Missing links in Kenya’s economic growth

When Kenya launched the standard gauge railway stretching 487 kilometres from the port city of Mombasa to Nairobi, the country was keen to make a huge economic statement.

The message that the East African economic giant was banking on infrastructure to bolster its economic leadership in the region was loud and clear.

However, despite these massive investments, opinion is divided as to whether Kenya will stay on the lead in the near future.

This doubt is informed by the fact that Kenya seems to be allowing golden economic opportunities to slip through its fingers.

Analysts agree that Kenya has all the ingredients to continue being the hub of commerce in East Africa, but only if it takes serious steps to promote the growth of the pillars that have sustained it at the top.

Because of missed opportunities, Kenya has allowed Tanzania whose gross domestic product has been growing faster, to threaten its regional powerhouse status. In the larger eastern Africa, Ethiopia has since overtaken Kenya.

Where did Kenya lose it? Exports to the neighbouring East Africa are dwindling as the countries in the region individually work extra harder to raise their industrial standing and lower dependency on Kenya.

In its latest Economic Update, the World Bank says Kenya’s merchandise trade performance is fast decreasing due to the influx of cheap goods from China into Uganda and Tanzania that are the major export destinations for Kenya.

The data show that exports contracted by an estimated 23.3 per cent in 2016 despite the region’s relative resilience underlined by a growth in the EAC intra-regional trade.

This set of factors is increasingly shaking Kenya’s economic dominance in the region where the country’s competitiveness has remained highest over time.

China exports

“Kenya has become less competitive in the EAC due mostly to cheaper products to EAC markets from elsewhere, in particular, East Asia (such as China). For instance, in both Tanzania and Uganda, the share of China exports has increased from some 45 per cent to 60 per cent over the past decade. This has not only driven down market share of Kenya’s exports but also that of other countries,” World Bank said it its latest Economic Update.

The narrowing space in the EAC export is affecting both agricultural and manufactured products. While Ugandan and Tanzanian imports grew at 12.4 and 16 per cent respectively over the 2000-2015 period, their imports from Kenya only increased by 4.3 per cent and 6.3 per cent underlining the worrying trend.

Nairobi-based economic analyst Robert Shaw told Smart Company that while Kenya’s anchor weapon for economic leap remains infrastructure growth, the country is yet to take full advantage of the projects to extend the lead in regional economics.

It is also worth noting that the benefits of some of the mega infrastructure being implemented will not be realised immediately.

Another worrying trend is that a section of economists has cast doubt on the potential of some the key projects to be the launchpad for economic takeoff as they are touted.

Mr Shaw opines that there is a need to keep the neighbouring countries in economic partnership by staying ahead and satisfying their needs in a manner that will keep the benefits to the country.

“I think Kenya needs to look at the region as a partner that we need as much as they need us. For a long time, we have enjoyed our strategic advantage to the extent that the region is keen to reduce dependency on Kenya. That is why Kenya must take full advantage of any opportunity to increase partnership and trade in the region with the focus on widening competitiveness,” Mr Shaw said.

The country also missed critical opportunities in the construction of mega projects by allowing billions worth of materials, which could have been sourced locally, to be imported. Getting these materials from local suppliers would have had a huge economic multiplier effect.

Experts say the country should have brought together all the manufacturers whose products could be used in the SGR, brief them on the required standards and quantities to prepare them for supply.

This was not done and now more than 70 per cent of materials supply came from China, leaving the local manufacturers jostling for a share of the measly 30 per cent. Thus, local firms lost a vital opportunity to gain capital for expansion and knowledge on international standards.

It remains unclear whether the second phase of the SGR has been contractually-fixed to give locals a piece of the multi-billion supply cake as was promised last year.

Analysts also aver that poor planning in almost every sector is Kenya’s undoing. The challenges such as heightening food inflation that has driven the cost of living to a six-year high of 11.7 per cent, way above the government’s projected ceiling, could have been averted with better planning.

Paul Gachanja, who heads the Department of Economic Theory at Kenyatta University in Nairobi pointed fingers at Kenya’s economic challenges to over reliance on rain-fed agriculture. This, he said has let the economy down and pushed Kenya to rely on imports of even essential food crops such as maize.

“We need a deliberate effort to build dams and engage in irrigation farming that will see Kenya food secure and even boost our agriculture exports to the region which has been falling lately. Kenya still has a critical place in the regional economics but we must get it right on long-term planning because our neighbours are getting cleverer,” says Dr Gachanja.

Agriculture, which is the engine of the economic growth, has been lately going through one rough patch after another.

This led to a decelerated growth of 4.4 per cent in 2016, a significant drop from the 7.2 per cent projection, according to the latest official data. This trend ought to concern Kenyans because when this crucial sector coughs, the fundamentals of the economy catch a cold.

The country’s industrial sector has stagnated at 15-16 per cent of GDP, with manufacturing stuck at 10 per cent per year for the last two decades.

This is undermining the country’s industrialisation efforts. Few economies in the world have been able to develop without putting manufacturing at the centre of its plans. This is clearly illustrated by most Asian economies which took off on the back of enhanced support for local industries.

They had clear policies favourable to homegrown businesses and this led them to achieve industrialisation quicker. Experts say Kenya is yet to borrow a leaf from these glaring examples.

For instance, ‘Buy-Kenya-Build-Kenya’ policy remains largely on paper as the government is not robustly driving it.

Another area that’s hampering Kenya’s aspiration for economic take-off is the high costs of labour. The World Bank says the country’s labour costs remain high relative to output and regional peers, discouraging investments.

Although Kenya has a better quality pool of skills and talents than its regional partners, it is not using them appropriately, especially in the implementation of big projects.

Contracted foreign firms bring their own employees, making Kenya miss an opportunity in tax collection and skills transfer.

“While Kenya has invested in broadening access to education, the payoff to educational investment has been low. Many educational assets sit idle because of mismatches, reinforcing the impression that Kenya is not making productive use of its available labour force,” the global lender wrote in the Economic Update.