KENYA COUNTRY REPORT

KENYA – AN OVERVIEW
Kenya, officially the Republic of Kenya, is a country in Africa and a founding member
of the East African Community (EAC). Kenya´s capital and largest city is Nairobi.
Kenya´s territory lies on the equator and overlies the East African Rift covering a
diverse and expansive terrain that extends roughly from Lake Victoria and further
south-east to the Indian Ocean. It is bordered by Tanzania to the south and southwest,
Uganda to the west, South-Sudan to the north-west, Ethiopia to the north and Somalia to
the north-east. Kenya covers 581,309km2 (224,445 sq mi), and had a population of
approximately 48 million people in January 2017.

The economy of Kenya is the largest by GDP in East and Central Africa. According to
the 2017 World Bank GDP rankings, Kenya is the ninth largest economy in Africa and
the fourth in Sub-Saharan Africa (World Bank Group, 2017). The capital, Nairobi, is a
regional commercial hub. Agriculture is a major employer in Kenya; the country
traditionally exports tea and coffee and has more recently begun to export fresh flowers
to Europe. The service industry is also a major economic driver. Additionally, Kenya is
a member of the East African Community trade bloc.

After attaining its independence in 1963, Kenya promoted rapid economic growth
through public investment, encouragement of smallholder agricultural production, and
incentives for private often foreign industrial investment. Gross domestic product (GDP)
grew at an annual average of 6.6% from 1963 to 1973 and 7.2% during the 1970s.
Agricultural production grew by 4.7% annually during the same period, stimulated by
redistributing estates, diffusing new crop strains, and opening new areas to cultivation.
Between 1974 and 1990, however, Kenya's economic performance declined. GSP
growth averaged 4.2% per year in the 1980s and 2.2% a year in the 1990s (Kimenyi,
Njuguna, & Mwega, 2016).

Kenya is a world leader in mobile money1 and has made major progress in financial
deepening and financial inclusion. Increasingly, Kenya has become a center of
innovation especially in mobile phone-based financial services, whose growth and
employment opportunities have ignited economic growth in the economy. Kenya has
also been an important player in the horticulture export market. The country has a
youthful population and is well positioned to reap the population dividend. In addition,

1
Kenya is home to the world´s leading mobile money platform – M-Pesa.
the country discovered oil in 2012 in the Northern Turkana region and it is likely to be
an oil exporter in the near future and will join Uganda and South Sudan. The Kenyan
economy serves five landlocked countries that are relatively resource-rich (Ethiopia,
South Sudan, Uganda, Rwanda, and Burundi). Therefore, Kenya´s comparative
advantage lies in improving its port facilities, road and railway networks, and transit
airports as trade routes for these five countries. Even more significant has been the
strengthening of the institutions of governance through the 2010 enactment of a
progressive constitution that radically altered the previous dominance of the executive.
At the core of the new constitutional dispensation is devolution of decision-making
powers to 47 county governments. All these factors augur well for continued strong
economic performance.

However, the country’s future growth faces several pitfalls even with the above set of
opportunities. Some of the risk factors include: first, the emerging terrorist attacks by
the Al-Shaabab group based in Somalia which has adversely impacted the country’s
economy; second and increasingly, although the country has recorded high rates of
economic growth, joblessness especially among the youth remains very high and a
likely source of instability; and third, poverty and inequality both at individual and
regional levels remain high and pose threats not only to sustained growth but also to
stability. In addition, internal institutional weaknesses and governance challenges
threaten the gains of the new constitution. These and other risk factors are of concern to
the country’s ability to sustain growth and retain its position as a dominant economy.
More recently, there have been growing concerns over the ballooning public debt and an
interest rate cap that has slowed down private sector credit growth.

This report seeks to analyze the main economic indicators of the Kenyan economy, to
provide a holistic understanding of the opportunities and emerging trends in various
economic sectors. We also review opportunities and pitfalls that are likely to influence
the country’s growth trajectory.
BACKGROUND OF THE KENYAN ECONOMY
Kenya´s economy is market-based with a few state-owned infrastructure enterprises and
maintains a liberalized external trade system. The country is generally perceived as
Eastern and central Africa's hub for Financial, Communication and Transportation
services. Major industries include: agriculture, forestry and fishing, mining and minerals,
industrial manufacturing, energy, tourism and financial services. As of 2016 estimates,
Kenya had a GDP of $70.53 billion. The GDP value of Kenya represents 0.11 percent
of the world economy, making it the 68th largest economy in the world (World Bank
Group, 2017). Per capita GDP was estimated at $1,455.36 in the 2016.

The government of Kenya is generally investment friendly and has enacted several
regulatory reforms to simplify both foreign and local investment, including the creation
of an export processing zone. The export processing zone has grown rapidly through
input of foreign direct investment. An increasingly significant portion of Kenya's
foreign inflows are remittances by non-resident Kenyans who work in the US, Middle
East, Europe and Asia. Compared to its neighbours, Kenya has well-developed social
and physical infrastructure..

Kenya´s real GDP growth has averaged over 5% for the last eight years. Since 2014,
Kenya has been ranked as a lower middle income country because its per capita GDP
crossed a World Bank threshold. Kenya has a growing entrepreneurial middle class and
steady growth.

Agriculture remains the backbone of the Kenyan economy, contributing one third of
GDP. About 75% of Kenya´s population of roughly 44.2 million work at least part time
in the agricultural sector, including livestock and pastoral activities. Over 75% of
agricultural output is from small-scale, rain-fed farming or livestock production.

Inadequate infrastructure and weak governance continue to hamper Kenya´s efforts to

improve its annual growth to the 8%-10% range so that it can meaningfully address
poverty and unemployment. The Kenyatta administration has been successful in
courting external investment for infrastructure development. International financial
institutions and donors remain important to Kenya´s economic growth and development,
but Kenya has also successfully raised capital in the global bond market. Kenya issued
its first sovereign bond offering in mid-2014, and recently raised an additional $2
billion in February 2018 Eurobond issue. Nairobi contracted a Chinese company to
construct a new Standard Gauge Railway (SGR) connecting Mombasa and Nairobi,
which was completed in May 2017.

The Central Bank of Kenya follows an inflation targeting monetary policy regime,
targeting an inflation range of 5% +/- 2.5%.Inflation pressures and sharp currency
depreciation peaked in early 2012 but have since abated following low global food and
fuel prices and monetary innovations by the Central Bank. Drought-like conditions in
parts of the country pushed inflation in 2017 above 8%. Chronic budget deficits,
including a shortage of funds in mid-2015, hampered the government’s ability to
implement proposed development programs, but the economy is back in balance with
many indicators, including foreign exchange reserves, interest rates and FDI moving in
the right direction. Underlying weaknesses were imposed in the banking sector in 2016
when the government was forced to take over three small and undercapitalized banks. In
2016, the government enacted legislation that limits interest rates that banks can charge
on loans and set a rate that banks must pay their depositors. This measure led to a sharp
shrinkage of credit in the economy.

Tourism holds a significant place in Kenya´s economy. A spate of terrorist attacks by

the Somalia-based group al-Shabaab reduced international tourism earnings after their
deadly 2013 attack on Nairobi´s Westgate mall, which killed 67 people, but the sector is
now recovering. In 2016, tourist arrivals grew by 17% while revenues from tourism
increased by 37%.
ANALYSIS OF KENYA´S ECONOMIC INDICATORS

1. GROSS DOMESTIC PRODUCT

Background
Since attaining its independence in 1963, Kenya´s economic growth and expansion of
the Gross Domestic Product have experienced phases of growth and contraction based
on a number of factors. Kenya accomplished good economic performance in the 1960s
and early 1970s but contracted in the 1980s and 1990s due to limited economic
transformation. The economy expanded from 2000 to 2016 following a new political
regime, adoption of a new constitution and strengthening of institutions. Even so, a
number of factors have occasionally disrupted economic growth such as drought, post-
election violence of 2007 and low commodity prices. The Gross Domestic Product
(GDP) in Kenya was worth 70.53 billion US dollars in 2016. This GDP value of Kenya
represents 0.11 percent of the world economy (World Bank Group, 2017). GDP in
Kenya averaged 14.33 USD Billion from 1960 until 2016, reaching an all-time high of
70.53 USD Billion in 2016 and a record low of 0.79 USD Billion in 1961. In the long-
term, the Kenya GDP is projected to trend around 82.00 USD Billion in 2020.

Figure 1: GDP of Kenya: 1960 - 2016

Source: Author´s computation from World Development Indicators, 2016 (World Bank 2017)
Analyzing Kenya´s GDP growth rate over the years: In the 1960s, growth averaged 5.7
per cent, accelerating in the 1970s to 7.2 per cent. It declined in the 1980s to 4.2 per
cent and in the 1990s to 2.2 percent. In the new millennium, the economy has
experienced relatively strong economic performance compared to the Sub-Saharan
region and the global economy at large. In the period 2000-2010, GDP growth averaged
4.1 per cent and accelerated to 5.45% from 2011 to 2017 (World Bank Group, 2017).

Figure 2: Kenya GDP growth rate (1961 – 2017)

Kenya GDP Growth Rate (1961-2017; projections to 2022)

25

20

15

10
GDP Growth Rate (%)
5

-5

-10
65 70 75 80 85 90 95 00 05 10 15 20

Year

Source: Author´s computation from World Development Indicators, 2016 (World Bank 2017)

The subdued economic growth of the 1980s was mainly due to the global recession,
commodity price decline, delayed structural adjustment policies, a political succession
in the country, as well as slow moving candidates such as institutional quality and
distributional policies (Ndulu, Bates, Chukwuma, O'Connell, & Collier, 2008).

Kenya ´s economy experienced sustained recovery and sound economic growth since
2000. This growth was consistent with the Africa Rising narrative of a resurgence of
economic growth in the region in the new millennium supported by the emergence of
strong institutions and increasing demand for political accountability. The rapid growth
in Africa has been attributed to a range of factors as discussed by Robertson (2013):
  better government finances and fiscal policies reflected in reduced debt and
general government expenditures ratios;
 booming commodity exports, especially to China, although the region runs a
trade deficit with the country
 increased FDI
 new discoveries of oil and other minerals
 increased role of telecoms
 ease of doing business reforms
 increased investments in education
 democratization of the continent

Figure 3: Kenya GDP Growth Rate in the recent age: 2000-2017

Kenya GDP Growth Rate (2000 - 2017)

9

5
Growth Rate (%) 4

0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Year

Source: Author´s computation from World Development Indicators, 2016 (World Bank 2017)

In 2000, the economy recorded an all-time low growth rate of 0.6 per cent, increasing to
3.8 per cent in 2001, but declining to 0.5 per cent in 2002. Following a peaceful change
of government in December 2002 from the Kenya African National Union (KANU),
which had ruled the country since independence, to the National Rainbow Coalition
(NARC) under Mwai Kibaki, the growth rate accelerated. The economy expanded
steadily from 2.9 per cent in 2003 to 5.1 per cent in 2004, 5.9 per cent in 2005, and 6.3
per cent in 2006, to reach a peak of 7.1 per cent in 2007, the highest in over two decades
and the only episode of five-year growth acceleration in Kenya´s independence history
(World Bank Group, 2014). The sound economic performance was bolstered by the
implementation of bold economic and structural reforms under the Economic Recovery
Strategy (ERS) and a favourable external environment. The ERS was a five-year
blueprint prepared to address Kenya´s macroeconomic vulnerabilities and structural
weaknesses.

The Kibaki government put in place economic policy and governance reforms that
enhanced economic performance. Kenya´s rankings in the World Bank Country Policy
and Institutional Assessment (CPIA), which rates 20 aspect of governance and policies,
generally improved in 2005-06 (from 3.52 to 3.58); declined in 2007-08 /to 3.55 and
3.52 respectively) as a result of the post-election violence, drought, and the global
financial crisis; and improved in 2009-13 (from 3.67 to 3.80). It has maintained at 3.8
till 2016.

Figure 3: Kenya CPIA scores: 2008 - 2016

World Bank CPIA Scores (2008 - 2016)

4.0

3.9

3.8

3.7
IDA Borrow ers Average
CPIA score 3.6
Kenya
3.5 SSA IDA average

3.4

3.3

3.2

3.1
2008 2009 2010 2011 2012 2013 2014 2015 2016
Year

Source: World Bank Country and Policy Institutional Assessment 2016

Kenya´s economic growth declined in 2008 as a result of post-election violence,

drought and the global finance crisis eroding the achievements of the previous half-
decade. Following counter cyclical demand management policies and favourable
weather conditions that improved agricultural performance, growth subsequently picked
up to 3.31 per cent in 2009 and to 8.41 percent in 2010.As a result of a surge in global
food and oil prices as well as a drought in the country, growth declined to 6.12 per cent
in 2011, to 4.45 per cent in 2012, 5.74 per cent in 2013, and was 5.3 percent in 2014.
The economy experienced slight recovery in 2015 (5.71 per cent) and also in 2016 (5.84
per cent) on the backdrop of heavy government spending on infrastructural projects
including the Standard Gauge Railway connecting the port city of Mombasa to the
capital city of Nairobi. In 2017, growth declined to 4.8 per cent. This was mainly due to
a prolonged election period during which Kenya had a repeat presidential election. Also
hampering economic growth in 2017 was weak private sector economic activity
following the adoption of legislation by the government in September 2016 where the
Government of Kenya set the lending and deposit rates to be charged by banks to
customers2. Private sector credit growth in Kenya slowed down to very low levels in
2017.

Figure 4: Slowdown in private sector credit growth

Growth in Private Sector Credit (2014 - 2017)

30

25
Percentage Growth

20

15

10

0
14 14 14 14 15 15 15 15 16 16 16 16 17 17 17 17
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Period

Source: Brookings Institution, obtained from Central Bank of Kenya

2
The Government of Kenya capped the commercial bank lending rates to 400 basis points above the
central bank interest rate. Deposit rates were set to 70 per cent of the central bank rate.
Outlook of Economic Performance in 2018
In 2017, Kenya´s economic growth was derailed by elevated uncertainty during the
prolonged election cycle, a crippling drought that damaged agricultural output, and the
government’s ongoing cap on lending rates charged by commercial banks. Economic
activity expanded again in January 2018 against a backdrop of political stability,
evidenced by a PMI reading above the 50-point threshold; the private sector returned to
growth in December 2017 following seven months of contraction. At the same time, the
economy’s public and external debt stocks have been piling up while revenue flows
have declined, eroding debt affordability. Data released by the Central Bank of Kenya
shows that both domestic debt and external debt jumped by double-digit figures over the
previous year in 2017. A deteriorating fiscal position led Moody’s to downgrade
Kenya’s credit rating from B1 to B2 on 13 February 2018. The agency views fiscal
trends worsening in the near-term, with greater reliance on commercial external debt.
However, it assigned a stable outlook, given the economy’s relatively diversified
structure, strong growth potential and mature financial sector.

In 2018, the economy is expected to expand more due to increased agricultural output,
supported by more favorable weather conditions; an expansion in construction activity
for planned infrastructure projects; and an upturn in investment should bump up growth
in 2018. That said, the government’s interest rate cap policy will continue to dent
growth. The economy’s rising debt levels may subdue growth in the medium term.
2 Labour
2.1 Background
Kenya is a multi-ethnic state, inhabited primarily by Bantu and Nilotic populations,
with some Cushitic-speaking ethnic minorities in the northern regions of the country.
Kenya has a very diverse population that includes most major ethnic, racial and
linguistic groups found in Africa. Bantu and Nilotic populations together constitute
around 97% of the nation's inhabitants.

Swahili and English are official languages. Swahili is compulsory in primary education,
and, along with English, serves as the main lingua franca between the various ethnic
groups.

According to the C.I.A World Factbook profile on Kenya, the main ethnic groups are as
follows: Kikuyu 22%, Luhya 14%, Luo 13%, Kalenjin 12%, Kamba 11%, Kisii 6%,
Meru 6%, other African 15%, non-African (Asian, European, and Arab) 1%. Since
Kenyan independence in 1963, Kenyan politics have been characterized by ethnic
tensions and rivalry between the larger groups. This devolved into ethnic violence in the
2007–2008 post-election violence.

The main religion in Kenya is Christianity, which is practised by 83% of the population.
Of the Christians, Protestant are 47.7%, Roman Catholics are 23.4% and Other
Christians are 11.9%. Islam religion in Kenya is practiced by 11.2% of the population.

2.2 Population Statistics

Kenya has experienced dramatic population growth since the mid-20th century as a
result of its high birth rate and its declining mortality rate. The last census to be
undertaken in Kenya was done in 2009, where the population was recorded at 38.6
million. The I.M.F World Economic Outlook 2017 database indicates that Kenya´s
population as of 2018 is estimated to be 48.03 million persons, and is expected to grow
to 53.52 persons by 2022.

Kenya has experienced dramatic population growth since the mid-20th century as a
result of its high birth rate and its declining mortality rate. More than 40% of Kenyans
are under the age of 15 because of sustained high fertility, early marriage and
childbearing. Kenya’s persistent rapid population growth strains the labor market, social
services, arable land, and natural resources. Although Kenya in 1967 was the first sub-
Saharan country to launch a nationwide family planning program, progress in reducing
the birth rate has largely stalled since the late 1990s, when the government decreased its
support for family planning to focus on the HIV epidemic. Government commitment
and international technical support spurred Kenyan contraceptive use, decreasing the
fertility rate (children per woman) from about 8 in the late 1970s to less than 5 children
twenty years later, but it has plateaued at just over 3 children today (Central Intelligence
Agency, 2017).

Kenya Population (1980-2018; projections to 2022)

55

50
2010: 38.5 Million
45 2016: 45.4 Million
2022: 53.5 Million
40

Millions 35

30

25

20

15
1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

Kenya is a source of emigrants and a host country for refugees. In the 1960s and 1970s,
Kenyans pursued higher education in the UK because of colonial ties, but as British
immigration rules tightened, the US, the then Soviet Union, and Canada became
attractive study destinations. Kenya’s stagnant economy and political problems during
the 1980s and 1990s led to an outpouring of Kenyan students and professionals seeking
permanent opportunities in the West and southern Africa. Nevertheless, Kenya’s
relative stability since its independence in 1963 has attracted hundreds of thousands of
refugees escaping violent conflicts in neighboring countries; Kenya shelters more than
300,000 Somali refugees as of April 2017.
2.3 Age Structure
Kenya has a vibrant young population. Approximately 60% of the Kenyan population is
under 25 years. This gives the country a great chance to build an educated and civic
community, together with having a growing market for manufactured good. The
youthful population also provides a wide tax base for the government, although
informal employment makes up the largest employment sector, making taxation more
difficult.

AGE % of Total MALE FEMALE

Population
0-14 40.02% 9,557,274 9,497,870
15-24 19.15% 4,552,448 4,567,894
25-54 33.91% 8,170,264 7,976,751
55-64 3.92% 856,092 1,009,075
65 years and over 3% 614,751 813,320

Source: C.I.A World Factbook 2017

Source: C.I.A World Factbook 2017

2.4 Gender Structure
The gender structure in Kenya is fairly evenly distributed between the male and female
population. Data from the World Bank indicates that in 2016, there were 24,085,548
males in Kenya, and a fairly equivalent female population of 24,376,019.
Gender Distributio in Kenya (Male vs Female): 1960-2016

28,000,000

24,000,000
Male Population
Female
20,000,000

Persons
16,000,000

12,000,000

8,000,000

4,000,000

0
60 65 70 75 80 85 90 95 00 05 10 15

Year

Source: 2017 World Bank Development Indicators

However, there are significant differences in terms of participation in the formal labour
force. As with many other African economies, there are more males in the formal
employment sector. This was mainly because of lack of access to education and
employment opportunities for girls, but since the introduction of free primary education
and abolishment of cultural malpractices, the situation has greatly improved.

Kenya Wage and Salaried Workers as a percentage of total employment (Male vs Female)

60

50

40

% of total employment
30

20

10
92 94 96 98 00 02 04 06 08 10 12 14 16
Wage and salaried workers, male (% of male employment)
Wage amd Salaried Workers, female (% of female employment)

Source: 2017 World Bank Development Indicators

The 2016 United Nations human development report indicates that Kenya´s HDI was
recorded at 0.555 in 2015, placing Kenya 146th in the world. Kenya´s HDI position
places it in the medium human countries. Other African countries in this category
include Botswana, Gabon, Egypt and Ghana.

Kenya HDI value

0.600

0.500

0.400

0.300

0.200

0.100

0.000
1990 2000 2010 2011 2012 2013 2014 2015

The report states that the Life expectancy at birth in Kenya is 66.2 years. Other major
rankings in the 2016 report are as follows:

Inequality Inequality- Inequality- Inequality-

Inequality- Coefficient in life adjusted Inequality adjusted adjusted
HDI HDI Adjusted of Expectancy life in education Inequality income
Rank Value HDI Inequality (%) expectancy education index in income index
146 0.555 0.391 29.4 32.1 0.44 22.9 0.4 33.1 0.339

The gender development index of the United Nations report notes the following:

Estimated
Gender Human Life gross national
Development Development Expectancy at Expected years Mean years income per
Index Index Birth of schooling of schooling capita

Value Value Years Years Years (2011 PPP $)

Male Female Male Female Male Female Male Female Male Female
0.919 0.577 0.531 60.3 64.1 11.4 10.8 7 5.7 3405 2357
2.5 Work and Employment
The World Bank reports employment to population ratio for ages 15-24 total % as
follows:
Kenya Employment to Population Ratio (1991-2017)
48

1997: 38.90%
44 2007: 31.40%
2017: 30.29%

40

% of population
36

32

28
92 94 96 98 00 02 04 06 08 10 12 14 16

Year

Source: World Bank Development indicators

The CIA World Factbook reports the following indices regarding Kenya´s population:

INDEX VALUE
DEPENDENY RATIO (2015 est.)
Total dependency ratio 78.3
Youth dependency ratio 73.7
Elderly Dependency Ratio 4.6
Potential support ratio 21.7
MEDIAN AGE (2017est.)
Total 19.7 years
male 19.6 years
female 19.9 years
Country comparison to the world 200
POPULATION GROWTH (2017 est.)
Population growth rate 1.69%
Country comparison to the world 63
BIRTH RATE (2017 est.)
Birth rate 23.9 births / 1,000
population
Country comparison to the world 59
DEATH RATE (2017 est.)
Death rate 6.7 deaths / 1,000
population
NET MIGRATION RATE (2017 est.)
Net migration rates -0.2 migrants / 1,000
population
Outlook for Population
2. TRADE AND BALANCE OF PAYMENTS

2.1 Background
Kenya is the 107th largest export economy in the world and the 76th most complex
economy according to the Economic Complexity Index (ECI). Kenya has a relatively
well-developed agricultural sector and relies on it for a significant portion of its exports.
Kenya is different from most medium to larger African economies in that it has
significant intra-African trade and, conversely, while China is growing as an import
source, China does not figure as an export destination.

Kenya principally relies on agricultural products for its exports, with agriculture
contributing approximately 30 percent of the Gross Domestic Product. The agricultural
sector faces a number of challenges, one of which is having the Kenyan population
tripling over the past 30 years and a large problem of poverty (both urban and rural);
another is the severe droughts and flooding in recent years (Sandrey, Mwanza, & Swarts,
2015). The main component if Kenya´s imports are machinery and equipment primarily
sourced from China and the Middle East.

In 2017, Kenya exported KES 549.178B ($5.49B) and imported KES 1,583.29B
($15.8B) resulting in a negative trade balance of KES 1,034.11B ($10.34B). This led to
expansion of the trade deficit from KES 854.51B in 2016 to KSh 1034.7 billion in
2017.There was a drop in the export to import ratio from 40.34% in 2016 to 34.69% in
2017. The terms of trade stood at 78.8% in 2016.
2.2 Exports
Kenya´s exports to the rest of the world grew on average by 9.02% on a year-to-year
basis, from KES 134.53 billion ($1.3B) in 2000 to KES 549.18B ($5.49B) in 2017.
Total Exports in Kenya (199-2016)
600,000

2017: KES 549.18B ($5.4B)

500,000 2016: KES 577.92B ($5.8B)
2015: KES 581.02B ($5.8B)

400,000

Ksh (Millions)
300,000

200,000

100,000
2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

Kenya´s principal exports are agricultural products. In 2017, tea contributed 45% of all
domestic exports, followed by horticulture which contributed 29.8%. Other export
products include coffee and fish, while re-exports to other African countries include
cement, chemicals and petroleum.

Intra-African trade has been the leading destination of the Kenya´s exports. The Kenya
National Bureau of Statistics 2017 Economic Report highlighted that African exports
accounted for 40.6 per cent of total exports, with East African Community (EAC)
accounting for 21.1, from 2000-2016. During the review period, Europe and Asia
accounted for 24.5 and 24.3 per cent of the total exports, with European Union (EU)
and the Far East accounting for 21.0 per cent and 15.6 per cent, respectively (Kenya
National Bureau of Statistics, 2017).
Kenya’s major regional trading partners are Uganda, Tanzania, Somalia, D.R.C and
Egypt.
Kenyan Exports to Selected African Countries (2015-2017)

70,000

60,000

50,000

40,000

Ksh (millions)
30,000

20,000

10,000

0
2015 2016 2017

DRC Ethiopia Egypt

Other Rwanda S.Africa
Somalia Tanzania Uganda
Zambia Zimbabwe

A working paper by the Trade and Law Center (Talac) reports that recent Africa trade
liberalisation initiatives and reforms continue to foster intra-African trade, and this has
improved Kenya´s exports to the region. However, the report notes that in as much as
the the results for tariff elimination on intra-African trade are promising, the real news
is in confirming that these barriers are not as significant as the various trade-related
barriers outside of tariffs (Sandrey, Mwanza, & Swarts, 2015). The report emphasizes
that over and above the Africa trade liberalisation reforms, the more traditional non-
tariff barriers to trade such as time in transit costs and reduction in the costs associated
with the particular African problem of transit-time delays at customs, terminals and
internal land transportation. The Government of Kenya is currently improving trade
prospects in Kenya through the construction of two transport corridors – the Kenya to
Uganda transport corridor and the Kenya, South Sudan and Addis Ababa transport
corridor. More on these projects is discussed in the trade outlook section of this chapter.

The major non-regional destinations for Kenya´s exports are the member states of the
European Union, the United States, and Pakistan. After Uganda, the U.S.A have for a
long time been Kenya´s main international export markets. However, in 2017, Pakistan
grew to become Kenya´s leading export market. Pakistan mainly imports tea from
Kenya, importing 153.68 million kilogrammes of tea in December 2017 alone.
Kenyan Exports to The Rest of The W orld (2015-2017)

60,000

50,000

40,000

Ksh (Millions)
30,000

20,000

10,000

0
2015 2016 2017

Belgium France Germany

Netherlands Pakistan UK
USA

2.3 Imports
Kenya´s imports from the rest of the world grew on average by 13.10% on a year-to-
year basis, from KES 247.803B ($2.5B) in 2000 to KES 1,583.28B ($15.83B) in 2017.
Total imports in Kenya (1999-2016)
1,800,000

1,600,000
2017: KES 1.583 Trillion (USD 15.8 billion)
1,400,000 2015: KES 1.432 Trillion (USD 14.3 billion)
2013: KES 1.580 Trillion (USD 15.8 billion)
1,200,000

Ksh (Millions) 1,000,000

800,000

600,000

400,000

200,000

0
2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

Asia accounted for 66.8 per cent of total value of imports in 2016 continuing its
dominance as the leading source of Kenya’s imports. The top 5 Import Partners to
Kenya are China, India, the United Arab Emirates, Saudi Arabia, and Japan. Imports
from China have continued to grow over the last five years making the country the
leading source of Kenya’s imports from 2015-2017. Kenya´s recent surge in imports
from China was related to the construction of the Standard Gauge Railway (SGR),
which was largely financed by China Exim Bank.

Imports from the Rest of the W orld (2015-2017)

400,000

350,000

300,000

250,000
Ksh (Millions)
200,000

150,000

100,000

50,000

0
2015 2016 2017

CHINA FRANCE GERMANY

INDIA ITALY JAPAN
S.AFRICA S.ARABIA U.A.E
U.K U.S.A

The main products imported to Kenya are non-food industrial supplies. Specifically,
machinery and equipment; fuel and minerals and manufactured goods constitute the
largest components of Kenya´s imports. The major commodities imported from China
include wind-powered generators, rails and signaling systems. Petroleum products were
the main items imported from the United Arab Emirates and Saudi Arabia.

Kenya´s Main Import Products (2015-2017)

600,000

500,000

400,000

Ksh (Millions)
300,000

200,000

100,000

0
2015 2016 2017

Animal & Vegetable Oils

Beverages and Tobacco
Chemicals
Food and Live animals
Fuels and Minerals
Inaudible Crude materials
Machinery & Equipent
Manufactured Goods
2.4 Balance of Trade
For a long time, Kenya has sustained a balance of trade deficit. The volume of imports
is significantly higher than the volume of exports, leading to a worsening of the export-
import ratio. The trade deficit is exacerbated by a weakening Kenyan Shilling.

Kenya Total Imports vs Total Exports (1999-2017)

1,800,000

1,600,000 Total Exports

Total imports
1,400,000

1,200,000
Ksh (Millions) 1,000,000

800,000

600,000

400,000

200,000

0
2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

Kenya Trade Balance (1999-2017)

0

-200,000

-400,000

-600,000
Ksh (Millions)
2017: KES -1034.111 Billion (USD -10 Billion)
-800,000 2012: KES -858.959 Billion (USD -8.6 Billion)
2007: KES -330.525 Billion (USD -3.3 Billion)

-1,000,000

-1,200,000
2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

The recent worsening of the trade balance in 2017 was on the back of increased food
imports due to a drought that posed a major risk to people, livestock and wildlife.
Imports increased 20.93 per cent to KES 1,580 billion in November 2017 while exports
rose a measly 3.37 per cent to KES 549.18 billion. The widening deficit is piling
pressure on the Kenyan shilling against global currencies such as the dollar. The high
demand for the dollar to fund imports forces the Central Bank of Kenya to intervene,
depleting stock of foreign exchange reserves.

Kenya´s current account has mostly been in deficit. There had been sustained
improvement from 2000 to 2004 following the establishment of the Mwai Kibaki
administration where the country experienced its best record performance of year-on-
year GDP growth rate. However, the situation worsened from 2005 to 2014 as the
deficit became more sustained. The government of Kenya is currently implementing job
creation reforms to improve the deficit.

Kenya Current Account Balance (1980-20189

2

-1

-2
USD (Billions)
-3

-4

-5

-6

-7
1980 1985 1990 1995 2000 2005 2010 2015

Year

Source: IMF World Economic Outlook 2018

 Kenya Current Account % of GDP (1980-2018)
12

2016: -5.18
8 2017: -6.06
2018*: -7.62

% of GDP 0

-4

-8

-12
1980 1985 1990 1995 2000 2005 2010 2015

Year

Source: IMF World Economic Outlook

2.5 International Liquidity

The Central Bank of Kenya maintains a reserve position to enable it to hold
approximately 4-5 months of import cover.

Central Bank of Kenya Usabe Foreign Exchange Reserves (2015-2017)

11,500

11,000

10,500

USD (millions) 10,000

9,500

9,000

8,500
I II III IV I II III IV I II III IV
2015 2016 2017

Source: Central Bank of kenya

2.6 Kenya Shilling Exchange Rate
Kenya Shilling Exchange Rate against USD, EUR and GBP (1991-2018)

180

160

140

120

KES 100

80

60
EUR
40 GBY
USD
20
92 94 96 98 00 02 04 06 08 10 12 14 16

Year

2.7 Trade Outlook

Kenya continues to be a leading regional trade hub in East and Central Africa. The
Government of Kenya is currently undertaking major strides to aid transportation of
goods and services into the East African Region and to improve international trade. In
2017, the Government of Kenya completed the construction of the Mombasa–Nairobi
Standard Gauge Railway that connects Kenya's port city of Mombasa to Nairobi, the
nation's capital. The SGR was constructed to replace the parallel Uganda Railway that
was built during British colonial rule in the 19th century. The SGR is the country's
largest infrastructure project since independence. Under the East African Railway
Master Plan, the Mombasa–Nairobi SGR will link up with other standard-gauge
railways being built in East Africa. Phase 2 of the project will extend the railway to the
Uganda border by 2021. The SGR is expected to greatly improve trade between the East
African communities.

The second major infrastructure project currently being undertaken by the Government
of Kenya to improve trade in the East-African community is the construction of the
Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor (LAPPSET). This
will serve as the country´s second transport corridor, after the Mombasa-Uganda
transport corridor. The LAPSSET project is a combination of various components –
ports, pipelines, roads and railways. The LAPSSERT Lamu port is currently under
construction Lamu, a coastal town near Mombasa in Kenya. In addition to the port, a
standard gauge railway will be constructed from Lamu to Juba in South Sudan and
Addis Ababa in Ethiopia. This will be accompanied by a highway crude oil pipelines
from Lamu to Addis Ababa. The LAPSSET corridor will greatly improve intra-African
trade. China is targeting Kenya’s ports of Mombasa and Lamu in expanding its global
influence through trade and connectivity. The Chinese government lists the two ports as
important to its One Belt One Road (OBOR) Initiative, an ambitious programme meant
to create “a community of common destiny” from among 63 countries around the world
with about 4.5 billion people.

The East African member states of Kenya, Uganda, Tanzania, Rwanda and Burundi
recently launched an East-African e-passport. Kenya launched the passport in
September 2017, while Tanzania launched in February 2018. Uganda, Rwanda and
Burundi are yet to roll out the e-passport, but have reported various stages of progress.
The e-passport — also known as the biometric passport — complies with guidelines set
by the International Civil Aviation Organisation (ICAO), making it admissible globally.
The East African e-passport is set to increase trade between the East African Countries
over the coming years.
BANKING AND FINANCE

Background
Kenya’s banking has been on a successful trend in recent years, exhibiting increased levels of
financial inclusion and financial deepening. Commercial banks in Kenya continue to provide
access to formalized financial services, and have representation in all 47 counties. The key
driver of financial inclusion in Kenya is mobile financial services, introduced in 2007. The rapid
success of mobile financial services have seen an increase in the number of mobile money
accounts, number of mobile money agents, the number of transactions and monetary value of
transactions. As of 2017, over 90% of Kenya´s adult population were actively subscribed to a
mobile money account.

As of 2017, the banking industry in Kenya comprised 42 banks, one mortgage finance company,
13 microfinance banks, and 8 representative offices of foreign banks. In addition, the CBK has
oversight for 76 foreign exchange bureaus, 17 money remittance providers and three credit
reference bureaus. The banking industry in Kenya is fairly resilient, and has not experienced a
significant banking crisis in the past decade. The regulatory oversight from the Central Bank of
Kenya has remained firm and steady, ensuring that all banks meet the regulatory liquidity
requirements.

Kenya´s capital markets are the deepest and most sophisticated in East Africa. Sixty-seven
companies were listed on the Nairobi Stock Exchange for a total market capitalization of KES
1.9 trillion (approximately $19 billion) as of March 2016. The Kenyan capital market has grown
rapidly in recent years and has also exhibited strong capital raising capacity. The bond market,
however, is still underdeveloped and dominated by trading in government debt securities. Long-
dated corporate bond issuances are uncommon, leading to a lack of long-term investment capital.
As of February 2016, the domestic government bond market denominated in local currency
represents a total of $14 billion dollars, of which only five percent is comprised of international
institutional investors. In March 2017, the Kenyan National Treasury launched its mobile
money platform government bond to retail investors locally. The name of the product is M-
Akiba, through which local Kenyans are able to purchase bonds as small as $30 on their mobile
phones.

The Central Bank of Kenya (CBK) is working with regulators in EAC member states through
the Capital Market Development Committee (CMDC) and East African Securities Regulatory
Authorities (EASRA) on a regional integration initiative and has successfully introduced cross
listing of equity shares. The combined use of both the Central Depository System (CDS) and an
automated trading system has moved the Kenyan securities market to globally accepted
standards. Kenya is a full (ordinary) member of the International Organization of Securities
Commissions.

4.2 Commercial Banks

Kenya´s financial landscape has experienced tremendous growth over the past decade. The
Financial Sector Deepening annual report of 2016 notes that the percentage of Kenyans not
using any form of financial service declined from 25.1% in 2013 to 17.4% in 2016 (Financial
Sector Deepening, 2016).

Data from the International Monetary Fund Financial Access Survey of 2017 indicates access to
formal financial services in Kenya continues to improve commendably. The number of
commercial banks operating in the Kenyan market has been on a steady increase, providing a
variety of services to the Kenyan public. As of the 2017 FinAccess survey, there were 42
licenced commercial banks in Kenya, with over 1,514 branches countrywide. There are also a
number of international banks with representative offices in Kenya. These include: HDFC Bank,
Bank of China, JP Morgan Chase, Nedbank, CitiBank and FirstRand Bank.

Branches of commercial banks in Kenya

1,600

1,400

1,200

No. of Branches
1,000

800

600

400
04 05 06 07 08 09 10 11 12 13 14 15 16
Year

Source: I.M.F Financial Access Survey 2017

The commercial banks were initially only located in major towns and urban centres, but have
expanded to have representation in all 47 counties in Kenya. The 2017 FinAccess survey reveals
that there are approximately 5 commercial bank branches per 100,000 adults. There are 3
branches of commercial banks per 1,000 km2, making Kenya a leader in financial inclusion in
the East African region.

Brances of Commercial Banks (2004-2016)

No. of Branches 3

0
04 05 06 07 08 09 10 11 12 13 14 15 16
Year
Branches of commercial banks per 100,000 adults
Branches of commercial banks per 1,000 km2

Source: I.M.F Financial Access Survey 2017

To complement the physical bank branches, Automated Teller Machines are well distributed in
most major and medium-sized towns around the country, with 9 ATMs per 100,000 adults. This
is three times more than the number of physical bank branches.

Automated Teller Machines (ATMs) per 100,000 adults (2004-2016)

10

No. of ATMs 6

1
04 05 06 07 08 09 10 11 12 13 14 15 16

Year
Source: I.M.F Financial Access Survey 2017

Following the increased availability of commercial banking services around the country, the
number of deposit accounts with commercial banks has been steadily increasing, with an
average year-on-year growth rate of 38% from 2004-2016. In 2004, there were just about
1,000,000 deposit accounts. Twelve years later in 2016, there were about 43,000,000 deposit
accounts with commercial banks. The Financial Sector Deepening report notes that the increase
in deposit accounts opened in commercial banks increased to 40.1 million in the third quarter of
2016 from 36.5 million in December 2015. This was mainly driven by accounts opened through
mobile phone platforms and increasing usage of bank agent networks.

Deposit accounts with commercial banks (2004-2016)

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0
04 05 06 07 08 09 10 11 12 13 14 15 16

Year

Source: I.M.F Financial Access Survey 2017.

Outstanding loans and deposits have sustained increased growth, occupying a higher percentage
of the Gross Domestic Product over the years.
 Outstanding Loans and Deposits as a % of GDP

45

40

35

% of GDP
30

25

20

15
04 05 06 07 08 09 10 11 12 13 14 15 16
Year
Outstanding deposits with commercial banks (% of GDP)
Outstanding loans with commercial banks (% of GDP)

4.3 Mobile Money , Agency Banking and Mobile Banking

Kenya is a world leader in mobile money and mobile banking services. Kenya´s pioneer mobile
money platform, M-Pesa, was established in 2007. Mobile money is a service that allows users
to store cash (known as mobile electronic float) in their mobile phone SIM cards. The users can
send the electronic float to other users on the same network using their mobile phones. To
convert the e-float back to physical currency, the users visit a mobile money agent shop and
convert to physical currency at a fee. Mobile money in Kenya has exhibited monumental growth
since its establishment in 2007. The number of mobile money users increased from virtually
NIL in 2007 to 37 million users by December 2017. Given that Kenya has a total population of
48 million, this means that over 90% of the adult population in Kenya are actively subscribed to
a mobile money account.

Number of Mobile money Accounts in Kenya (2007-2017)

40,000,000

35,000,000

30,000,000

25,000,000

Accounts
20,000,000

15,000,000

10,000,000

5,000,000

0
07 08 09 10 11 12 13 14 15 16 17

Year

Source: Central Bank of Kenya

The number of mobile money agents facilitating the mobile money services have also exhibited
accelerated growth. In March 2007 when mobile money was launched, there were 307 agents.
10 years later in December 2017, there were 182,472 mobile money agents. The agents are
present in all counties, and even in the smallest towns where commercial bank branches or
ATMs cannot be established. The easy accessibility of mobile money agents to process deposit
and withdrawal transactions has been one of the key factors promoting the success of mobile
money in Kenya.
Number of mobile money agents in Kenya (2007-2017)
200,000

160,000

120,000
Agents

80,000

40,000

0
07 08 09 10 11 12 13 14 15 16 17

Year

Source: Central Bank of Kenya

The volume and value of mobile money transactions in Kenya have also experienced
expeditious growth. In 2017 alone, the total value of mobile money transactions was KES 3,638
billion (approximately $36 billion). This transaction value was far greater than that of any
commercial bank in Kenya during the same period.

Monetary value of mobile money transactions in Kenya (2007-2017)

350,000

300,000

250,000

Ksh (Millions) 200,000

150,000

100,000

50,000

0
07 08 09 10 11 12 13 14 15 16 17
Year
Source: Central Bank of Kenya

Following the success of the mobile money model whereby mobile money agents facilitated all
transactions regarding the deposit and withdrawal of funds into users´ accounts, a number of
commercial banks in Kenya developed the agency banking model be bring their services closer
to their customers. The agency banking model is a function of certain Commercial banks in
Kenya that allows them to contract third party retail networks as banking agents. Upon
successful application, vetting and approval, these Agents are authorized to offer selected
products and services on behalf of the Bank. This relationship creates an Agency Banking
business model. The primary services offered through agency banking include: (1) cash
withdrawal, (2) bills payment, (3) cash deposits, (4) funds transfer, (5) balance enquiry, (6)
document collection for debit and credit cards, loan applications and account opening forms, (7)
collection of bank correspondence and mail and, finally, (8) mobile banking services.

Agency banking became a successful model to carry out commercial banking in Kenya. From
its establishment in 2010, many commercial banks adopted agency banking and contracted bank
agents. The Central Bank of Kenya (CBK’s) annual supervision report for 2012 showed that
more bank customers were making cash deposits, withdrawals and other transactions through
agents, fundamentally changing their mode of interaction with banks (Central Bank of Kenya,
2012). By December 2016, 18 commercial banks and 5 microfinance banks (MFBs) had
contracted 53,833 and 2,068 agents, respectively, spread across the country (Central Bank of
Kenya, 2016).

Number of Banking Agents in Kenya (2011-2016)

60,000

50,000

40,000

No. of agents 30,000

20,000

10,000

0
2011 2012 2013 2014 2015 2016

Year

Source: Central Bank of Kenya

Over 87 percent of the approved commercial bank agents were concentrated in 3 banks with the
largest physical branch presence namely; Equity Bank Ltd. with 25,428 agents, Kenya
Commercial Bank Ltd. with 12,883 and Cooperative Bank Ltd. with 8,856. The number of
transactions carried out by bank agents increased considerably over the past 6 years.

Number of Agency Banking Transactions (2011-2016)

120,000,000

100,000,000

80,000,000

No. of Transactions 60,000,000

40,000,000

20,000,000

0
2011 2012 2013 2014 2015 2016

Year

Value of Agency Banking Transactions (2011-2016)

800,000

700,000

600,000

500,000

Ksh (millions)
400,000

300,000

200,000

100,000

0
2011 2012 2013 2014 2015 2016

Year
The success of agency banking model and improvements in mobile technology led to yet
another significant shift in banking service provision in Kenya - introduction of mobile banking
services. Mobile banking is a service provided by a bank or other financial institution that
allows its customers to conduct financial transactions remotely using a mobile device such as a
smartphone or tablet. Unlike the related internet banking it uses software, usually called an app,
provided by the financial institution for the purpose. Mobile banking is usually available on a
24-hour basis. Unlike traditional mobile money accounts, mobile banking accounts allow users
to earn interest on deposits and also process loans. The pioneer mobile banking platform in
Kenya was M-Shwari, a joint initiative by Safaricom and the Commercial Bank of Africa. M-
Shwari accomplished massive success following its introduction to the market and many other
commercial banks introduced mobile banking afterwards.

The agency banking and mobile banking models proved to be a strategic shift for Kenyan
commercial banks. They made it easier for customers to open and maintain a bank account, and
rapidly increased financial inclusion in Kenya. In 2017, KCB Bank (Kenya´s largest Bank),
reported that over 86 per cent of all the bank´s transactions happened outside the physical bank
branches (Kenya Commercial Bank, 2017). Specifically, 51% of the bank´s transactions were
processed through mobile banking and 14% were processed through agency banking.
Transactions processed through Automated teller machines were 10% while the transactions
carried out at the bank´s physical branches constituted only 14%.

The Financial Sector Deepening 2016 report notes that mobile money stands as the leading
driver of financial inclusion by providing access to formal financial services to a significant part
of the Kenyan population, over and above commercial banks, savings and credit cooperative
societies and microfinance institutions.

Access to formal and informal financial services (% of adults)

Source: Financial Sector Deepening Annual Report

Just a few years after their introduction, mobile banking services are already used by 17.5% of
Kenyans and have become the most common banking solution among youth (Financial Sector
Deepening, 2016).

Usage of Traditional and Mobile Bank Account by age group (2016)

40

35

30

25

% 20

15

10

0
18-25 26-35 36-45 46-55 >55

Mobile Bank account

Traditional banking services

Source: Financial Sector Deepening

Outlook for Banking and Finance in Kenya

Talk about the interest rate cap, talk about Pesalink.
5. FINANCIAL MARKETS
5.1 Background
A vibrant and well-functioning sound, efficient and stable financial system is a catalyst
for broad based sustainable economic growth and development. It mobilizes savings
and channels them to investors facing shortage of investible funds to support Kenya’s
development. Kenya´s financial markets are relatively well developed in the African
region. Kenya’s financial sector comprises of deposits-taking institutions (commercial
banks and mortgage finance companies, microfinance banks and deposit taking Savings
and Credit Co-operatives (SACCOs), non-deposits taking institutions (insurance
industry, pensions industry, capital markets industry, Development Finance Institutions
and several other entities) and financial markets infrastructure providers.

The financial sector in Kenya is well-regulated and supervised by five main regulators
responsible for different segments in this sector, namely the Capital Markets Authority
(CMA) regulating money and capital markets; Central Bank of Kenya (CBK) regulating
commercial banks and instituting monetary policy; Insurance Regulatory Authority
(IRA) regulating insurance and re-insurance companies; Retirement Benefits Authority
(RBA) regulating pension funds; and the Sacco Societies Regulatory Authority
(SASRA) regulating the Savings and Credit Co-operative societies in Kenya.

The banking subsector, which comprises of commercial banks, mortgage finance

companies and microfinance banks, accounts for more than 60 percent of total assets in
Kenyan financial sector. Kenya is therefore a bank-based economy, with most players
accessing finance through the banking system. The capital markets continue to develop
in terms of liquidity and depth. For Kenya to become a market-based economy,
significant improvements need to be made in improving liquidity of the capital markets.
One of the strategies being undertaken by the Capital Markets Authority is the
introduction of mobile trading for individual investors to access capital markets without
the need for brokers.

Kenya´s financial system is fairly resilient and is able to sustain both domestic and
international shocks. The country has not experienced any major banking or financial
crisis in the past decade. The 2007/08 global financial crisis did not affect African
economies to a large degree, and the Kenyan financial system remained relatively stable
during this period.
5.2 Capital Markets
Kenya´s capital markets are the deepest and most sophisticated in East Africa. The
Capital Markets Authority Financial Stability Report of 2016 states that sixty-seven
companies were listed on the Nairobi Stock Exchange for a total market capitalization
of KES 1,834 billion (approximately $18 billion) as of March 2017 (Capital Markets
Authority, 2017).

Kenya Equity Market Capitalization (1993-2016)

30

25

20

Billions USD
15

10

0
94 96 98 00 02 04 06 08 10 12 14 16
Year

Source: World Bank

The market capitalization as a percentage of GDP stood at 26%

Kenya Market Capitalization % of GDP (1993-2016)

30

25

20

% of GDP 15

10

0
94 96 98 00 02 04 06 08 10 12 14 16
Year

Source: World bank

The Kenyan capital market has grown rapidly in recent years and has also exhibited
strong capital raising capacity. The main index of the Nairobi Securities exchange is the
NSE 20, an index consisting of 20 of the major listed stocks in the Kenyan market. The
performance of the NSE 20 index is as below:

Kenya NSE 20 Index (Dec 1997- March 2018)

6,000

5,000

4,000
Ksh

3,000

2,000

1,000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

Source: Investing.com

5.3 Money Markets

Unlike the capital market in Kenya, the bond market, however, is still underdeveloped
and dominated by trading in government debt securities. Long-dated corporate bond
issuances are uncommon, leading to a lack of long-term investment capital. The bond
yields in Kenya are as follows:
 10-Year Bond Yields (KEN;US;JAP) 2005-2018

20
Japan Yield
Kenya Yield
16 US Yield

12

Bond Yield 8

-4
06 07 08 09 10 11 12 13 14 15 16 17 18
Year

Source: Investing.com

3-month bond yield for KEN; US; JAP (2004-2018)

24
Japan Yield
20 Kenya Yield
USA Yield

16

12
Yield to Maturity
8

-4
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Year

Source: Investing.com
5.4 Currency Market
The official currency of Kenya is the Kenyan Shilling (KES / KSH). Since the early
1990s, the Central Bank of Kenya has pursued a flexible exchange rate regime.

The most popular Kenya Shilling exchange rate is the USD to KES rate. The
performance of the Kenyan Shilling in comparison to the United States dollar is as
below:
KSH/USD (Jan 1991 - March 2018)
110

100

90

80

70
Price

60

50

40

30

20
92 94 96 98 00 02 04 06 08 10 12 14 16

Year

Source: YahooFinance.com

The exchange rate of the Kenyan shilling slumped dramatically in mid-2011, from about
83 shillings per US dollar to about 100 shillings per US dollar at late 2011. The
depreciation was mainly due to a 25 basis points cut in interest rates by the Central
Bank in January 2011 from 6 per cent to 5.75 per cent, in over-hasty recognition of
good growth prospects,that backfired and boosted inflation. The Central Bank increased
interest rates from 6 per cent in June 2011 to a record high of 18 per cent in December
2011. The depreciation ceased and the shilling resumed to previous trends. The most
recent depreciation of the Kenyan Shilling was experienced in 2015. This was following
the Chinese devaluation where the U.S dollar extended a further upward global rally
against all major currencies. Current-account deficit pressures also put pressure on the
Kenyan shilling during the same period.
 Kenya Shilling Exchange Rate against Major Global Currencies (USD; EUR; GBP)

180

160

140

120

KES 100

80

60

40

20
92 94 96 98 00 02 04 06 08 10 12 14 16
Year
EUR GBY USD

Source: YahooFinance.com

5.5 Outlook for Financial Market In Kenya

Recent Market Developments and Innovations

• M-Akiba, a retail mobile-based savings product/

bond launched in April 2017.

• Exchange Traded Funds - launched in March

2017 to provide investors an opportunity to

invest in gold-backed assets as one of the ways

of diversifying the choice set for capital markets

investors.

• Support for FinTech innovations - CMA and

the Australian Securities and Investments

Commission (ASIC) signed a cooperation

agreement in October 2016 to promote innovation

in financial services in the respective markets and

the Regulatory Sandbox.

• Islamic Financial Services Board Membership

- The CMA was admitted by the Council of the

Islamic Financial Services Board (IFSB) as an

associate member in December 2016. This is a key

step towards the development of Islamic finance

hub in the East African region.

• Increase the number of listings – CMA initiated

business incubator, accelerator and listing

experience initiative to help small and medium

enterprises to list on the NSE.

The Central Bank of Kenya (CBK) is working with regulators in EAC member states
through the Capital Market Development Committee (CMDC) and East African
Securities Regulatory Authorities (EASRA) on a regional integration initiative and has
successfully introduced cross listing of equity shares. The combined use of both the
Central Depository System (CDS) and an automated trading system has moved the
Kenyan securities market to globally accepted standards. Kenya is a full (ordinary)
member of the International Organization of Securities Commissions.
6. Government Finance
6.1 Government Revenue and Expenditure
The government of Kenya has continued to improve its revenue collection mechanisms.

Kenya Total Government Revenue (2001-2017)

9,000,000

8,000,000 2017: KES 8.728B ($8.6B)

2016: KES 7.673B ($7.6B)
7,000,000 2015: KES 6.856B ($6.7B)

6,000,000

Ksh (Millions) 5,000,000

4,000,000

3,000,000

2,000,000

1,000,000
2002 2004 2006 2008 2010 2012 2014 2016
Year
Source: Central Bank of Kenya

The composition of government revenue in terms of tax revenue and non-tax revenue is
as below. Tax revenue continues to be the key component of Kenya´s government
revenue.

Composition of Total Revenue (Tax vs Non-Tax): 2001-2017

2001 2002 2003 2004 2005

2006 2007 2008 2009 2010

2011 2012 2013 2014 2015

2016 2017

Non-tax revenue Tax revenue

Tax collection continues to face major hurdles as most of Kenya´s businesses are in the
informal sector and are not formally registered.

6.2 Government Expenditure

The Kenyan Government´s expenditure has been increased linearly with increase in revenue.
The Central Bank of Kenya data on government expenditure shows increased government
spending from 2015-2017.

Kenya Total Expenditure (2001-2017)

14,000,000
2017: KES 12,103.88B ($121B)
12,000,000 2016: KES 10,368.13B ($103B)
2015: KES 9,207.90B ($92B)
10,000,000

Ksh (Millions) 8,000,000

6,000,000

4,000,000

2,000,000

0
2002 2004 2006 2008 2010 2012 2014 2016

Year

The largest component of government expenditure is recurrent expenditure. Many

stakeholders, including the International Monetary Fund, have raised concerns over the
prevalence of recurrent expenditure over development expenditure in Kenya.

Composition of T otal Expenditure (Development vs Recurrent): 2001-2017

2001 2002 2003 2004 2005

2006 2007 2008 2009 2010

2011 2012 2013 2014 2015

2016 2017

Development Expenditure
Recurrent Expenditure
The increase in recurrent expenditure has been further exacerbated by the devolution of
government functions from a central government to country governments after the
adoption of the new constitution in 2010. The creation of these new administrative posts
greatly increased the wage bill in Kenya leading to a significant part of the revenue
collected to finance recurrent expenditure, and also the repayment of maturing debt. In
the Budget Policy Statement 2018/19, the National Treasury of Kenya proposed that
out of the Sh1.68 trillion revenue, Sh688 billion be allocated to servicing existing public
debt (Standard Media Group, 2018).

Total Revenue vs Total Expenditure in Kenya (2001-2017)

14,000,000

Total Revenue
12,000,000 Total Expenditure

10,000,000

Ksh (Millions) 8,000,000

6,000,000

4,000,000

2,000,000

0
2002 2004 2006 2008 2010 2012 2014 2016
Year

Source: Central Bank of Kenya

The government of Kenya has been following behind in implementation of some

projects due to low spending on the development budget.

6.3 Public Debt

Public debt in Kenya has been on a rapid increase in the past half decade. Data from the
International Monetary Fund World Economic Outlook Indicates that total debt stood
at (debt as of DECEMBER)
 Kenya Governent Net Debt (National Currency): 1998-2017; predictions to 2022

7,000

2016: KES 3384.72 Billion (Appx. $34 Billion)

6,000
2017: KES 4233.88 Billion (Appx. $42 Billion)
2020 estimate: KES 5691.53 Billion (Appx. $57 Billion)
5,000

4,000
Ksh (Billions)
3,000

2,000

1,000

0
98 00 02 04 06 08 10 12 14 16 18 20 22

Year

Source: IMF World Economic Outlook

The debt to GDP ratio has increased over the period,

Kenya net government debt as a percentage of GDP (1998-2018)

60

2014: 44.42%
55 2016: 47.28%
2018: 52.75%
50

% of GDP 45

40

35

30
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Year

Source: IMF WEO

Composition of Public Debt

Outlook for Government Revenue and Expenditure