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Economy of Kenya

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Through Kenya, Developing country and Middle East

The government of Kenya is generally investment-friendly and has enacted several regulatory reforms to simplify foreign and local investment, including the creation of an export processing zone. An increasingly significant portion of Kenya's foreign financial inflows are remittances by Kenyans in the Diaspora, who work in the United States, the Middle East, Europe and Asia. According to data by the Central Bank of Kenya, remittances from Kenyans living abroad make up over 3.4 percent of the Gross Domestic Product (GDP).

As of September 2018, economic prospects were positive, with above 6% gross domestic product (GDP) growth expected. This growth was attributed largely to expansions in the telecommunications, transport, and construction sectors; a recovery in agriculture; and the rise of small businesses helping to pull the economy. These improvements are supported by a large pool of highly educated professional workers. There is a high level of IT literacy and innovation, especially among young Kenyans.

In 2020, Kenya ranked 56th in the World Bank ease of doing business rating, up from 61st in 2019 (of 190 countries). Compared to its neighbours, Kenya has a well-developed social and physical infrastructure.

History

Between 70 AD and 1500 AD, trade routes — spanning Africa, Asia and Europe — integrated the Kenyan coastal strip into the world economy. Foreign merchants would bring their merchandise to the Kenyan coast and leave with African goods.

In 1499 AD, Vasco da Gama, a Portuguese explorer, returned to Europe after discovering the sea route to India through South Africa. This new route allowed European nations to dominate the trade economy of the East African coast, with the Portuguese entrenching themselves in the 16th and 17th centuries. In the 18th century, the Portuguese were replaced in this East African economic corridor by Omani Arabs. Eventually, the British replaced the Omani Arabs. In 1895 they dominated the coastal strip; by 1920, they had followed the interior trade routes all the way to the Buganda Kingdom. To make this ancient economic trade route more profitable, the British used Indian labourers to build a railway from Mombasa at the coast to Kampala, the capital of Buganda kingdom, following old trade routes. Major towns were founded along the railway line, backed by European settler farming communities. The Indian labourers who did not return to India after railway construction ended were the first to establish shops (dukawallahs) in these towns.

During the colonial period, the European settler farming community and the Indian dukawallahs established the foundations of the modern formal Kenyan economy. Prominent examples of Asian-Kenyan business owners whose businesses started as dukawallahs include Manu Chandaria and Madatally Manji. While Europeans and Indians enjoyed strong economic growth between 1920 and 1963, Africans were deprived of their land, dehumanised, and forced to work for minimal pay under extremely poor working conditions through a well-established system of racial segregation.

Kenya gained its independence in 1963. Under President Jomo Kenyatta, the Kenyan government promoted africanisation of the Kenyan economy, generating rapid economic growth through public investment, encouragement of smallholder agricultural production, and incentives for private, often foreign, industrial investments. An influential sessional paper authored by Tom Mboya and Mwai Kibaki in 1965 stressed the need for Kenya to avoid both the capitalistic economy of the West and the communism of the East. The paper argued that Kenya should instead concentrate on African socialism, while avoiding linking Kenya's economic fortunes to any country or group of countries. From 1963 to 1973, GDP grew at an annual average rate of 6.6%; during the 1970s, it grew at an average rate of 7.2%. Agricultural production grew by 4.7% annually in the same period, stimulated by redistributing estates, distributing new crop strains, and opening new areas to cultivation. However, the rate of GDP growth declined to 4.2% per year in the 1980s, and 2.2% a year in the 1990s.

Kenya's policy of import substitution, which started in 1946 with European and Asian enterprises, did not achieve the desired result of transforming Kenya's industrial base. In the late 1970s, rising oil prices began to make Kenya's manufacturing sector noncompetitive. In response, the government began a massive intervention in the private sector. Lack of export incentives, tight import controls, and foreign exchange controls made the domestic environment for investment even less attractive.

In the 1980s and 1990s, Kenya signed structural adjustment loans with the World Bank and IMF, the loans were to be given on the condition that Kenya adopts government reforms, a liberal trade and interest rate regime, and an outward-oriented industrial policy, among other reforms. The Kenyan economy performed very poorly during this era of World Bank and IMF-driven liberalisation at the height of Daniel Arap Moi administration.

From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3.9%. Inflation reached a record of 100% in August 1993, and the government's budget deficit was over 10% of GDP. As a result of these issues, bilateral and multilateral donors suspended their aid programmes in Kenya in 1991.

In 1993, the Kenyan government began a major programme of economic reform and liberalisation. A new minister of finance and a new governor of the central bank undertook a series of economic measures with the assistance of the World Bank and the International Monetary Fund (IMF). The government eliminated price controls and import licensing, removed foreign exchange controls, privatised a number of publicly owned companies, reduced the number of civil servants, and introduced conservative fiscal and monetary policies. From 1994 to 1996, Kenya's real GDP growth rate averaged just over 4% a year.

In 1997, however, the economy entered a period of slow growth, due in part to adverse weather conditions and reduced economic activity before the general elections in December 1997. In July 1997, the Government of Kenya refused to meet earlier commitments to the IMF on governance reforms. As a result, the IMF suspended lending for three years, and the World Bank put a $90 million structural adjustment credit on hold.

The Kenyan government subsequently took positive steps on reform, including the establishment of the Kenya Anti-Corruption Authority in 1997. The state also implemented measures to improve the transparency of government procurement and reduce the government payroll. In July 2000, the IMF signed a $150 million Poverty Reduction and Growth Facility, and the World Bank followed shortly after with a $157 million Economic and Public Sector Reform credit. However, both were eventually suspended. Despite setbacks, the process of reform established Kenya as East Africa's economic powerhouse and the region's business hub.

Economic growth improved between 2003 and 2008, under the Mwai Kibaki administration. When Kibaki took power in 2003, he immediately established the National Debt Management Department at the treasury, reformed the Kenya Revenue Authority (KRA) to increase government revenue, reformed financial laws on banking, wrote off the debts of strategic public enterprises, and ensured that 30% of government tax revenue was invested in economic development projects. With these reforms, driven by the National Rainbow Coalition government, the KRA collected more tax revenue in 2004 than was anticipated. The government then initiated investments in infrastructure. By 2005, the Kenyan public debt had reduced from highs of 80% of GDP in 2002 to 27% of GDP in 2005. The financial sector greatly improved, and Equity Bank Kenya became one of the largest banks in East Africa. Economic growth improved from 2% in 2003 to 7% in 2007. In 2008, the growth slumped to 1% due to post-election violence before returning to an average of 5% between 2009 and 2013. However, in 2009, due to drought and the 2008 financial crisis, high input costs as well as a fall in demand for some of the country's exports caused the agriculture sector to contract by 2.7%.

Between 2013 and 2018, under the Jubilee Party government led by Uhuru Kenyatta, the GDP growth averaged above 5%. Growth in small businesses is credited with some of the improvement. Real GDP growth (annualised) was 5.7% in Q1 of 2018, 6.0% in Q2 2018 and 6.2% in Q3 2018. Despite this robust growth, concerns remained about Kenya's debt sustainability, current account deficit, fiscal consolidation and revenue growth.

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