Kenya Drivers of growth

Report Submission By:

Pranav Sharma

150401030
Kenya Economic Review

According to data released by the Kenya National Bureau of Statistics (KNBS), the increase in the
countrys gross domestic product (GDP) from 5.3% in 2014 to 5.6% in 2015 was driven by the
construction sector that grew by 13.6% in 2015 compared to 13.1% in 2014, the financial and
insurance sector that grew by 8.7% in 2015 from 8.3% in 2014 and the agricultural sector that
reported a 5.6% growth in 2015 compared to the sectors growth of 3.5% in 2014. The National
Treasury reported that Kenya had a fiscal deficit of 8.7% of GDP in FY15. BMI forecasts a fiscal deficit
of 8.1% of GDP in FY16 due to shortfalls in income tax and value added tax (VAT) collections despite
efforts by the Government to increase tax compliance through incentive programmes and electronic
payment systems. The Central Bank of Kenyas (CBK) Monetary Policy Committee (MPC) in May 2016
lowered its benchmark interest rate to 10.5% from 11.5% due the trends of reducing inflation rates
and stabilisation of the Kenyan shilling (KES). Following this move, the MPC is also expected to revise
the base lending rate, Kenya Banks Reference Rate (KBRR) in June 2016 and hence reduce the cost
of credit in the country in the second half of 2016. The health of the banking sector in the country
has come under severe scrutiny following the placement of three banks under statutory
management by the CBK. BMI notes that the CBKs enforcement of strict prudential regulations
along with an over-served banking sector present opportunities for consolidation in the sector. As a
member of the integrated EAC, Kenyas external performance will also depend on the growth rate of
EAC countries. According to BMI, all countries in the EAC except Burundi and South Sudan will
achieve rapid GDP growth rates. BMI notes that 9.3% of the workforce in Kenya is unemployed while
the countrys poverty rate is over 40%. BMI however forecasts that the net income per household
will reach USD 2,496 in 2020 from USD 1,752 in 2016 due to the countrys improving economy
GDP

BMI reported that Kenya remained resilient through a turbulent 2015 characterised by currency
instability and monetary tightening to post an economic growth of 5.6% in 2015 from 5.3% in 2013.
BMI forecasts Kenyas economy to grow by 6% in 2016 and by an average of 6.1% between 2016 and
2020 supported by strong public investment in infrastructure, a dynamic services sector and
favourable demographics. BMI projects the Kenyan Governments spending to rise by 7.7% in 2016
from 5.8% in 2015 as it remains committed to spending heavily on infrastructure. According to BMI,
consumer spending will also be a key driver of Kenyas economic growth between 2016 and 2020.
BMI predicts private spending to grow from KES 4.7 trillion in 2015 to KES 8.7 trillion in 2020 due to
rising incomes, favourable demographics and growing financial inclusion as mobile financial services
continue to spread across the country.

Inflation

The KNBS reported a reduction in overall inflation to 5.3% in April 2016 from 7.1% in April 2015 due
to lower food prices and reduced motoring expenses caused by low fuel prices. The EIU expects
inflation to average 5.6% in 2016 due to subdued oil prices, lower electricity tariffs due to increased
reliance on drought-resistant geothermal power and low food prices due to improved rainfall. The
EIU forecasts inflation to average 5.1% between 2017 and 2020 due to a prudent monetary policy
and efficiency gains arising from regulatory reform and investment in infrastructure. The EIU notes
that drought remains a potential risk to inflation and demand pressures will prevent a rapid decline
in inflation
Interest rates

According to the CBK, lending rates in Kenya increased from 15.5% in February 2015 to 17.9% in
February 2016 while deposit rates increased from 6.7% to 7.5% in the same period perhaps due to a
move by Kenyan banks to maintain their interest spreads following the increase in the base lending
rate by CBK by 300 basis points to 11.5% in July 2015. The World Bank attributes the high interest
spreads in Kenya due to lack of competitiveness in the banking sector and the high cost of financial
intermediation. The World Bank notes that large banks in Kenya have the power to maintain wide
interest spreads at the expense of borrowers and depositors. The CBK reported that the 91 day
Treasury Bill (T-bill) rates were volatile in 2015 increasing from 8.3% in June 2015 to 21.7% in
October 2015. BMI attributes this increase to tight liquidity in the market following the decision by
CBK to raise its base lending rate in July 2015. The T-bill rates dropped to 10.6% in February 2016
following improved liquidity in the market. 0 5 10 15 20 25 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sep-
15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 0 1 2 3 4 5 6 7 8 9 Apr-16 Mar-16 Feb-
16 Jan-16 Dec-15 Nov-15 Oct-15 Sept-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 80 90 100 110 120 130
140 150 160 170 Apr-16 Mar-16 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sept-15 Aug-15 Jul-15 Jun-15
M

Political overview
With Kenyas next Presidential and legislative elections scheduled for August 2017, the Economic
Intelligence Unit (EIU) predicts that political tensions will rise as campaigning gathers momentum.
The countrys President, Uhuru Kenyatta, is likely to seek re-election for a second and final five-year
term as President especially since the International Criminal Court (ICC) dropped both his and the
Deputy Presidents (William Ruto) cases.

Kenya faces insecurity threats most notably from Al-Shabaab, the Somalia-based Islamist group that
carried out a string of terrorist attacks such as the massacre of 147 people at Garissa University
College in April 2015 and the killing of 67 people at the Westgate Mall in September 2013. The EIU
notes that security risks will not necessarily improve after the 2017 election. Corruption is a major
impediment to doing business in Kenya with allegations of misappropriation of public funds on the
rise. The 2015 Corruption Perception Index released by Transparency International (TI) ranked Kenya
among the most corrupt countries at 139 out of 168 countries.

According to Business Monitor Intelligence (BMI), Ugandas decision to pursue an oil pipeline route
through Tanzania instead of Kenya in April 2016 highlights economic competition that will
undermine the East African Communitys (EAC) goal of regional integration. This decision will see the
scope of Kenyas Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) corridor project reduced
since the pipeline was a major part of the project. The EIU notes that Kenyas foreign policy will be
driven by economic interests; especially the maintenance of close relations with donors and the
advancement of regional integration of the EAC between 2016 and 2020.

Capital markets
The stock markets performance dipped in 2015 in the backdrop of profit warnings by companies
and increasing yields in the fixed income market. KNBS reported that Nairobi Stock Exchange (NSE)-
20 index dropped from 5,346 in January 2015 to 4,040 in December 2015. According to KNBS, equity
turnover dropped from KES 216 billion in 2014 to KES 209 billion in 2015 while bond turnover
dropped from KES 506 billion in 2014 to KES 305 billion in 2015 largely due to increased yields in
Government securities.

In October 2015, the NSE got approval from the CMA to operate a derivatives market. The NSE has
since signed up 6 commercial banks in Kenya to handle the Central Counter Party (CCP) clearing
system of the derivatives market ahead of the markets official launch. The Government is keen on
strengthening the Primary and Secondary markets for Government Securities which constitute a
major component of the capital markets. This will include: introducing electronic bond auctions
which will spare investors from the current manual process of submitting paper bids; separating the
retail and wholesale components of the market, introducing primary dealers and market makers;
and establishing an efficient horizontal repo market.

In addition, withvolatility in interest rates having been tamed, the Government will proceed with the
M-Akiba Government Bond, the worlds first purely mobile phone based Government security.

Demographics of Kenya
The demographics of Kenya show that the country has one of the highest population growth rates in
the world. The total population is estimated at 46,445,079 inhabitants as of January 2015, compared
to only 6,077,000 in 1950.

The demographics of Kenya show that the countrys population growth rate stands at 2.46%. During
2016 Kenya population is estimated to be increased by 1,171,143 inhabitants and reach 48,759,235
in January 2017.
Population 44,037,656 (July 2013 est.)
country comparison to the world: 31
note:
estimates explicitly take into account the effects of excess mortality
due to AIDS; this can result in lower life expectancy, higher infant
mortality, higher death rates, lower population growth rates, and
changes in the distribution of population by age and sex than would
otherwise be expected

Age structure 0-14 years: 42.4% (male 9,357,084/female 9,299,586)

15-24 years: 18.8% (male 4,148,153/female 4,147,896)
25-54 years: 32.4% (male 7,210,891/female 7,070,217)
55-64 years: 3.6% (male 719,374/female 876,458)
65 years and over: 2.7% (male 529,873/female 678,124) (2013 est.)

Median age total: 18.9 years

male: 18.8 years
female: 19 years (2013 est.)

Population growth 2.27% (2013 est.)

rate country comparison to the world: 39

Ethnic groups Kikuyu

22%, Luhya 14%, Luo 13%, Kalenjin 12%, Kamba 11%, Kisii 6%,
Meru 6%,
other African 15%, non-African (Arab, Asian and European) 1%

Languages English (official), Kiswahili (official), numerous indigenous languages

Religions Christian
 82.5% (Protestant 47.4%, Catholic 23.3%, other 11.8%), Muslim
11.1%,
Traditionalists 1.6%, other 1.7%, none 2.4%, unspecified 0.7% (2009
census)

Birth rate 30.08 births/1,000 population (2013 est.)

country comparison to the world: 43

Death rate 7.12 deaths/1,000 population (2013 est.)

country comparison to the world: 126

Net migration rate -0.23 migrant(s)/1,000 population (2013 est.)

country comparison to the world: 119

Urbanization urban population: 22% of total population (2010)rate of

urbanization: 4.2% annual rate of change (2010-15 est.)

Sex ratio at birth: 1.02 male(s)/female

0-14 years: 1.01 male(s)/female
15-24 years: 1 male(s)/female
25-54 years: 1.02 male(s)/female
55-64 years: 0.82 male(s)/female
65 years and over: 0.79 male(s)/female
total population: 1 male(s)/female (2013 est.)

Maternal 360 deaths/100,000 live births (2010)

mortality rate country comparison to the world: 29

Financial services
The Kenya National Bureau of Statistics (KNBS) reported that the financial services (FSI) industry
which contributes 6.8% to the countrys Gross Domestic Product (GDP), withstood a turbulent year
to post a growth of 9.3% in 2015 compared to 9.1% in 2014. This is attributed to increased lending to
the Government and growth in the construction, manufacturing and agriculture sectors. The FSI
industry in Kenya is currently characterised by themes on consolidation, with both the industrys
regulators and players expected to consolidate in the near-term. On 31 May 2016, the Treasury
published a bill that proposes the merging of four regulatory agencies: the Capital Markets Authority
(CMA), the Retirements Benefits Authority (RBA), the Insurance Regulatory Authority (IRA) and the
Sacco Societies Regulatory Agency (SASRA) into one regulatory body: the Financial Sector Authority
(FSA). The introduction of risk-based minimum capital ratios together with liquidity constraints in the
banking and insurance sectors also point towards the consolidation of small and large banks and of
small and large insurers respectively

Banking

The banking sector in Kenya is dominated by large banks that control an estimated 80% of the
market according to BMI. With erosion of consumer confidence in small and mid-sized banks
following the placement of three banks into receivership, large banks could become even more
dominant by acquiring the businesses of small and mid-sized banks. The proposed acquisition of
Chase Bank by KCB, the proposed consolidation of all state-owned banks (National Bank of Kenya,
Consolidated Bank and Development Bank of Kenya) and the imminent sale of Barclay Africa Group
Limiteds 68.5% stake in Barclays Bank of Kenya Limited could set the stage for more mergers and
acquisition in the countrys banking sector.

Insurance

According to KNBS, the growth in the insurance sector slowed to 0.7% in 2015 compared to the 0.9%
growth the sector posted in 2014. This can be attributed to a depressed domestic equities market
and the weakening of the Kenyan shilling. The new Insurance Regulatory Authoritys (IRA)
regulations that include the introduction of risk based capital requirements and the increasing of the
minimum core capital requirements for both life insurance business (from KES 150m to KES 400m)
and long-term insurance business (from KES 300m to KES 600m) are set to begin implementation in
June 2016 till June 2018.

Trade
Kenya is largely a trade deficit country. The negative balance of trade occurs because the country's
exports are vulnerable to both international prices and the weather conditions. Since independence,
Kenya has enjoyed close international relations, particularly with the western countries. It is also a
member of several regional trade blocs, such as the COMESA (Common Market for Eastern and
Southern Africa) and the EAC (East African Community). These blocs are a key components
of Kenyas trade volumes.

Kenya Trade: Exports

Agricultural productivity is central to Kenya's export industry. More than 75% of the population is
engaged in agriculture and allied activities, which contribute almost 25% to the national production.
Horticultural produce and tea are the major items of export for Kenya. In 2006, the combined share
of these two products was 10 times higher than the share of the other export items. The country has
subsistence petroleum production, which is consumed internally and exported to neighboring
countries. Kenya has signed an MoU (Memorandum of Understanding) with China regarding oil
exploration in the country. Till January 2010, no oil was found.
Kenya Trade: Imports
Kenyas imports include machinery, transport equipments, motor vehicles, metals, plastics and
electrical equipments. India and the UAE are the largest import partners for Kenya. In 2009, both
countries accounted for more than 11% of the total import volume. Other major import partner
countries are China, Saudi Arabia, South Africa,

Technology Innovation And

Infrastructure
A paradigm shift is underway in Kenya. New innovations are destroying old ways of doing business,
and smart young startup entrepreneurs are at the forefront of this quiet but historic transformation.
Teams of skilled developers and programmers have sprung up in innovation hubs, incubators and
accelerators across the country to build information and telecom solutions that capitalize on the
countrys mix of challenges and opportunities. At the same time, we have seen a number of spinoffs
of Kenyas unique entrepreneurial revolution reach across Africa and into other corners of the world,
attracting global recognition for the country.

Digital Kenya addresses the many different aspects of these technological changes, innovations and
entrepreneurial activities, including policy formulation, impediments and opportunities. It is the first
book to chronicle the digital entrepreneurship revolution in Africa and describe how it has emerged
in the face of high unemployment rates, poverty, lack of technological infrastructure and disparate
cultural interpretations of entrepreneurialism and risk-taking. In this context, the book heralds a new
way of thinking about and understanding emergent opportunities in the digital world and how best
to exploit them in the face of significant developmental challenges.

The Rise of Silicon Savannah

Nairobi, the capital city of Kenya, has transformed into a technology epicentre. An agile mobile
banking system has created new market opportunities for digital entrepreneurs. 3G internet
connections became more and more affordable and still are mobile payment services are booming
up and the promising startup scene and ecosystem constantly is reinventing their offerings. Silicon
Savannah has positioned itself as an epicentre of startup weekends, innovations meet ups,
accelerators, incubator events and investors get together. True to that form, Nairobi has one of East
Africas highest concentrations of US dollar millionaires accounting for 8400 in number as of 2016.

Kenya had the highest number of mega infrastructure projects in East Africa in 2016, Deloitte has
said, noting it helped the country to maintain its lead as the regional powerhouse.

There were 11 ongoing projects valued at $7.01 billion (Sh727.98 billion) in the country last year, the
consultancy firm said in the 2016 Africa Construction Trends Report.

The top projects comprised both public and private investments such as the standard gauge railway,
the Lamu port berths and the Lake Turkana Wind Power Project.
Lake Turkana Wind Power Project is the single largest private sector investment in Kenyas
history. Once completed, it will provide 310 megawatts of power to the grid, approximately 18 per
cent of Kenyas installed capacity, the firm stated.

Kenya was followed by Ethiopia and Uganda, each with nine projects, and Tanzania with eight.

In total, East Africa had 43 projects valued at $27.4 billion (Sh2.84 trillion) spread across Burundi,
Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Seychelles, Somalia, Tanzania and Uganda.

These translated into 15 per cent of the 286 development projects valued at $50 million (Sh5.91
billion) and above that had broken ground across Africa by June 1 last year.

Business Conditions
Business conditions in Kenya deteriorated in June as political uncertainty and lack of access
to credit continue to weigh on demand of goods and services, a survey by Stanbic Bank and
HIS Markit shows.

The Stanbic-IHS Markit Purchasing Managers Index (PMI) shows that June was the worst
performing month since the survey began in January 2014.

Down from 49.9 in May to 47.3 in June, the seasonally adjusted PMI fell to a survey-record
low. Overall, the second quarter was the worst-performing quarter in the series history, said
Stanbic and Markit in the PMI report released Wednesday.

Readings above 50 on the index signal an improvement in business conditions on the

previous month, while those below 50 show a deterioration.

Firms frequently linked lower business activity to a lower customer turnout due to the
political climate and weaker purchasing power among clients, said the firms in the PMI
report.

Human Development
Kenya: Kenya has been ranked lowly in a UN global survey on well being and quality of life
beyond annual economic growth rates. The Human Development Index survey by the United
Nations Development Programme ranked Kenya at 145th out of 187 nations.
Read more at: https://www.standardmedia.co.ke/article/2000085846/study-kenya-fares-
badly-in-human-development

Though the report ranks Kenya low on human development, it adds that there are many
lessons it can learn from countries in the global south including Brazil, China, India,
Indonesia, South Africa and Turkey which have been noted to have made rapid advances in
human development in recent decades.
Read more at: https://www.standardmedia.co.ke/article/2000085846/study-kenya-fares-
badly-in-human-development

The report further says HDI for the sub-Saharan Africa rose from 0.0366 in 1980 to the
current 0.475 placing Kenya above the regional average. While unveiling the report the
regional director for African Development Bank Gabriel Negatu said despite the impressive
economic advances shown in the report, inequalities remain in gender, location (rural versus
urban areas) and wealth (the rich and poor). He said the combined economic output of three
leading developing countries Brazil, China and India will surpass the aggregate production of
Canada, France, Italy, the UK and the US. The director, who was flanked by UNDP resident
representative Steven Ursino, said beyond the four focus areas in the report there is need to
enhance equity across gender and class in the global south
Read more at: https://www.standardmedia.co.ke/article/2000085846/study-kenya-fares-
badly-in-human-development

Enviornment
USAID is advancing Kenyas sustainable growth by supporting community-based natural
resource management and improving ecosystem resilience.

Kenyas natural heritage is globally recognized for its rich biodiversity and iconic
landscapes. Kenyas economy and peoples livelihoods are highly dependent on these natural
resources and nature-based tourism. The arid and semi-arid lands account for 80 percent of the
countrys land area and climate variability has led to significant economic losses and increased
food insecurity. Other external factors such as wildlife crime, urban expansion, and population
growth are threatening conservation efforts in Kenya.

USAID addresses these development challenges through the promotion of community-based

natural resource management in biodiversity hotspots across Kenya. With over 60 percent of
Kenyas wildlife ranging outside state-protected areas, sustainable management of community
and private lands has proved vital to protecting and conserving Kenyas natural heritage.