011 PPPs, log scale) Source: Kenya Economic Survey 2017, World Development Indicators, and CEQ Institute. 28 October 2018 | Edition No. 18 Special Focus Figure 44: Share of direct and indirect taxes in GDP against GDP per capita (2011 PPPs, log scale) (a) Direct taxes as percent of GDP (b) Indirect taxes as percent of total government revenue 20% 25% 15% South Africa 20% Tanzania 15% Kenya 10% Tanzania Ghana Ethiopia 10% 5% South Africa 5% Uganda Uganda Ghana Kenya Ethiopia 0% 0% 1,000 10,000 1,000 10,000 GDP per capita (2011 PPPs, log scale) GDP per capita (2011 PPPs, log scale) Source: Kenya Economic Survey 2017, World Development Indicators, and CEQ Institute. roughly equally split between income tax from individuals zero-rated or exempt. As a result, the share of VAT in and corporate income tax. VAT contributed about 25.4 Kenya’s total tax revenue is lower relative to low-and percent of the total tax revenue while excise taxes middle-income countries, (where it accounts for around contributed about 12.3 percent. Taxes on international 60 percent). The number of VAT exempt categories in trade accounted for about 9.2 percent of total tax revenue. Kenya recently increased to more than 30, with a resulting loss in tax revenue of about two percent of GDP in 2015 7.1.3. Among indirect taxes, VAT in Kenya accounts (World Bank, 2017). Excise taxes account for one fourth for about a quarter of total tax revenue. This is a lower of indirect taxes, a larger share than typically seen in low- share than in other low- and middle-income countries. and middle-income countries. Excise taxes are applied to The standard rate of VAT in Kenya is 16 percent. However, tobacco products, alcoholic and non-alcoholic beverages, a considerable number of goods and services are either airtime, and some other goods and services. Overall, exempt and zero-rated items within Kenya’s VAT regime benefit the poor only marginally. Photo: © Sarah Farhat/World Bank October 2018 | Edition No. 18 29 Special Focus 7.2. Direct Taxes – Personal Income Tax total household expenditure among the poorest quintile, (Figure 45b) but their share increases to 4.5 percent in the 7.2.1. Personal income is taxed based on a progressive fourth quintile and to more than eight percent in the top rate structure with six tax brackets. Income tax in Kenya quintile. This is a result of both the progressivity of the tax is imposed inter alia on business income, employment system and limited access to formal-sector jobs among income (including benefits), rental income, pensions, and the poor. Less than five percent of all formal sector jobs investment income. Personal income tax (PIT) is governed are held by individuals in the bottom 20 percent while 48 by the Income Tax Act (Kenya Revenue Authority, 2014). percent are held by individuals in the top 20 percent. Marginal tax rates on income increase progressively from ten percent to 30 percent. In addition, every individual is 7.2.4. The distribution of taxpayers across tax entitled to an allowance, known as ‘personal relief,’ which brackets suggests that a large share–one third–of was Ksh 13,944 in 2015/16. The present analysis uses the those that pay income tax end up paying the highest tax brackets as applied in 2015 and 2016. marginal tax rate of 30 percent. Only 2.8 percent of individuals report employer contributions to the NSSF 7.2.2. The relationship between structural whose taxable income falls below the personal relief progressivity, changes in the average or marginal threshold. Around 20 percent fall into the two subsequent tax rate along the income distribution and observed tax brackets, with marginal tax rates of 10 and 15 percent, progressivity of PIT is empirically ambiguous. Efficiency respectively. On average, they pay 7.4 and 9.4 percent of considerations aside, higher top tax rates and the resulting their gross income in taxes, respectively. Almost one in increase in structural progressivity imply that the rich pay a three individuals that are assumed to pay income tax in relatively larger share of their pre-tax income in taxes. The the analysis are in the top tax bracket with a marginal tax inequality-improving effect may further be strengthened rate of 30 percent. The estimated average tax rate in this if the additional revenue is progressively redistributed. bracket is 18 percent. While this may seem intuitive, responses to taxation of personal income such as tax evasion and tax avoidance 7.3. Indirect Taxes imply that the empirical relationship between structural progressivity and actual inequality is ambiguous. Value Added Tax 7.3.1. Goods and services in Kenya’s VAT regime 7.2.3. Direct taxes are progressive. The poorest 40 are either standard-rated, zero-rated, or exempt. The percent of Kenya’s population in terms of per capita market standard VAT rate in Kenya is 16 percent. Exclusion from income accounts for 14.3 percent of market income VAT appears in two different ways, zero-ratings and but less than one percent of direct taxes (Figure 45a). In exemptions. Of the 460 items for which expenditure was contrast, 80 percent of direct taxation incidence is borne recorded in the survey data, 311 were taxed at 16 percent, by the richest ten percent of the population. On average, 29 were zero-rated, and 120 were exempt. Most exempt direct individual taxes account for only 1.2 percent of goods and services were found in the agricultural sector. Figure 45: Lorenz and concentration curves for per capita market income and direct taxes on individual income and share in total expenditure by quintile (a) Lorenz-and concentration curve for direct taxes and market income (b) Share of personal income tax in total expenditure by quintile 100 12 80 10 Cumulative share (%) 8 60 Percent 6 40 4 20 2 0 0 20 40 60 80 100 0 Percentiles of market income (%) All Bottom 20% 2 3 4 Top 20% Per capita market income Direct individual tax 45-degree line By quintile Source: World Bank based on KIHBS 2015/16. Note: 95-percent confidence intervals indicated in panel (b). 30 October 2018 | Edition No. 18 Special Focus The exemption also extends to agricultural inputs such be considered luxury goods and services, such as air as seeds, fertilizers, and tractors (World Bank, 2017). Two ticketing services supplied by travel agents. The removal alternative assumptions were made regarding exempt of exemptions would boost tax collection without major goods in this analysis. Exempt items were either (1) impacts at least on the relative distribution of welfare. A treated as taxed at the 16-percent rate or (2) treated as revenue-neutral removal of some exemptions for luxury zero-rated items. While the actual tax rate will typically items and a concomitant shift of merit goods into the fall somewhere in-between, it turned out that the category of zero-rated goods would have positive distributional implications of these assumptions do not effects for the poor. Alternatively, additional revenue differ substantially. Given that many exempt items in the from the removal of exemptions and zero rates could be data pertained to the agricultural sector, in which inputs redistributed in ways that are less distortive, e.g. through are often also exempt, it was decided to proceed with the cash transfers. However, greater in-depth analysis of assumption that exempt goods carry no VAT. this question is called for to identify exemption and zero-rates that appear poorly targeted to the bottom of 7.3.2. VAT is mildly progressive but close to neutral, the distribution. regardless of how exempt goods are treated. The burden of VAT is distributed almost proportionally to Excise Tax market income (Figure 46). For instance, the bottom-40 7.3.4. The analysis of excise tax in this report accounts percent account for between 12.4 and 14.1 percent of the for more than 80 percent of revenue from this tax. VAT burden, depending on whether exempt items are Beverages and cigarettes are taxed based on quantities treated as zero-rated or taxed at 16 percent, compared whereas consumption of airtime is taxed at ten percent. to a share in market income of 14.3 percent. The average Excise tax on financial transactions and other commodities share of VAT in total household expenditure is 8.4 percent (jewelry, cosmetics, and locally assembled vehicles) is not if exempt items are assumed to be zero-rated and 9.0 considered. However, the items included in the analysis percent if they are assumed to carry 16 percent VAT. account for 87 and 82 percent of total revenue from excise The expenditure share among the bottom 20 percent tax in 2015 and 2016, respectively. increases from 7.2 to 8.4 percent in going from zero-rates to the full 16-percent tax rate and falls from 10.3 to 9.7 7.3.5. Excise taxes are progressive except for tobacco among the richest 20 percent. products. The bottom 40 percent, which account for 14.3 percent of market income, account for only 6.6 7.3.3. Exemptions could be eliminated or replaced by percent of all excise taxes, rendering the overall tax zero-rates for merit goods without major distributional highly progressive (Figure 48a). This is driven mainly by consequences. Exemptions do not have a large effect excise taxes on beer (3.9 percent), wine and spirits (4.4), on the relative distribution of welfare because they are non-alcoholic beverages (3.9), and air time (6.6). Excise both applied to merit goods and other goods that could duty on tobacco is initially mildly progressive but then Figure 46: Lorenz and concentration curves for market income and VAT under different assumptions about exempt items and share in total expenditure by quintile (a) Lorenz-and concentration curve for market income and VAT (under (b) Share of VAT in total expenditure by quintile different assumptions) 100 12 80 10 Cumultative share (%) 8 60 Percent 6 40 4 20 2 0 0 0 20 40 60 80 100 Percentiles of market income (%) All Bottom 20% 2 3 4 Richest 20% Per capita market income VAT, exempt goods zero-rated By quintile VAT, exempt goods 16 percent-rated 45-degree line VAT, exempt items zero-rated VAT, exempt items taxed at 16 percent Source: World Bank based on KIHBS 2015/16 and administrative data (KNBS, 2017). October 2018 | Edition No. 18 31 Special Focus Box B.3: Can VAT be progressive? VAT usually disproportionately affects the poor. Why not in Kenya? Exempt and zero-rated items may be disproportionately consumed by the poor, contributing to a mildly progressive impact of VAT. Is this also true for Kenya? Expenditure shares (in total expenditure) of zero-rated goods are generally too small to make much of a difference, increasing from only 3.1 percent in the bottom quintile to 6.2 percent in the top quintile. But the share of exempt items falls from 46.9 percent among the poorest 20 percent to 37.2 percent among the richest 20 percent. Hence, while exemptions are not particularly well-targeted to the poor, they do benefit from them somewhat. Also, the poor typically have lower shares of expenditure in consumption because they rely more heavily on auto-consumption or transfers. In Kenya, the share of expenditure in total consumption increases from 49.2 percent among the bottom 20 percent to 62.9 percent among the richest 20 percent (Figure 47a). Figure 47: Share of expenditure in total consumption of items differentiated by type of VAT (a) Share of expenditure in total consumption by VAT type (b) Lorenz and concentration curve for (income- based) market income and VAT (under alternative assumptions)by VAT type 80 100 Share of total household consumption (%) 80 60 Cumulative share (%) 60 40 40 20 20 0 0 All Bottom 20% 2 3 4 Top 20% 0 20 40 60 80 100 By quintile Percentiles of market income (%) Per capita market income (income-based) VAT, exempt items zero-rated Other Zero-rated Exempt 16 percent VAT, exempt items 16-percent rated 45-degree line Source: World Bank based on KIHBS 2015/16. The use of consumption as the relevant welfare indicator makes the result of progressive VAT more likely. VAT is foremost a tax on consumption. It is often assumed to be regressive as the share of consumption in income is lower for the rich than for the poor, the difference being savings. Here, however, consumption is used as the relevant welfare indicator instead of income. This implies that even if expenditure were equal to consumption and there were no exemptions, VAT could at most be neutral. If progressivity would be measured against a welfare indicator based on actual household income, VAT would clearly be regressive (Figure 47b). Hence, differences in the method used to assess economic welfare are largely responsible for this result. turns regressive around the median household. The 7.3.6. Adverse economic effects of tobacco bottom ten percent account for only 2.2 percent of per consumption that arise only in the medium- and long- capita market income yet 1.4 percent of tobacco excise term have the potential to alter the assessment of tax. However, the concentration curve for tobacco excise the progressivity of excise duty on tobacco. Tobacco duties eventually crosses the Lorenz curve so that the taxes are often assessed as regressive as low-income poorest 60 percent already account for 30.7 percent of household tend to allocate a larger share of their budgets tobacco excise tax, a larger share than their 27.5 percent to the purchase of tobacco products. On the other hand, in market income. This suggests lower relative spending because tobacco consumption is associated with shorter among the poor and higher relative spending among the life expectancy, higher medical expenses, added years of middle quintiles. The expenditure shares of excise taxes disability, and negative externalities through secondhand are small (Figure 48b). Across the entire population, excise smoke, tobacco taxes are considered an effective policy tax duty accounts for little more than one percent of total tool to reduce tobacco consumption (Lewit & Coate, 1982). household expenditure. The share rises from 0.6 percent To the extent that tobacco consumption is price-elastic, among the poorest quintile to 2.3 percent among the higher duties have the potential to reduce these adverse richest 20 percent of the population. economic effects. Recent evidence from extended cost- 32 October 2018 | Edition No. 18 Special Focus Figure 48: Lorenz and concentration curves for market income and excise taxes and share in total expenditure by quintile a) Lorenz and concetration for market income and excise taxes (b) Share of excise taxes in total expenditure by quintile 100 3 80 Cumultative share (%) 2 60 Percent 40 1 20 0 0 All Bottom 20% 2 3 4 Top 20% 0 20 40 60 80 100 By quintile Percentiles of market income (%) Per capita market income All excise taxes Beer Wine and spirits All excise taxes Beer Wine and spirits Non-alcoholic beverages Tobacco Air time 45-degree line Non-alcoholic beverages Cigarettes Air time Source: World Bank based on KIHBS 2015/16. benefit analyses in developing countries suggest that among low-income households (Fuchs & Meneses, 2017a; the aggregate net effect of immediate negative income Fuchs & Meneses, 2017b; Fuchs, Del Carmen, & Kechia variations and long-term benefits of reduced uptake can Mukong, 2018). result in positive benefits that can be more pronounced 8. Effects on Poverty and Inequality 8.1.1. Direct taxes and transfers have virtually no 8.1.2. Increases in VAT and excise taxes are positively correlation with poverty but a negative relationship associated with poverty and have a small, negative with inequality. The poverty headcount ratio tends to relationship with inequality. The poverty rate increases by increase with direct taxes by around 0.6 percentage more than five percentage points after VAT is accounted for. points and decreases with direct transfers by almost the However, because VAT is mildly progressive and its burden same amount (Figure 49). While the correlations between is shared across all income groups, it also has a sizable, these interventions and poverty headcount are small, the negative relationship with the Gini index (0.6 percentage Gini index decreases by 2.3 percentage points with direct points; Figure 15a). Excise taxes, which generate only half taxes and by another one third of a percentage point with of the revenue that VAT generates, have a similar effect on cash transfers (Figure 49a). The analysis suggests that the poverty and inequality. They further increase poverty, by top ten percent account for 80 percent of the income tax about one percentage point, and lower the Gini index by burden which is reflected here in a sharp drop in their 0.3 percentage points (Figure 49a). share in income (Figure 49b). Figure 49: Combined effects of taxes and transfers on inequality – Gini index and income shares of top 10 percent and bottom 40 percent (a) Gini index (b) Income shares 0.4 0.362 40 0.340 0.336 0.331 0.328 0.297 28.2% 0.3 30 26.2% 26.0% 25.6% 25.4% 23.8% 0.2 20 21.9% 19.4% 19.7% 20.0% 20.1% 18.5% 0.1 10 0 0 Pre- scal Income CTs VAT Excise Net education Pre- scal Income CTs VAT Excise Net education tax tax bene ts tax tax bene ts Top 10% Bottom 40% Source: World Bank based on KIHBS 2015/16 and administrative data as detailed in the text. October 2018 | Edition No. 18 33 Special Focus 8.1.3. The net benefits of public education spending to this pattern is South Africa, which achieves significant have a large, negative relationship with inequality. poverty reduction in going from market to disposable Public education spending is large and progressive in income, mainly as a result of large direct transfer programs. absolute terms, primarily through spending on pre- primary, primary, and secondary. Inequality measured by 8.1.5. As in Kenya, indirect taxes are often associated the Gini index drops to only 0.297 after the net benefits with an increase in poverty in Sub-Saharan Africa. In of public education spending are accounted for, causing going from disposable to consumable income, poverty the income shares of the top ten percent and the bottom rates increase in most countries, including those in 40 percent to converge significantly (Figure 49). This Sub-Saharan Africa. The increase in poverty headcount result should be interpreted carefully. The production using the $1.25-poverty line ranges from three tenths cost of education is not necessarily equal to households’ of a percentage points in Uganda to 7.9 percentage willingness-to-pay for public education, particularly in the points in Tanzania. With an increase in poverty of 5.9 Kenyan context in which there is evidence of large rents percentage points, Kenya is close to the upper end earned by civil-service teachers. of this range. However, it should be noted again that indirect subsidies in Kenya, while likely negligible, were 8.1.4. As in other countries in Sub-Saharan Africa, not included in this study. the effects of direct transfers and taxes on poverty are moderate in Kenya. Cross-country comparisons 8.1.6. Kenya achieves little poverty reduction through suggest that poverty headcount ratios in SSA, using the direct taxes and transfers while indirect taxes are World Bank’s $1.25-poverty line based on 2005 PPPs, associated with increase in poverty. Among countries do not change much in going from market income to for which similar distributional impact analyses have been disposable income (Figure 50a). Such changes range completed, poverty reduction (based on the $1.25-poverty from a reduction by only a tenth of a percentage point in line) in going from market income to disposable income Tanzania to one percentage point in Ethiopia. Kenya falls varies widely (Figure 51a). For instance, almost one fifth of roughly in the middle of this range with a reduction in South Africa’s population is initially lifted out of poverty the poverty headcount by half a percentage point. Using at this stage, compared to almost basically no one in the $2.50-poverty line, the positive effect on poverty of Ghana and Armenia. While South Africa is an outlier here, direct taxes even dominates the poverty-reducing effect countries like Brazil and Mexico, which were among the of direct transfers in Ghana, Uganda, Kenya, and Tanzania first to adopt large-scale cash transfer programs, are but the overall effect remains small (Figure 50b). It seems also among those that achieve significant reductions in plausible that the same factors are at play that are also extreme poverty at this stage. Kenya’s reduction of half observed in Kenya, namely a small effective tax base due a percentage point ranks among the upper end of the to high levels of informality and direct transfer programs distribution. Only seven out of a total of 29 countries in the that are small in terms of coverage. The major exception dataset achieve less poverty reduction. On the other hand, Figure 50: Poverty headcount ratios (using the World Bank’s $1.25 and $2.50-poverty lines based on 2005 PPPs) across countries and income concepts (a) Poverty rates ($1.25 2005 PPPs) (b) Poverty rates ($2.50 2005 PPPs) 60 100 Tanzania Tanzania 50 80 Kenya 40 60 Uganda Kenya Ethiopia 30 South Africa 40 South Africa 20 Uganda Ghana 20 10 Ghana 0 0 Market income Disposable income Consumable income Market income Disposable income Consumable income Source: World Bank based on KIHBS 2015/16 and administrative data as detailed in text as well as data from the CEQ institute. 34 October 2018 | Edition No. 18 Special Focus Figure 51: Density distribution of poverty effects in going from market to disposable and from disposable to consumable income (based on the World Bank’s $1.25-poverty line using 2005 PPPs) (a) Density of change in poverty rate: market to disposable income (b) Density of change in poverty rate: disposable to consumable income 60 Ethiopia 80 Indonesia Sri Lanka 70 50 Sri Lanka 60 40 Kenya Mexico Ghana Mexico 50 Uganda Tanzania Density Density 30 Brazil Uganda 40 Indonesia 30 20 Ghana Kenya South Africa 20 Brazil Ethiopia 10 10 Tanzania 0 0 -4 -3 -2 -1 0 1 -1 0 1 2 3 4 5 6 7 8 9 Relative change in poverty (percentage points) Relative change in poverty (percentage points) Source: World Bank based on KIHBS 2015/16 and administrative data as detailed in text as well as data from the CEQ institute. Note: The observation for South Africa is removed from panel (a) as an outlier (see text). only two countries, Tanzania and South Africa, register a countries. The effect of public education spending on larger effect on poverty of indirect taxes and transfers inequality is pronounced in Ghana, Tanzania, and Uganda, (Figure 51b). Results are qualitatively similar when the at 2.1, 1.3, and 1.7 percent. However, it is much larger in $2.50-poverty line is used. Kenya, at 3.1 percent. It should be noted that the estimates for Kenya do not include public health spending. Again, 8.1.7. The inequality-reducing effect of direct taxes there are major concerns about allocating public education and transfers between market income and consumable spending to households based on the production-cost income in Kenya is similar to other countries in the approach, maybe more so than in other countries. region. Ethiopia, Ghana, Tanzania, and Uganda all reduce Figure 52: Gini coefficient by CEQ income concepts and country inequality through direct taxation and transfers, ranging from a decline in the Gini by 1.3 percentage points in 0.45 Ghana and Uganda to 2.5 percentage points in Tanzania 0.4 (Figure 52). With 2.6 percentage points, the reduction in Kenya is at the upper end of this range but not very 0.35 different from that of Tanzania. As in Kenya, inequality barely changes in these countries between disposable 0.3 income and consumable income. Only Tanzania achieves a reduction by 1.5 percentage points. 0.25 Market (pre Disposable Consumable Final - scal) income income income income 8.1.8. The negative effect of public education Ethiopia 2010-11 Ghana 2012-13 Tanzania 2011-12 Uganda 2012-13 Kenya 2015-16 spending on poverty and inequality is substantially Source: World Bank based on KIHBS 2015/16 and administrative data as well as data more pronounced in Kenya relative to benchmark from the CEQ institute. 9. Summary and Policy Implications 9.1.1. Overall, taxes and transfers have mostly an with poverty, are progressive and thus reduce inequality. attenuating effect on inequality while their effect Additionally, while public spending on education is pro- on poverty is more mixed. This report considers the poor, the analysis underlying this assertion relies on strong combined effect of taxes and transfers in Kenya on assumptions. Overall, Kenyan spending and taxation poverty and inequality. Direct taxes and transfers reduce policies are associated with a change in inequality and inequality and are almost exactly off-setting in their effect poverty to a degree similar to what is observed regionally. on poverty. Indirect taxes, while positively associated October 2018 | Edition No. 18 35 Special Focus 9.1.2. The Government of Kenya could consider about exemptions. However, a more detailed follow-up further expanding direct cash transfer programs, but analysis of exemptions and zero-rates would be necessary this will also require enhanced revenue mobilization. to determine item-level incidence, including the recent Cash transfer programs are well-targeted so that a large removal of exemptions on petroleum products. fraction of the benefits is captured by the poor. However, cash transfer schemes in Kenya cover only a small portion 9.1.4. Shifting public resources from higher-level of the population. These programs, which have been health facilities to lower-level facilities is likely to benefit introduced only recently, could further be expanded in the poor. The results suggest that redirecting spending order to increase their poverty-reducing effect. However, from higher-level public health facilities to primary care more robust revenue mobilization is needed to increase facilities has the potential to benefit the poor and might coverage significantly. increase access. However, it is important in this case to also assess the absorptive capacities of these facilities. This 9.1.3. Overall, exempt and zero-rated items within is less clear for public spending on tertiary education. The Kenya’s VAT regime benefit the poor only marginally. immediate benefits, calculated as the cost of producing The report finds that the variation in consumption public tertiary education, are captured overwhelmingly by shares of exempt and zero-rated items across the welfare the top 20 percent. But higher education has also been distribution is small. A review of the VAT law might help linked to an economy’s prospect of achieving high rates to make VAT more progressive or, alternatively, increase of growth through fostering technological convergence revenue that could then be employed in progressive cash (Bloom, Canning, Chan, & Luca, 2014). transfer programs, while also addressing other concerns 36 October 2018 | Edition No. 18 REFERENCES Abiad, A.D., Dell’Ariccia, G., and Li, G.B. (2011). Creditless Recoveries, IMF Working Paper No 11/58 (Washington DC: International Monetary Fund Berg, A, E F Buffie and A Cashin (2012), “Public investment, growth, and debt sustainability: Putting together the pieces”, International Monetary Fund, Working Paper WP/12/144. Bhattacharya, A., J, P. Meltzer, J. Oppenheim, Z. Qureshi and N. Stern (2016), “Delivering on sustainable infrastructure for better development and better climate”, Brookings Institution, Washington, DC. 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October 2018 | Edition No. 18 39 STATISTICAL TABLES Statistical Tables Table 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e GDP growth Rates (percent) 3.3 8.4 6.1 4.6 5.9 5.4 5.7 5.9 4.9 5.7 Agriculture -2.3 10.1 2.4 3.1 5.4 4.3 5.3 4.7 1.6 4.3 Industry 3.7 8.7 7.2 4.2 5.3 6.1 7.3 5.7 3.6 4.0 Manufacturing -1.1 4.5 7.2 -0.6 5.6 2.5 3.6 2.7 0.2 Services 6.2 7.3 6.1 4.7 5.4 6.0 6.0 6.7 6.9 7.3 Fiscal Framework (percent of GDP)/1 Total revenue 19.4 19.1 18.7 19.2 19.2 19.0 18.7 18.3 16.8 20.0 Total expenditure 24.0 23.8 23.7 25.1 25.6 28.1 27.2 27.5 23.9 26.3 Grants 1.0 0.6 0.4 0.5 0.5 0.5 0.5 0.3 0.3 0.5 Budget deficit (including grants) -5.8 -3.5 -4.5 -5.7 -6.1 -8.1 -7.3 -9.1 -6.9 -5.8 Total debt (net) 40.7 43.1 40.6 42.1 47.8 48.8 55.5 57.5 57.0 57.2 External Account (percent of GDP) Exports (fob) 12.2 13.1 13.9 12.3 10.6 10.1 9.4 8.2 7.7 7.6 Imports (cif ) 25.6 28.7 33.8 30.8 29.2 28.6 24.5 19.1 21.3 21.1 Current account balance -4.6 -5.9 -9.1 -8.3 -8.8 -9.8 -6.8 -5.3 -6.7 -6.2 Financial account -10.2 -8.1 -8.2 -11.0 -9.4 -11.4 -8.0 -5.9 -6.1 -6.5 Capital account 0.7 0.6 0.6 0.5 0.3 0.4 0.4 0.3 0.2 0.3 Overall balance -3.0 -0.4 2.1 -2.4 -0.7 -2.4 0.4 -0.2 0.2 -0.6 Prices Inflation 9.2 4.0 14.0 9.4 5.7 6.9 6.6 6.3 8.0 5.2 Exchange rate (average Ksh/$) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 101.5 103.4 105.0 Source: Kenya National Bureau of Statistics, National Treasury, Central Bank of Kenya and World Bank End of FY in June (e.g 2009 = 2009/2010) 1 /Figures for 2017 are actuals for 2017/18 42 October 2018 | Edition No. 18 Statistical Tables Table 2: GDP growth rates for Kenya and EAC (2011-2017) 2011 2012 2013 2014 2015 2016 2017 2018e Kenya 6.1 4.6 5.9 5.4 5.7 5.9 4.9 5.7 Uganda 9.4 3.8 3.6 5.1 5.2 4.7 4.0 5.5 Tanzania 7.9 5.1 7.3 6.9 7.0 7.0 6.4 6.6 Rwanda 7.8 8.7 4.7 7.6 8.8 6.0 6.1 6.5 Average 7.8 5.6 5.3 6.2 6.7 5.9 5.3 6.1 Source: World Bank Note: “e” denotes an estimate Table 3: Kenya annual GDP GDP, GDP, 2009 GDP/capita, Years GDP growth current prices constant prices current prices Ksh millions Ksh millions US$ Percent 2007 2,151,349 2,765,595 839 6.9 2008 2,483,058 2,772,019 917 0.2 2009 2,863,688 2,863,688 920 3.3 2010 3,169,301 3,104,303 967 8.4 2011 3,725,918 3,294,026 987 6.1 2012 4,261,370 3,444,339 1,155 4.6 2013 4,745,594 3,646,821 1,229 5.9 2014 5,403,471 3,842,186 1,335 5.4 2015 6,284,191 4,061,901 1,355 5.7 2016 7,194,163 4,300,302 1,463 5.9 2017 7,749,435 4,510,390 1,508 4.9 Source: Kenya National Bureau of Statistics and World Development Indicators October 2018 | Edition No. 18 43 Statistical Tables Table 4: Broad sector growth (y-o-y, Percent) Year Quarterly Agriculture Industry Services GDP Q1 3.1 5.2 4.3 4.1 Q2 2.2 2.1 5.3 4.2 2012 Q3 3.1 5.2 4.4 5.2 Q4 4.2 4.2 4.9 4.7 Q1 5.3 9.4 4.0 6.1 Q2 6.8 6.9 6.7 7.5 2013 Q3 5.8 6.2 5.8 6.4 Q4 3.6 -0.6 5.2 3.5 Q1 4.2 5.8 5.6 5.2 Q2 4.4 9.9 5.8 6.0 2014 Q3 7.1 3.5 5.1 4.6 Q4 1.8 5.3 7.5 5.6 Q1 7.8 6.4 5.2 5.7 Q2 4.4 7.0 6.3 5.6 2015 Q3 4.0 9.1 7.0 6.1 Q4 4.5 6.6 5.5 5.5 Q1 4.5 4.6 6.9 5.3 Q2 7.7 6.4 6.5 6.2 2016 Q3 4.7 5.9 6.4 5.7 Q4 1.1 5.8 7.2 6.3 Q1 0.9 4.1 7.2 4.7 Q2 0.8 3.6 7.0 4.7 2017 Q3 3.7 2.5 6.2 4.7 Q4 1.4 4.1 7.0 5.4 Q1 5.2 4.1 6.8 5.7 2018 Q2 5.6 4.7 6.9 6.3 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Agriculture = Agriculture, forestry and fishing Industry = Mining and quarrying + Manufacturing+Electricity and water supply+Construction Services = Whole sale and retail trade + Accomodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Proffessional administration and support services + Real estate + Education + Health + Other services + FISIM + Taxes on products 44 October 2018 | Edition No. 18 Table 5: Contribution by Broad sub-sectors (percentage points) Industry by sub sector contribution Service by sub sector contribution Agriculture Industries Quarterly contribution Accommo- Information Services Mining and Electricity and Transport and Financial and to GDP Manufacturing Construction dation and Real estate and communi- Other Statistical Tables quarrying water supply storage insurance restaurant cation Q1 0.8 0.1 -0.1 0.2 0.7 0.9 0.2 0.5 0.4 0.4 0.0 0.5 1.9 Q2 0.5 0.2 -0.2 0.1 0.3 0.4 0.0 0.5 0.3 -0.2 0.3 1.4 2.4 2012 Q3 0.6 0.2 0.1 0.2 0.5 1.0 0.0 -0.1 0.3 -0.4 0.4 2.0 2.1 Q4 0.8 0.2 0.0 0.2 0.4 0.9 0.1 -0.1 0.3 0.5 0.6 0.9 2.4 Q1 1.4 0.2 1.0 0.1 0.4 1.7 -0.5 -0.6 0.3 0.4 0.6 1.5 1.8 Q2 1.7 -0.2 0.8 0.2 0.4 1.3 0.0 0.1 0.3 0.3 0.6 1.7 3.0 2013 Q3 1.1 0.0 0.6 0.2 0.4 1.2 0.2 0.2 0.4 0.4 0.4 1.3 2.8 Q4 0.7 -0.1 0.1 0.1 -0.1 -0.1 0.0 0.7 0.4 0.5 0.3 0.7 2.5 Q1 1.1 0.1 0.5 0.1 0.3 1.1 -0.3 0.2 0.4 0.4 0.4 1.4 2.5 Q2 1.1 0.2 0.8 0.1 0.7 1.8 -0.3 0.4 0.4 0.3 0.4 1.4 2.6 2014 Q3 1.4 0.0 0.1 0.2 0.4 0.7 -0.4 0.6 0.5 0.6 0.5 0.7 2.5 Q4 0.3 0.2 -0.3 0.2 0.9 1.0 0.0 0.3 0.5 0.7 0.6 1.6 3.7 Q1 2.0 0.1 0.3 0.2 0.6 1.2 -0.1 0.5 0.5 0.3 0.6 0.6 2.3 Q2 1.1 0.1 0.3 0.3 0.6 1.3 0.0 0.6 0.5 0.2 0.5 1.0 2.8 2015 Q3 0.8 0.2 0.5 0.2 0.8 1.7 0.0 0.7 0.6 0.2 0.7 1.1 3.4 Q4 0.8 0.1 0.4 0.1 0.7 1.3 0.1 0.4 0.7 0.3 0.5 0.8 2.8 Q1 1.2 0.1 0.1 0.2 0.4 0.9 0.1 0.5 0.7 0.4 0.5 0.8 3.0 Q2 1.8 0.1 0.5 0.3 0.4 1.2 0.1 0.5 0.7 0.3 0.5 0.9 3.0 2016 Q3 0.9 0.1 0.4 0.2 0.5 1.2 0.1 0.4 0.7 0.3 0.4 1.2 3.1 Q4 0.2 0.2 0.1 0.1 0.7 1.1 0.2 0.7 0.7 0.5 0.2 1.2 3.6 Q1 0.2 0.1 0.1 0.1 0.4 0.8 0.3 0.6 0.5 0.5 0.3 1.1 3.2 Q2 0.2 0.1 0.0 0.2 0.5 0.7 0.1 0.5 0.5 0.3 0.2 1.5 3.2 2017 Q3 0.7 0.1 0.0 0.1 0.3 0.5 0.1 0.4 0.5 0.4 0.1 1.5 3.0 Q4 0.2 0.1 0.0 0.1 0.6 0.8 0.1 0.5 0.6 0.5 0.2 1.7 3.6 Q1 1.3 0.1 0.2 0.1 0.4 0.8 0.2 0.4 0.6 0.5 0.2 1.3 3.1 2018 October 2018 | Edition No. 18 Q2 1.3 0.0 0.3 0.2 0.3 0.9 0.1 0.5 0.5 0.4 0.1 1.4 3.2 Source: World Bank, based on data from Kenya National Bureau of Statistics 45 Note: Other = Wholesale and retail trade + Public administration + Professional, administration and support services + Education + Health +Other services + FISIM Table 6: Quarterly growth rates (percent) 46 Agriculture Industry Services GDP Four Four Four Four Year Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving Average Average Average Average Q1 48.2 3.1 2.6 -4.6 5.8 6.7 -1.0 4.4 5.2 7.5 4.7 5.4 Q2 -10.2 2.2 2.3 -1.2 2.0 4.6 -1.3 5.3 5.2 -3.5 4.3 4.8 2012 Q3 -21.9 3.1 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.5 4.5 4.5 October 2018 | Edition No. 18 Q4 0.3 4.2 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.6 Q1 49.8 5.3 3.3 -0.6 8.8 4.9 -1.8 3.9 4.6 8.3 5.5 4.8 Q2 -8.9 6.8 4.7 -2.8 7.0 6.2 1.3 6.7 4.9 -1.8 7.0 5.6 2013 Q3 -22.7 5.8 5.7 3.7 6.8 6.7 4.3 5.8 5.3 -1.7 7.2 6.2 Q4 -1.9 3.6 5.6 -0.8 -0.7 5.3 1.5 5.3 5.4 -1.1 3.5 5.9 Q1 50.7 4.2 5.4 5.9 5.8 4.6 -1.6 5.6 5.8 10.1 5.2 5.8 Q2 -8.7 4.4 4.7 0.9 9.9 5.4 1.6 5.8 5.6 -1.0 6.0 5.5 2014 Q3 -20.7 7.1 4.8 -2.4 3.5 4.6 3.6 5.1 5.5 -2.9 4.6 4.9 Q4 -6.6 1.8 4.4 0.9 5.3 6.1 3.8 7.5 6.0 -0.2 5.6 5.4 Q1 59.8 7.8 5.5 7.0 6.4 6.2 -3.7 5.2 5.9 10.3 5.7 5.5 Q2 -11.5 4.4 5.5 1.4 7.0 5.6 2.6 6.3 6.1 -1.2 5.6 5.4 2015 Q3 -21.1 4.0 4.8 -0.4 9.1 7.0 4.3 7.0 6.5 -2.5 6.1 5.7 Q4 -6.4 4.5 5.3 -1.4 6.6 7.3 2.3 5.4 6.0 -0.7 5.5 5.7 Q1 59.7 4.5 4.4 5.1 4.6 6.8 -2.5 6.7 6.4 10.1 5.3 5.6 Q2 -8.9 7.7 5.3 3.2 6.4 6.6 2.3 6.4 6.4 -0.3 6.2 5.8 2016 Q3 -23.3 4.7 5.4 -0.9 5.9 5.9 4.4 6.4 6.2 -3.0 5.7 5.7 Q4 -9.5 1.0 4.7 -1.5 5.8 5.7 3.2 7.4 6.7 -0.2 6.3 5.9 Q1 59.5 0.9 3.5 3.3 4.1 5.6 -2.7 7.2 6.9 8.4 4.7 5.7 Q2 -9.0 0.8 1.7 2.8 3.6 4.8 2.1 7.0 7.0 -0.3 4.7 5.3 2017 Q3 -21.0 3.7 1.5 -1.9 2.5 4.0 3.6 6.2 6.9 -3.0 4.7 5.1 Q4 -11.6 1.4 1.6 0.0 4.1 3.6 4.0 7.0 6.9 0.4 5.4 4.9 Q1 65.5 5.2 2.9 3.3 4.1 3.6 -2.9 6.8 6.8 8.8 5.7 5.2 2018 Q2 -8.6 5.6 4.3 3.4 4.7 3.9 2.2 6.9 6.7 0.2 6.3 5.6 Source: World Bank and Kenya National Bureau of Statistics Statistical Tables Statistical Tables Table 7: Growth Outlook Annual growth (percent) 2014 2015 2016 2017e 2018f 2019f 2020f BASELINE GDP 5.4 5.7 5.9 4.9 5.7 5.8 6.0 Revised projections 5.4 5.7 5.8 4.8 5.5 5.9 6.1 Revised projections (KEU 17) 5.4 5.7 5.8 4.8 5.5 5.9 6.1 Revised projections (KEU 16) 5.4 5.7 5.8 4.9 5.5 5.9 Private consumption 4.3 5.2 4.7 7.0 5.9 6.0 6.0 Government consumption 1.1 13.7 8.5 8.4 8.5 4.2 3.5 Gross fixed capital investment 14.5 5.3 -9.4 6.3 7.8 10.2 11.5 Exports, goods and services 5.8 6.2 -2.6 -6.2 4.9 6.8 7.1 Imports, good and serveices 10.4 1.2 -6.3 8.4 8.7 8.9 9.0 Agriculture 4.4 5.3 4.7 1.6 4.1 4.2 4.4 Industry 6.1 7.3 5.7 3.6 4.1 4.1 5.2 Services 6.0 6.0 6.7 6.9 7.0 7.1 7.0 Inflation (Consumer Price Index) 6.9 6.6 6.3 8.0 5.2 6.0 6.5 Current Account Balance, % of GDP 8.1 10.0 8.1 2.7 6.6 6.7 6.0 Fiscal balance, % of GDP -7.1 -7.7 -8.2 -8.0 -6.3 -5.0 -3.8 Debt (% of GDP) 48.3 52.1 56.5 57.3 57.1 56.1 53.3 Primary Balance (% of GDP) -4.3 -4.6 -4.8 -4.3 -1.8 -0.4 0.4 Sources: World Bank and the National Treasury Notes: “e” denotes and estimate, “f” denotes forecast * Fiscal Balance is sourced from National Treasury and presented as Fiscal Years October 2018 | Edition No. 18 47 Statistical Tables Table 8: National Fiscal position Actual (percent of GDP) 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Revenue and Grants 19.7 19.1 19.7 19.7 19.5 19.2 18.6 17.1 20.5 Total Revenue 19.1 18.7 19.2 19.2 19.0 18.7 18.3 16.8 20.0 Tax revenue 18.0 17.1 17.2 18.1 17.7 17.7 17.1 15.4 18.2 Income tax 7.9 7.8 8.3 8.9 8.7 8.6 8.2 7.2 8.6 VAT 5.0 4.4 4.1 4.6 4.5 4.4 4.4 4.0 4.8 Import Duty 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.2 Excise Duty 2.3 2.0 1.9 2.0 2.0 2.1 2.2 1.8 2.3 Other Revenues 1.5 1.6 1.7 1.3 1.3 1.3 1.1 1.2 1.3 Railway Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Appropriation in Aid 1.1 1.7 2.0 1.1 1.3 1.0 1.2 1.4 1.9 Grants 0.6 0.4 0.5 0.5 0.5 0.5 0.3 0.3 0.5 Expenditure and Net Lending 23.8 23.7 25.1 25.6 28.1 27.2 27.5 23.9 26.3 Recurrent 16.9 16.3 18.1 14.8 14.8 15.6 15.4 14.5 15.5 Wages and salaries 5.7 5.5 6.1 5.5 5.1 4.7 4.4 4.3 4.6 Interest Payments 2.3 2.1 2.7 2.7 2.9 3.3 3.5 3.7 4.1 Other recurrent 8.9 8.8 9.3 6.6 6.7 7.5 7.5 6.5 6.8 Development and net lending 6.8 7.4 6.8 6.3 8.7 7.0 8.0 5.5 6.8 County allocation 0.2 3.8 3.9 4.1 3.7 3.5 3.3 Contigecies 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 Parliamentary Service 0.4 0.4 0.3 0.3 0.3 0.4 Judicial Service 0.3 0.2 0.2 0.2 0.1 0.1 Fiscal balance Deficit including grants (cash -3.5 -4.5 -5.7 -6.1 -8.1 -7.3 -9.1 -6.9 -5.8 basis) Financing 3.5 4.5 5.7 6.1 8.1 7.3 9.1 6.9 5.8 Foreign Financing 0.8 2.8 1.9 2.1 3.7 4.1 5.0 3.7 3.0 Domestic Financing 2.7 1.6 3.8 4.0 4.4 3.1 4.1 3.1 2.8 Total Public Debt(net) 43.1 40.6 42.1 47.8 48.8 55.5 57.5 57.0 57.2 External Debt 21.0 19.6 18.7 22.4 24.4 27.6 30.0 28.9 28.9 Domestic Debt (net) 22.2 21.5 23.3 25.3 24.4 27.9 27.6 28.0 28.3 Memo: GDP (Fiscal year current market 3,447,610 3,994,393 4,503,257 5,073,777 5,828,115 6,508,084 7,658,100 8845853.96 9726649.41 prices, Ksh bn) Source: 2017 Budget Review Outlook Paper (BROP) and Quarterly Budgetary Economic Review (Fourth Quarter, Financial Year 2016/2017), National Treasury Note: *indicate Preliminary results 48 October 2018 | Edition No. 18 Table 9: Kenya’s Public and Publicly Guaranteed Debt, June 2014 to June 2018 KShs. Millions Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 TOTAL PUBLIC DEBT (Net) 2,394,450 2,601,432 2,723,628 2,844,004 2,938,291 3,210,775 3,276,654 3,448,699 3,675,734 3,972,526 4,045,218 4,217,535 4,304,497 4,529,996 Lending (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) -5701 -5701 -5701 Statistical Tables Government Deposits (275,083) (236,565) (208,869) (305,496) (320,041) (394,856) (426,911) (373,016) (364,909) (428,774) (432,113) (350,924) (573,884) (503,337) Total Public Debt (Gross) 2,675,234 2,843,698 2,938,199 3,155,200 3,264,033 3,611,331 3,709,266 3,827,417 4,046,344 4,407,001 4,483,032 4,574,160 4,884,082 5,039,034 External Debt 1,278,108 1,423,253 1,550,233 1,615,183 1,617,506 1,796,198 1,854,711 1,896,443 2,101,391 2,294,736 2,310,197 2,353,795 2,512,431 2,560,199 Bilateral 384,607 445,057 482,203 481,282 478,883 548,351 545,652 641,763 689,119 724,823 742,063 782,588 800,912 816,119 Multilateral 618,456 684,631 754,599 751,154 762,089 798,842 839,936 781,256 806,922 841,899 842,814 841,847 836,766 820,966 Commercial Bank & Supplier 275,044 293,565 313,430 382,747 376,534 449,005 469,123 473,424 605,350 728,014 725,320 729,360 874,753 923,114 Credit Commercial Banks 259,746 276,937 295,642 366,231 360,175 432,377 452,495 458,122 594,140 712,100 708,231 712,274 858,062 906,389 Suppliers Credit 15,298 16,628 17,788 16,516 16,359 16,628 16,628 15,302 11,210 15,914 17,089 17,086 16,691 16,725 Domestic Debt 1,397,126 1,420,444 1,387,966 1,540,017 1,646,527 1,815,133 1,854,555 1,930,973 1,944,953 2,112,265 2,172,835 2,220,365 2,371,651 2,478,835 Central Bank 64,835 63,335 107,637 101,386 102,648 99,856 58,945 85,528 85,316 55,061 79,201 96,797 93,583 110,782 Commercial Banks 715,011 730,419 682,694 764,399 829,688 927,307 969,790 947,030 975,803 1,141,889 1,144,536 1,124,950 1,226,866 1,266,457 Non Banks & Nonresidents 617,280 626,689 597,635 674,232 714,192 787,970 825,820 898,415 883,834 915,316 949,098 998,618 1,051,202 1,101,596 (%) of Total public debt(gross) External Debt 47.8 50.0 52.8 51.2 49.6 49.7 50.0 49.5 51.9 52.1 51.5 51.5 51.4 50.8 Domestic Debt 52.2 50.0 47.2 48.8 50.4 50.3 50.0 50.5 48.1 47.9 48.5 48.5 48.6 49.2 % of External debt Bilateral 30.1 31.3 31.1 29.8 29.6 30.5 29.4 33.8 32.8 31.6 32.1 33.2 31.9 31.9 Multilateral 48.4 48.1 48.7 46.5 47.1 44.5 45.3 41.2 38.4 36.7 36.5 35.8 33.3 32.1 Commercial Bank & Supplier 21.5 20.6 20.2 23.7 23.3 25.0 25.3 25.0 28.8 31.7 31.4 31.0 34.8 36.1 Credit Commercial Banks 20.3 19.5 19.1 22.7 22.3 24.1 24.4 24.2 28.3 31.0 30.7 30.3 34.2 35.4 Suppliers Credit 1.2 1.2 1.1 1.0 1.0 0.9 0.9 0.8 0.5 0.7 0.7 0.7 0.7 0.7 % of Domestic debt Central Bank 4.6 4.5 7.8 6.6 6.2 5.5 3.2 4.4 4.4 2.6 3.6 4.4 3.9 4.5 Commercial Banks 51.2 51.4 49.2 49.6 50.4 51.1 52.3 49.0 50.2 54.1 52.7 50.7 51.7 51.1 October 2018 | Edition No. 18 Non Banks & Nonresidents 44.2 44.1 43.1 43.8 43.4 43.4 44.5 46.5 45.4 43.3 43.7 45.0 44.3 44.4 Source: National Treasury (Quarterly Economic Budgetary Review,November 2017) 49 Note: *Provisional 50 Table 10: 12-months cumulative balance of payments BPM6 Concept (US$ million) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jun-18 A. Current Account, n.i.e. (505) (796) (1,821) (1,713) (2,371) (3,821) (4,205) (4,838) (5,998) (4,322) (3,697) (5,016) (4,821) Merchandise A/C (3,243) (4,222) (5,593) (4,952) (6,216) (8,355) (9,315) (10,243) (11,319) (9,577) (7,665) (10,201) (10,813) Goods: exports f.o.b. 3,509 4,153 5,067 4,526 5,248 5,834 6,212 5,846 6,219 5,985 5,748 5,792 6,043 Goods: imports f.o.b. 6,752 8,375 10,659 9,479 11,464 14,189 15,527 16,089 17,538 15,563 13,413 15,994 16,856 October 2018 | Edition No. 18 Oil 1,745 1,919 3,051 2,192 2,673 4,082 4,081 3,838 4,026 2,500 2,087 2,728 3,131 Services 1,013 1,263 1,377 1,084 1,744 1,994 2,602 2,926 2,405 2,329 1,421 1,558 1,476 Services: credit 2,431 2,938 3,260 2,904 3,789 4,131 4,990 5,130 5,066 4,496 4,154 4,651 4,902 Services: debit 1,418 1,675 1,883 1,820 2,045 2,138 2,387 2,204 2,662 2,167 2,733 3,093 3,426 Income 1,725 2,162 2,395 2,156 2,101 2,540 2,507 2,479 2,889 2,795 2,547 3,627 4,516 B. Capital Account, n.i.e. 168 157 94 261 240 235 235 158 275 257 206 185 273 C. Financial Account, n.i.e. (677) (2,247) (1,423) (3,782) (3,252) (3,425) (5,542) (5,183) (7,008) (5,070) (4,137) (4,606) (5,202) Direct investment: net (27) (1,001) (384) (1,452) (1,117) (1,364) (1,142) (920) (1,045) (1,088) (235) (415) (585) Portfolio investment: net 21 16 25 (81) (156) 1 (218) (273) (3,716) 156 385 775 (859) Financial derivatives: net - - - - - - - - - - - - - Other investment: net (671) (1,262) (1,064) (2,249) (1,979) (2,062) (4,182) (3,990) (2,248) (4,139) (4,286) (4,966) (3,758) D. Net Errors and Omissions 235 (805) (189) (1,215) (947) (734) (348) (134) 168 (1,260) (516) 68 (157) E. Overall Balance (575) (802) 493 (1,115) (174) 896 (1,223) (369) (1,453) 255 (129) 157 (497) F. Reserves and Related Items 575 802 (493) 1,115 174 (896) 1,223 369 1,453 (255) 129 (157) 497 Reserve assets 618 941 (480) 1,322 154 246 1,455 859 1,333 (361) 38 (235) 375 Credit and loans from the IMF (6) 116 (17) 199 (34) 284 193 177 (119) (107) (91) (77) (122) Exceptional financing 48 23 30 8 13 858 38 312 - - - - - Gross Reserves (USD Million) 3,331 4,557 4,641 5,064 5,123 6,045 7,160 8,483 9,738 9,794 9,588 9,646 12,102 Official 2,415 3,355 2,875 3,847 4,002 4,248 5,702 6,560 7,895 7,534 7,573 7,332 8,954 Commercial Banks 916 1,202 1,765 1,217 1,121 1,797 1,458 1,923 1,843 2,259 2,015 2,314 3,148 Imports cover (36 mnths import) 4 4 3 4 4 3 4 4 5 5 5 5 6 Memo: Annual GDP at Current prices (USD 25,826 31,958 35,895 37,022 40,000 41,953 50,411 55,101 61,395 63,398 70,092 75,168 79,822 Million) Source: Central Bank of Kenya Statistical Tables Statistical Tables Table 11: Inflation Year Month Overall Inflation Food Inflation Energy Inflation Core Inflation January 5.5 7.7 4.5 4.1 February 5.6 8.7 3.3 4.1 March 6.3 11.0 2.9 3.9 April 7.1 13.4 1.5 4.0 May 6.9 13.2 0.3 4.2 June 7.0 13.4 0.2 4.4 2015 July 6.6 12.1 0.6 4.4 August 5.8 9.9 1.1 4.3 September 6.0 9.8 1.5 4.4 October 6.7 11.3 2.0 4.4 November 7.3 12.7 2.3 4.2 December 8.0 13.3 2.9 5.1 January 7.8 12.7 2.9 5.4 February 7.1 10.8 1.7 5.4 March 6.5 9.4 2.1 5.4 April 5.3 6.8 2.0 5.2 May 5.0 6.6 1.8 4.7 June 5.8 8.9 1.4 4.5 2016 July 6.4 10.8 0.9 4.4 August 6.3 10.9 0.1 4.6 September 6.3 10.9 0.2 4.6 October 6.5 11.0 0.1 4.6 November 6.7 11.1 0.6 4.7 December 6.3 11.2 0.1 3.8 January 7.0 12.5 0.7 3.3 February 9.0 16.7 3.0 3.3 March 10.3 18.8 3.3 3.3 April 11.5 21.0 3.7 3.5 May 11.7 21.5 3.5 3.6 June 9.2 15.8 3.4 3.5 2017 July 7.5 12.2 2.9 3.5 August 8.0 13.6 3.1 3.4 September 7.1 11.5 3.3 3.2 October 5.7 8.5 3.0 3.2 November 4.7 5.8 4.8 3.4 December 4.5 4.7 5.4 3.6 January 4.8 4.7 6.1 4.0 February 4.5 3.8 6.2 4.2 March 4.2 2.4 8.2 4.0 April 3.7 0.3 10.2 4.1 2018 May 4.0 0.3 11.4 3.9 June 4.3 0.9 11.9 4.0 July 4.4 0.5 12.4 4.1 August 4.0 -1.2 14.2 4.3 September 5.7 0.5 17.4 4.5 Source: World Bank, based on data from Kenya National Bureau of Statistics October 2018 | Edition No. 18 51 52 Table 12: Credit to Private Sector Growth (%) Total Private Transport Manufactur- Building and Finance and Mining and Private Consumer Business Other activ- Year Month sector annual Agriculture Trade and commu- Real estate ing construction insurance quarrying households durables services ities growth rates nication January 16.6 17.3 15.9 28.4 25.3 30.2 12.2 9.1 -9.3 14.6 12.8 13.8 4.1 February 15.5 21.0 18.7 25.4 20.5 27.7 11.1 10.2 1.7 12.0 7.3 16.2 -3.8 March 15.2 18.6 20.6 21.8 23.2 22.6 10.8 15.0 12.5 10.1 10.0 13.4 -8.6 April 13.2 15.5 15.2 21.8 23.1 20.5 13.4 13.4 5.3 10.2 7.5 7.8 -15.5 May 10.7 20.2 12.2 18.1 16.1 16.9 8.1 10.1 3.2 7.8 9.5 8.5 -18.7 October 2018 | Edition No. 18 June 8.9 13.7 13.3 12.3 13.2 14.1 9.1 11.9 -1.6 5.7 2.5 5.1 -11.8 2016 July 7.0 6.1 12.5 13.8 9.2 12.4 13.5 8.8 -4.5 3.1 4.3 -4.4 -12.9 August 5.3 1.8 -0.3 16.4 8.3 16.8 -2.5 9.4 -32.8 7.2 9.2 -11.1 -17.1 September 4.4 -0.5 -2.0 15.2 1.3 13.6 2.7 8.9 -33.7 10.5 5.6 -10.2 -24.3 October 4.6 0.4 -4.3 12.8 -4.9 14.7 1.2 9.3 -36.4 10.1 10.1 -2.0 -20.1 November 4.2 3.5 -4.1 15.7 -5.3 16.1 0.1 8.8 -21.3 10.6 10.6 -11.7 -30.6 December 4.1 0.9 -2.4 15.9 -2.8 14.9 16.7 11.0 -19.1 19.7 11.3 -34.8 -27.0 January 3.9 -2.6 -6.8 13.4 -0.8 10.2 -0.6 10.3 -17.5 14.7 11.1 -13.0 -31.3 February 3.5 1.4 -8.6 10.1 8.3 8.0 -4.6 9.7 -25.5 15.6 11.1 -13.7 -29.2 March 3.0 -7.7 -7.8 11.6 0.6 9.6 -9.2 12.4 -34.0 13.3 10.1 -15.5 -23.5 April 2.2 -8.8 -6.8 8.0 -2.3 7.6 -11.9 13.2 -34.2 10.4 11.9 -15.1 -19.8 May 1.9 -12.6 -5.2 8.8 2.5 5.6 -2.8 11.8 -39.5 9.8 11.3 -21.8 -20.0 June 1.5 -12.3 -7.1 10.7 -0.7 3.2 -4.4 10.1 -37.8 10.9 7.5 -15.8 -25.0 2017 July 1.4 -11.6 -6.6 9.0 0.5 0.6 -8.5 11.8 -41.0 12.1 3.3 -10.8 -28.1 August 1.6 -7.6 3.3 4.3 -1.5 -2.3 5.4 9.7 -7.6 6.2 -1.6 -6.5 -27.4 September 1.7 -2.0 6.1 6.9 1.8 -4.9 -1.4 8.9 -0.8 1.9 -0.5 -6.4 -28.6 October 2.0 -1.1 10.2 11.5 4.0 -8.2 -1.3 10.0 9.2 2.9 0.1 -19.2 -35.0 November 2.7 -7.7 10.6 10.0 3.1 -8.0 1.5 9.3 -3.2 2.7 -0.4 -7.6 -23.1 December 2.4 -7.9 13.0 9.0 4.8 -7.2 -4.3 8.6 -5.5 -1.5 -1.6 -6.4 -7.5 January 1.8 -7.9 12.0 5.0 5.3 -11.3 -1.3 8.2 -7.3 -1.5 1.4 -0.4 -12.5 February 2.1 -13.3 13.1 6.8 4.7 -14.4 4.8 8.3 -7.3 -2.7 2.3 -0.8 -2.9 March 2.0 -6.5 11.3 5.4 12.7 -18.9 11.6 4.4 -3.1 -0.7 4.7 -0.9 -7.3 April 2.8 -4.7 10.1 5.0 14.4 -18.2 10.1 3.6 -4.9 2.6 5.0 2.6 -2.6 2018 May 3.8 -3.6 12.2 6.8 9.2 -15.3 2.6 3.7 -3.9 3.8 5.5 11.1 -8.6 June 4.3 -4.9 12.3 8.6 13.5 -13.0 3.8 3.8 -9.5 2.9 7.8 6.9 -9.4 July 4.3 -6.7 11.6 6.5 13.7 -11.0 8.5 4.3 0.1 2.9 9.1 3.3 -7.1 August 4.3 -4.5 13.3 7.0 14.9 -11.3 3.5 0.9 -9.6 2.7 11.5 6.6 -5.8 Source: Central Bank of Kenya Statistical Tables Statistical Tables Table 13: Mobile payments Number of Number of Value of Year Month Number of Agents customers transactions transactions (Millions) (Millions) (Billions) January 125,826 25.4 81.7 210.5 February 127,187 25.5 80.7 208.1 March 128,591 25.7 90.3 231.8 April 129,218 26.1 84.9 213.7 May 129,735 26.5 89.9 230.2 June 131,761 26.5 90.7 227.9 2015 July 133,989 26.7 94.0 238.9 August 136,042 27.0 94.1 248.2 September 138,131 27.3 96.3 247.5 October 140,612 27.5 102.8 255.8 November 142,386 28.1 101.3 236.4 December 143,946 28.6 107.4 267.1 January 146,710 29.1 95.5 243.4 February 148,982 29.5 101.0 257.2 March 150,987 30.7 107.9 273.6 April 153,762 31.4 105.5 269.8 May 156,349 31.3 107.8 277.9 June 162,465 31.4 106.3 271.0 2016 July 167,072 32.3 110.5 281.9 August 173,774 32.8 114.2 296.9 September 173,731 33.4 112.6 283.9 October 181,456 34.0 122.5 292.1 November 162,441 34.3 120.9 291.2 December 165,908 35.0 126.3 316.8 January 152,547 33.3 122.0 299.5 February 154,908 33.3 117.5 279.4 March 157,855 33.9 133.3 320.2 April 160,076 34.3 128.9 297.4 May 164,674 34.2 132.5 315.4 June 165,109 34.2 125.9 299.8 2017 July 169,480 34.6 128.1 308.9 August 167,353 35.3 120.6 286.3 September 167,775 35.5 128.5 300.9 October 170,389 36.0 134.2 299.0 November 176,986 36.4 131.7 299.0 December 182,472 37.4 139.9 332.6 January 188,029 37.8 136.7 323.0 February 192,117 38.4 132.3 300.9 March 196,002 39.3 147.5 337.1 2018 April 201,795 40.3 142.1 313.0 May 202,387 41.7 141.0 329.0 June 197,286 42.6 137.4 317.7 July 200,227 42.6 143.1 332.4 Source: Central Bank of Kenya October 2018 | Edition No. 18 53 Statistical Tables Table 14: Exchange rate Year Month USD UK Pound Euro January 91.4 138.5 106.3 February 91.5 140.2 103.9 March 91.7 137.5 99.4 April 93.4 139.6 100.7 May 96.4 149.1 107.5 June 97.7 152.2 109.7 2015 July 101.2 157.5 111.4 August 102.4 159.8 114.1 September 105.3 161.5 118.2 October 102.8 157.5 115.4 November 102.2 155.4 109.8 December 102.2 153.3 111.1 January 102.3 147.5 111.1 February 101.9 145.9 113.0 March 101.5 144.2 112.6 April 101.2 144.8 114.8 May 100.7 146.3 114.0 June 101.1 144.3 113.7 2016 July 101.3 133.4 112.1 August 101.4 132.9 113.7 September 101.3 133.2 113.5 October 101.3 125.4 111.9 November 101.7 126.3 110.0 December 102.1 127.7 107.7 January 103.7 128.0 110.2 February 103.6 129.5 130.4 March 102.9 126.9 109.9 April 103.3 130.4 110.7 May 103.3 133.5 114.8 June 103.5 132.5 116.2 2017 July 103.9 134.9 119.4 August 103.6 134.2 122.2 September 103.1 137.1 122.9 October 103.4 136.4 121.6 November 103.6 136.8 121.4 December 103.1 138.2 122.0 January 102.9 141.9 125.4 February 101.4 141.7 125.3 March 101.2 141.2 124.7 April 100.6 141.9 123.7 2018 May 100.7 135.7 119.0 June 101.0 134.2 118.0 July 100.7 132.6 117.5 August 100.6 129.7 116.2 Source: Central Bank of Kenya 54 October 2018 | Edition No. 18 Statistical Tables Table 15: Exchange rate (Index January 2016 = 100) Year Month NEER REER USD January 93.0 99.6 89.3 February 92.7 99.2 89.4 March 91.8 97.8 89.7 April 93.4 99.2 91.3 May 97.0 101.3 94.2 June 98.1 102.4 95.5 2015 July 101.2 105.7 98.9 August 102.1 106.2 100.1 September 104.8 108.3 102.9 October 102.4 105.8 100.5 November 100.7 103.4 99.9 December 100.5 101.9 99.9 January 100.0 100.0 100.0 February 100.1 100.5 99.6 March 100.0 100.2 99.2 April 100.6 100.5 98.9 May 99.9 99.5 98.5 June 100.2 99.3 98.9 2016 July 99.7 98.2 99.0 August 100.3 99.1 99.1 September 100.3 99.2 99.0 October 99.3 98.1 99.0 November 99.0 97.7 99.4 December 98.5 97.8 99.8 January 87.3 84.5 101.4 February 87.5 83.8 101.3 March 87.0 82.2 100.5 April 87.8 81.5 101.0 May 88.3 81.3 100.9 June 88.9 82.9 101.2 2017 July 89.6 84.5 101.5 August 90.1 84.9 101.2 September 90.0 86.3 100.8 October 89.6 85.8 101.1 November 89.7 86.3 101.2 December 89.7 85.7 103.1 January 90.7 85.5 102.9 February 89.9 84.1 101.4 March 89.6 82.7 101.2 April 84.1 77.6 100.6 2018 May 83.0 76.3 100.7 June 82.8 77.1 101.0 July 86.7 80.5 100.7 August 101.2 Source: Central Bank of Kenya and World Bank October 2018 | Edition No. 18 55 Statistical Tables Table 16: Nairobi Securities Exchange (NSE 20 Share Index, Jan 1966=100, End - month) Year Month NSE 20 Share Index June 4,906 July 4,405 August 4,177 2015 September 4,174 October 3,869 November 4,016 December 4,041 January 3,773 February 3,862 March 3,982 April 4,009 May 3,828 June 3,641 2016 July 3,489 August 3,179 September 3,243 October 3,229 November 3,247 December 3,186 January 2,794 February 2,995 March 3,113 April 3,158 May 3,441 June 3,607 2017 July 3,798 August 4,027 September 3,751 October 3,730 November 3,805 December 3,712 January 3,737 February 3,751 March 3,845 April 3,705 2018 May 3,353 June 3,286 July 3,297 August 3,203 Source: Central Bank of Kenya 56 October 2018 | Edition No. 18 Statistical Tables Table 17: Central Bank Rate and Treasury Bills Year Month Central Bank Rate 91-Treasury Bill 182-Treasury Bill 364-Treasury Bill January 8.5 8.6 9.6 12.1 February 8.5 8.6 10.0 11.0 March 8.5 8.5 10.3 10.7 April 8.5 8.4 10.3 10.6 May 8.5 8.3 10.3 10.7 June 10 8.3 10.4 11.0 2015 July 11.5 10.6 11.0 11.6 August 11.5 11.5 11.5 13.3 September 11.5 14.0 12.5 15.2 October 11.5 21.0 15.7 21.5 November 11.5 12.3 16.3 15.2 December 11.5 9.7 15.7 12.5 January 11.5 11.2 13.0 14.1 February 11.5 10.6 12.8 13.7 March 11.5 8.7 12.6 12.3 April 11.5 8.9 11.7 11.8 May 10.5 8.2 10.7 11.6 June 10.5 7.3 10.2 10.8 2016 July 10.5 7.4 9.9 10.9 August 10.0 8.5 10.8 11.7 September 10.0 8.1 10.8 11.0 October 10.0 7.8 10.3 10.4 November 10.0 8.2 10.3 10.8 December 10.0 8.4 10.5 10.6 January 10.0 8.6 10.5 11.0 February 10.0 8.6 10.5 10.9 March 10.0 8.6 10.5 10.9 April 10.0 8.8 10.5 10.9 May 10.0 8.7 10.4 10.9 June 10.0 8.4 10.3 10.9 2017 July 10.0 8.2 10.3 10.9 August 10.0 8.2 10.4 10.9 September 10.0 8.1 10.4 10.9 October 10.0 8.1 10.3 11.0 November 10.0 8.0 10.5 11.0 December 10.0 8.0 10.5 11.1 January 10.0 8.0 10.6 11.2 February 10.0 8.0 10.4 11.2 March 9.5 8.0 10.4 11.1 April 9.5 8.0 10.3 11.1 2018 May 9.5 8.0 10.3 11.1 June 9.5 7.8 9.9 10.8 July 9.0 7.7 9.3 10.3 August 9.0 7.6 9.0 10.0 September 9.0 7.6 8.8 9.8 Source: Central Bank of Kenya October 2018 | Edition No. 18 57 Statistical Tables Table 18: Interest rates Short-term Long-term Overall Year Month Average Interest 91-Treasury Central weigheted Interbank deposit Savings Rate Bill Bank Rate lending rate Spread rate June 11.9 8.3 10.0 6.6 1.9 16.1 9.4 July 13.4 10.6 11.5 6.3 1.4 15.8 9.4 August 18.6 11.5 11.5 6.9 1.5 15.7 8.8 2015 September 21.3 14.0 11.5 7.3 1.7 16.8 9.5 October 15.3 21.0 11.5 7.5 1.7 16.6 9.0 November 8.9 12.3 11.5 7.4 1.3 17.2 9.8 December 5.3 9.7 11.5 8.0 1.6 18.3 10.3 January 6.4 11.2 11.5 7.6 1.6 18.0 10.4 February 4.5 10.6 11.5 7.5 1.4 17.9 10.4 March 4.0 8.7 11.5 7.2 1.4 17.9 10.7 April 3.9 8.9 11.5 6.9 1.5 18.0 11.1 May 3.6 8.2 10.5 6.4 1.6 18.2 11.8 June 4.9 7.3 10.5 6.8 1.6 18.2 11.4 2016 July 5.5 7.4 10.5 6.6 1.7 18.1 11.5 August 5.0 8.5 10.0 6.4 1.7 17.7 11.2 September 4.9 8.1 10.0 6.9 3.8 13.9 7.0 October 4.1 7.8 10.0 7.8 6.1 13.7 5.9 November 5.1 8.2 10.0 7.6 6.5 13.7 6.0 December 5.9 8.4 10.0 7.3 6.4 13.7 6.4 January 7.7 8.6 10.0 7.2 6.1 13.7 6.5 February 6.4 8.6 10.0 7.7 6.8 13.7 6.0 March 4.5 8.6 10.0 7.1 5.9 13.6 6.5 April 5.3 8.8 10.0 7.0 5.7 13.6 6.6 May 4.9 8.7 10.0 7.1 5.9 13.7 6.6 June 4.0 8.4 10.0 7.2 5.6 13.7 6.5 2017 July 6.8 8.2 10.0 7.4 6.4 13.7 6.3 August 8.1 8.2 10.0 7.7 5.9 13.7 6.0 September 5.5 8.1 10.0 7.7 6.4 13.7 6.0 October 7.8 8.1 10.0 8.0 6.9 13.7 5.7 November 8.9 8.0 10.0 8.1 6.9 13.7 5.6 December 7.3 8.0 10.0 8.2 6.9 13.6 5.4 January 6.2 8.0 10.0 8.3 7.0 13.7 5.4 February 5.1 8.0 10.0 8.3 7.0 13.7 5.4 March 4.9 8.0 9.5 8.2 6.8 13.5 5.3 April 5.4 8.0 9.5 8.1 6.7 13.2 5.0 2018 May 4.9 8.0 9.5 8.1 6.6 13.3 5.2 June 5.0 7.8 9.5 8.0 6.6 13.2 5.2 July 4.8 7.7 9.0 August 6.6 7.6 9.0 September 7.6 9.0 Source: Central Bank of Kenya 58 October 2018 | Edition No. 18 Statistical Tables Table 19: Money aggregate Year Growth rates (yoy) Money supply, M1 Money supply, M2 Money supply, M3 Reserve money January 11.4 17.0 16.0 15.8 February 10.0 17.2 18.6 11.5 March 11.9 16.4 16.4 11.8 April 13.4 17.2 17.3 12.0 May 10.0 14.8 16.5 15.0 June 9.6 16.4 18.6 14.9 2015 July 13.0 16.0 16.4 25.8 August 10.5 14.3 14.0 2.9 September 8.5 12.7 13.5 16.7 October 10.8 13.6 13.6 24.5 November 7.9 11.6 13.0 13.0 December 8.5 12.4 13.7 3.3 January 10.9 10.8 11.1 9.1 February 9.9 10.0 9.3 9.2 March 10.9 10.7 11.2 16.1 April 10.6 9.9 9.5 9.0 May 12.8 9.8 8.6 7.6 June 13.4 9.2 8.1 4.9 2016 July 9.4 7.8 6.9 4.3 August 9.5 6.9 6.8 6.8 September 26.1 8.8 8.0 4.3 October 24.3 6.8 6.8 -7.4 November 25.3 6.2 6.2 0.5 December 28.1 4.8 3.7 4.8 January 21.9 5.3 5.2 5.1 February 23.7 4.5 5.4 2.9 March 22.1 5.7 6.4 3.2 April 23.6 6.3 7.1 9.0 May 21.8 6.2 6.7 5.2 June 22.5 5.4 6.0 2.9 2017 July 24.6 7.5 8.3 5.0 August 22.5 7.5 7.7 7.7 September 11.6 7.5 7.7 8.1 October 9.5 7.0 7.9 3.8 November 7.8 7.4 7.8 6.2 December 6.7 7.5 8.9 6.7 January 8.0 8.3 9.0 8.3 February 8.4 8.4 8.0 6.3 March 4.2 5.6 5.9 0.8 April 3.9 5.5 5.5 -0.1 2018 May 3.9 5.9 7.6 5.5 June 3.3 7.6 10.5 7.0 July 4.6 7.8 10.2 2.1 August 2.9 7.3 9.2 6.6 Source: Central Bank of Kenya and World Bank October 2018 | Edition No. 18 59 Statistical Tables Table 20: Coffee production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 2,795 412 2,844 1,307 February 4,837 489 2,884 1,339 March 5,571 378 4,290 2,025 April 3,714 310 3,948 1,901 May 2,969 289 4,383 2,236 June 0 0 4,220 2,068 2015 July 2,086 339 3,938 1,943 August 3,286 371 3,991 1,790 September 2,643 364 3,405 1,617 October 1,768 320 4,400 2,019 November 1,268 337 2,769 1,244 December 1,282 435 2,528 1,092 January 3,432 462 2,449 1,184 February 5,220 486 3,277 1,636 March 6,835 437 4,169 2,206 April 4,513 340 4,804 2,540 May 4,735 263 4,814 2,170 June 1,747 268 4,983 2,369 2016 July 569 324 3,987 1,798 August 3,723 431 3,719 1,637 September 3,284 437 3,173 1,399 October 1,573 410 3,116 1,489 November 2,374 468 3,929 1,691 December 1,666 514 2,886 1,252 January 5,190 590 3,214 1,553 February 6,081 606 3,868 2,094 March 5,460 507 5,447 3,231 April 4,563 299 4,201 2,698 May 1,639 276 5,424 3,117 June - - 4,443 2,501 2017 July 762 420 3,598 1,971 August 2,319 443 2,649 1,311 September 2,465 457 3,134 1,516 October 1,619 409 2,335 1,121 November 2,310 419 3,196 1,566 December 1,320 453 1,955 775 January 5,112 527 2,509 1,286 February 5,832 577 2,834 1,612 March 4,913 478 3,936 2,237 2018 April 4,194 305 4,550 2,822 May 4,620 217 5,573 3,209 June - - 4,649 2,664 July 1,221 357 4,683 2,457 Source: Kenya National Bureau of Statistics 60 October 2018 | Edition No. 18 Statistical Tables Table 21: Tea production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 41,653 212 40,970 8,485 February 24,276 221 41,086 9,313 March 15,688 250 35,700 8,796 April 23,837 258 28,262 7,189 May 37,523 297 27,016 7,506 June 32,286 319 35,915 11,263 2015 July 30,942 344 30,623 10,146 August 28,410 330 27,687 9,481 September 36,484 327 33,528 11,413 October 41,343 333 40,246 13,538 November 40,382 313 36,714 12,126 December 46,387 309 42,779 13,768 January 50,308 279 36,575 11,013 February 43,969 253 43,292 12,200 March 45,330 234 37,571 9,887 April 37,571 214 39,313 9,517 May 36,573 223 44,901 10,658 June 35,603 243 52,175 12,613 2016 July 29,285 246 42,751 10,679 August 29,462 234 39,673 9,993 September 36,785 236 33,528 8,454 October 41,342 243 29,656 7,548 November 39,903 273 41,138 11,123 December 45,103 273 39,396 10,811 January 32,991 316 46,434 14,072 February 22,605 317 33,898 10,880 March 34,498 300 33,662 10,693 April 31,458 297 32,091 9,991 May 38,822 304 39,329 12,354 June 40,538 325 42,370 13,485 2017 July 31,565 310 41,437 13,442 August 32,693 300 29,628 9,269 September 38,386 305 43,469 13,570 October 43,420 316 41,173 13,147 November 45,374 309 39,128 12,713 December 47,507 285 44,413 13,634 January 40,834 304 48,447 14,964 February 27,939 302 47,357 14,657 March 30,987 284 34,488 10,471 2018 April 44,580 268 33,565 9,830 May 43,356 263 42,533 11,703 June 43,299 257 45,182 12,463 July 35,278 251 45,242 12,226 Source: Kenya National Bureau of Statistics October 2018 | Edition No. 18 61 Statistical Tables Table 22: Horticulture Exports Exports value Year Month Exports MT Ksh. Million January 18,170 6,413 February 20,599 7,892 March 21,259 10,510 April 21,410 6,223 May 19,160 6,300 June 16,904 5,140 2015 July 17,359 8,551 August 16,175 5,824 September 25,188 8,187 October 22,179 9,905 November 19,428 8,095 December 20,179 7,399 January 20,160 10,927 February 22,337 10,151 March 24,314 11,140 April 25,931 8,611 May 21,260 7,004 June 20,157 10,293 2016 July 17,981 5,577 August 19,650 7,293 September 20,924 6,659 October 23,327 8,312 November 22,772 7,641 December 22,294 7,906 January 27,045 11,559 February 27,461 10,942 March 27,892 9,094 April 25,658 8,977 May 30,549 10,292 June 26,271 9,395 2017 July 22,179 8,660 August 23,357 9,237 September 23,818 8,962 October 24,337 9,059 November 21,676 8,275 December 23,905 10,871 January 27,131 14,899 February 29,603 16,454 March 32,902 12,610 2018 April 29,589 12,870 May June Source: Kenya National Bureau of Statistics 62 October 2018 | Edition No. 18 Statistical Tables Table 23: Leading Economic Indicators year to date growth rates (Exports MT, Percent) Year Month Horticulture Coffee Tea January -1.8 -10.3 6.0 February 1.7 -8.3 13.7 March 5.4 -7.5 7.2 April 5.0 -11.0 -0.8 May 3.3 -9.5 -5.7 June 1.6 -9.3 -6.1 2015 July 1.6 -12.5 -9.6 August 1.2 -9.3 -11.8 September 5.1 -9.7 -11.3 October 5.9 -7.0 -9.4 November 6.6 -8.5 -8.9 December 8.1 -8.1 -7.9 January 11.0 -13.9 -10.7 February 9.6 0.0 -2.7 March 11.3 -1.2 -0.3 April 13.9 5.3 7.4 May 13.3 6.3 16.5 June 14.2 8.5 21.5 2016 July 12.8 7.5 23.8 August 13.7 5.6 25.8 September 9.4 4.3 22.9 October 8.9 0.5 17.1 November 9.6 3.3 16.6 December 9.7 3.9 14.1 January 34.1 31.2 27.0 February 28.3 23.7 0.6 March 23.3 26.6 -2.9 April 16.5 13.8 -6.8 May 21.6 13.5 -8.1 June 22.9 8.6 -10.3 2017 July 22.9 6.0 -9.2 August 22.5 2.0 -11.1 September 21.5 1.7 -7.4 October 19.7 -0.5 -4.0 November 17.3 -2.1 -4.1 December 16.5 -4.1 -2.7 January 0.3 -21.9 4.3 February 4.1 -24.5 19.3 March 8.8 -25.9 14.3 2018 April 10.3 -17.3 12.2 May -12.4 11.3 June -9.6 10.4 July -4.8 10.2 Source: World Bank, based on data from Kenya National Bureau of Statistics October 2018 | Edition No. 18 63 Statistical Tables Table 24: Local Electricity Generation by Source Hydro KWh Geo-thermal Thermal KWh Total KWh Year Month Million KWh Million million million January 278 388 109 776 February 230 352 121 703 March 246 377 134 757 April 264 359 121 744 May 301 380 103 784 June 297 362 109 769 2015 July 305 353 143 801 August 319 378 112 808 September 306 389 99 794 October 310 402 100 812 November 300 393 89 782 December 307 387 92 786 January 322 392 93 808 February 297 392 95 784 March 335 383 112 830 April 303 394 102 800 May 334 403 92 830 June 348 342 113 803 2016 July 337 393 110 842 August 364 345 138 850 September 349 335 137 824 October 357 364 135 862 November 315 369 158 848 December 299 371 158 836 January 252 380 197 837 February 214 354 182 758 March 234 388 230 858 April 212 381 223 822 May 229 394 224 849 June 180 376 274 834 2017 July 193 402 271 867 August 251 415 159 829 September 239 403 213 859 October 217 416 224 861 November 305 411 153 877 December 250 436 184 879 January 223 430 242 900 February 193 387 249 837 March 248 448 202 903 2018 April 317 428 139 887 May 386 447 83 918 June 401 430 82 914 July 420 438.1 86.9 947.0 Source: Kenya National Bureau of Statistics 64 October 2018 | Edition No. 18 Statistical Tables Table 25: Soft drinks, sugar, galvanized sheets and cement production Soft drinks litres Galvanized sheets Year Month Sugar MT Cement MT (thousands) MT January 41,348 63,227 21,304 511,298 February 41,440 57,917 20,078 465,471 March 48,865 63,389 22,797 550,556 April 42,148 46,280 20,674 537,452 May 36,874 44,081 23,132 516,513 June 36,274 46,098 20,358 516,185 2015 July 32,086 47,957 18,415 570,904 August 38,432 54,089 20,871 553,929 September 40,176 61,069 20,581 561,235 October 42,936 56,360 26,024 557,589 November 40,025 43,401 25,764 510,747 December 49,966 48,089 16,938 486,306 January 50,502 41,348 21,330 533,490 February 45,237 41,440 20,102 531,813 March 58,038 48,865 20,120 541,438 April 44,429 42,148 23,109 568,253 May 43,189 36,874 21,980 585,929 June 39,191 36,202 20,180 547,238 2016 July 42,393 32,158 18,320 575,193 August 39,331 38,508 24,190 591,612 September 48,884 40,291 21,045 528,494 October 46,131 43,203 18,328 573,034 November 41,877 40,141 19,143 584,780 December 52,185 49,966 19,431 545,956 January 50,409 53,071 26,230 565,440 February 43,353 49,094 22,994 491,307 March 50,623 41,936 22,574 570,522 April 46,399 26,230 23,225 535,061 May 40,742 15,246 23,081 482,762 June 45,875 16,113 15,424 513,313 2017 July 41,980 17,882 22,640 553,631 August 41,217 10,892 15,296 451,651 September 40,221 21,649 24,188 498,167 October 45,275 32,296 21,312 498,374 November 45,073 43,175 24,357 483,956 December 66,378 49,240 21,438 518,410 January 52,617 54,907 23,919 494,709 February 50,806 50,758 21,890 490,020 March 51,419 40,918 22,048 476,730 2018 April 38,573 21,434 474,740 May 22,271 452,034 June 454,322 Source: Kenya National Bureau of Statistics October 2018 | Edition No. 18 65 Statistical Tables Table 26: Tourism arrivals Year Month JKIA MIA TOTAL January 40,846 10,107 50,952 February 45,141 7,882 53,053 March 66,121 6,958 73,079 April 49,933 4,020 53,953 May 50,764 2,511 53,275 June 59,867 3,218 63,146 2015 July 72,515 5,728 78,243 August 63,332 7,546 70,878 September 54,162 5,114 59,276 October 66,441 6,049 72,490 November 53,622 7,718 61,340 December 50,015 9,070 59,085 January 65,431 9,407 74,838 February 62,856 9,983 72,839 March 49,996 8,551 58,547 April 51,311 3,869 55,180 May 59,294 3,578 62,872 June 64,451 4,182 68,633 2016 July 81,729 7,832 89,561 August 87,141 9,817 96,958 September 67,249 8,381 75,630 October 63,229 9,015 72,244 November 61,224 7,990 69,214 December 67,602 10,267 77,869 January 67,053 12,637 79,690 February 62,119 10,611 72,730 March 63,568 8,382 71,950 April 62,982 4,102 67,084 May 64,866 2,665 67,531 June 74,194 4,734 78,928 2017 July 97,955 7,286 105,241 August 79,053 10,729 89,782 September 78,329 9,111 87,440 October 57,034 7,557 64,591 November 61,617 10,956 72,573 December 90,745 15,117 105,862 January 61,137 15,512 76,649 February 70,169 13,482 83,651 March 61,652 14,321 75,973 2018 April 49,388 6,653 56,041 May 70,981 4,047 75,028 June 71,461 5,147 76,608 Source: Kenya National Bureau of Statistics 66 October 2018 | Edition No. 18 Statistical Tables Table 27: New Vehicle registration All body types Year Month (numbers) January 15,366 February 17,409 March 25,067 April 20,730 May 22,837 June 25,070 2015 July 21,132 August 17,360 September 18,596 October 18,740 November 23,209 December 22,308 January 14,652 February 12,771 March 10,280 April 13,699 May 11,855 June 22,428 2016 July 23,442 August 18,288 September 18,527 October 13,018 November 27,286 December 27,431 January 23,889 February 20,748 March 27,720 April 23,074 May 24,720 June 24,509 2017 July 29,346 August 22,422 September 21,137 October 18,889 November 22,954 December 23,264 January 23,676 February 24,123 March 23,290 2018 April 21,920 May 23,729 June 21,011 July 24,232 Source: Kenya National Bureau of Statistics October 2018 | Edition No. 18 67 SPECIAL FOCUS: ANNEX Special Focus Table 3: Tax revenue by source, 2015/16 Ksh million Share in total Share in GDP revenue Taxes on income, profits, and capital gains 569,811.18 50.1% 8.5% Income tax from individuals (PAYE) 286,166.16 25.2% 4.3% Income tax from corporations 279,834.49 24.6% 4.2% Capital gains tax 3,810.54 0.3% 0.1% Taxes on property 88.26 0.0% 0.0% Immovable property 0.00 0.0% 0.0% Financial and capital transactions 88.26 0.0% 0.0% Value-added tax (VAT) 289,213.47 25.4% 4.3% VAT on domestic goods and services 160,389.01 14.1% 2.4% VAT on imported goods and services 128,824.45 11.3% 1.9% Taxes on other goods and services 162,593.81 14.3% 2.4% Excise taxes 139,540.34 12.3% 2.1% Taxes on use of goods and on permission to use goods or to perform services and 5,780.10 0.5% 0.1% activities Taxes on goods and services collected as AIA 17,273.37 1.5% 0.3% Taxes on international trade transactions 104,433.27 9.2% 1.6% Custom duties 79,187.93 7.0% 1.2% Other taxes on international trade and transactions 25,245.33 2.2% 0.4% Other taxes not elsewhere classified 10,423.54 0.9% 0.2% Total tax revenue 1,136,563.52 100.0% 17.0% Source: Kenya Economic Survey 2017. Note: GDP in the last column is calculated as the geometric mean of GDP in market prices in 2015 and 2016. Table 4: Personal income tax rates, 2016 tax calendar year. Annual taxable income Marginal tax rate (percent) Tax bracket as share of GDP per capita in 2016 On first Ksh121,968 10 0.86 On next Ksh114.912 15 1.59 On next Ksh114.912 20 2.32 On next Ksh114.912 25 3.05 On taxable income in excess of Ksh466,704 30 3.78 Source: Kenya Economic Survey 2017. Note: GDP in the last column is calculated as the geometric mean of GDP in market prices in 2015 and 2016. Table 5: Simulation results for personal income tax – taxpayers and average tax rate by bracket Tax brackets Taxpayers Share in total Average tax rate taxpayers (payroll and business income) < Ksh13,944 68,482 2.8% 0.0% Ksh13,944 - Ksh135,912 502,667 20.9% 7.4% Ksh135,912 - Ksh250,824 487,235 20.3% 9.4% Ksh250,824 - Ksh365,736 355,683 14.8% 11.4% Ksh365,736 - Ksh480,648 227,561 9.5% 13.3% Ksh480,648 and above 761,263 31.7% 18.0% All 2,402,891 100.0% 12.3% Source: World Bank based on KIHBS 2015/16 and using income tax brackets as applied in 2015 and 2016 (see text) 70 October 2018 | Edition No. 18 Special Focus Table 6: Description of four main cash transfer programs Program Geographic Households Transfer (Ksh per Targeting coverage (2015) covered (2015) household) Hunger Safety Net Program (CT-HSNP) 4 counties 84,340 2,550 monthly PMT Orphans and Vulnerable Children (CT-OVC) 47 counties 255,643 2,000 monthly PMT, OVCs Poor and older Older People (OPCT) 47 counties 162,695 2,000 monthly than 65 years Persons with Severe Disability (CT-PwSD) 47 counties 25,471 2,000 monthly Poor and disabled Total 519,878 Source: Ministry of Labour and East African Affairs (2016). Table 7: Excise tax revenue by item, 2015 and 2016 Ksh million Share in total 2015 2016 2015 2016 Beer 19,526 24,443 31.2% 30.4% Wine and spirits 6,148 10,681 9.8% 13.3% Mineral water, soft drinks, and juices 2,515 3,319 4.0% 4.1% Cigarettes 12,230 12,441 19.5% 15.5% Airtime 14,139 15,541 22.6% 19.3% Financial transactions 7,222 11,313 11.5% 14.1% Other commodities 902 2,642 1.4% 3.3% Total 62,682 80,380 100.0% 100.0% Source: World Bank based on KES 2017 (KNBS, 2017). Table 8: Tuition, gross, and net benefits of public education expenditure, 2015/16 Average tuition Gross benefit Average net Net benefit as allocated per benefit per share of gross Public Private Ratio student in student in benefit public public Early childhood education 917 5,685 16.1% 6,024 5,107 84.8% Primary and special education 456 10,466 4.4% 15,074 14,619 97.0% Secondary education 14,553 27,451 53.0% 39,013 24,460 62.7% Technical and teacher education 29,780 36,228 82.2% 31,823 2,043 6.4% University education 58,921 107,709 54.7% 111,921 52,999 47.4% Source: World Bank based on KIHBS 2015/16 and various issues of the education sector reports. October 2018 | Edition No. 18 71 In Search of Fiscal Space Government Spending and Taxation: Who Bene ts? In December 2017, the government announced its Big 4 Developments Agenda, aimed at increasing delivery of a ordable housing, universal health coverage, raising the share of manufacturing in the economy and improving food and nutritional security. Nonetheless, against the backdrop of scal consolidation, it will be important to be careful on which expenditures are contained so that the government’s inclusive growth agenda is not jeopardized. This 18th Edition of the Kenya Economic Update seeks to contribute to this discussion. The report has three key messages. First, the Kenyan economy is on a rebound in 2018. Re ecting improved rains, better business sentiment and easing of political uncertainty, real GDP growth is estimated to rebound from 4.9 percent in 2017 to 5.7 percent in 2018 and rise gradually to 6.0 percent by 2020 as the output gap closes. This growth trajectory lays a solid foundation within which the government could accelerate poverty reduction especially if accompanied by pro-poor and inclusive growth policy measures. The downside risks to this outlook arise from subdued private sector credit growth that could curtail private investment; scal slippages that could compromise macroeconomic stability; and an uptick in oil prices and tightening global nancial markets, which could exert undue pressures to the current account balance. Second, there is need to re-ignite private sector led growth and ensure that scal consolidation is growth friendly. Although private sector investment is recovering, it is well below levels needed to achieve the Big 4 Development Agenda goals. Boosting private sector investment is more important, given the waning contribution of public investment to growth due to scal consolidation. Furthermore, with the majority of government expenditure cuts falling on development spending, the structure of scal consolidation could compromise the growth potential of the economy. Additional macroeconomic and structural reforms could help crowd in the private sector and support achievement of the Big 4. For instance, it is critical to address bottlenecks against private sector credit growth, including removal of interest rates caps. Third, the special focus section examines distributional consequences of government spending and taxes. It nds that cash transfer programs are well-targeted because a large fraction of the bene ts is captured by the poor. Nonetheless, cash transfer schemes in Kenya cover only a small portion of the population. Hence, these programs could be scaled up to increase their poverty-reducing e ect. However, enhanced revenue mobilization would be needed to increase coverage signi cantly. The World Bank remains committed to working with key Kenyan stakeholders to identify policy and structural issues that will enhance inclusive growth and attainment of the Big 4 development agenda. The Kenya Economic Update o ers a forum for such policy discussion aimed at fostering growth, reduce poverty and improve shared prosperity in Kenya. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @Worldbankkenya Nairobi, Kenya #KenyaEconomicUpdate Telephone: +254 20 2936000 Fax: +254 20 2936382 http://www.worldbank.org/en/country/kenya Produced by Macroeconomics, Trade & Investment and Poverty & Equity Global Practices