Review of GDP good for Kenya’s economy

Kenya Bureau of Statistics will rebase the country’s Gross Domestic Product by changing the base year for its calculation from 2001 to 2009.

The country’s revised GDP is expected to go up by between 15 to 25 per cent taking us to above the $50 billion mark. With an estimated population of 43 million, Kenyans will also become richer on paper and enjoy a GDP per capita of over $1,100 (Sh95,589), up from a current estimate of $943 (Sh81,946).

This will make us cross the benchmark of $1,036 (Sh90,028) set by the World Bank for middle-income nations.

The GDP revision is merely cosmetic and will not affect the daily lives of most average Kenyans. We will still remain tenth in the world among countries with the highest number of poor people.

Despite these realities, there are a number of principal benefits and important implications of the GDP recalculation.

GET STATISTICS RIGHT

First, there is nothing wrong with getting our statistics right. Rebasing our GDP just means we were ignorant of our exact wealth position.

The new knowledge does not actually change our wealth position; it only makes us aware of our net worth before the wealth accounting exercise. Rebasing may change nothing but it means measuring better.

Our current system causes more confusion than enlightenment. Is our wage bill 51 per cent of revenues or 55 per cent of revenues? And what per cent of GDP is it?

We have numbers all over the place quoted by different agents of the same government. It's a dog’s breakfast. Economic indicators are used to make critical decisions that allocate scarce resources and we must ensure they are accurate.

It could harm the economy if the government makes judgments based on erroneous statistics. The government will not be able to make informed decisions if existing GDP data are too weak or the needed data do not exist. IMF recommends that GDP be rebased every five years.

IMPACT ON INVESTORS

Second, the revised GDP will lead to some changes in the competitive landscape. Kenya’s revised GDP will definitely have a psychological impact on foreign investors.

If you are an emerging or frontier markets investor, you will look at for example the current stock market capitalisation to GDP ratio to see if there is an upside potential. Currently our stock market capitalisation to GDP is around 36 per cent.

Post-announcement, the ratio is likely to come down significantly. Whereas the rebasing suggests that our capital markets may be farther to the “promised land”, investors will see it differently as they would be more interested in the upside potential of our market compared to say South Africa’s which has a 159 per cent stock market capitalisation to GDP ratio.

Inbound foreign direct investment into Africa will hopefully also look at basing their operations in the country and use Kenya as entry point into the continent.

Third, the revised GDP number and its composition will tell us more about the nature of our current economy. I suspect the services sector will probably account for a bigger per cent of the GDP which could be an explanation of why Kenya has been experiencing joblessness.

It would probably show us that we have been managing an import-dependent economy and understanding this could help us put in place the necessary policy measures to remedy the situation.

POLICY IMPLICATIONS

Finally, the revised GDP number will impact on key dependent ratios such as debt to GDP, fiscal deficit to GDP, trade to GDP, tax to GDP etc, vis-a-vis the country’s peers and the impact on foreign investors’ perception of Kenya.

There will be possible policy implications of this new reality. The expected lower debt to GDP and deficit to GDP post-rebasing for example, will give the government some breathing space to borrow and drive national development through infrastructure development.

Assuming that more allowance for borrowing will translate to growth projects, then, it means the rebased GDP will translate into better infrastructure for the country.

Prior to the GDP rebase, our tax revenue’s contribution to GDP looked quite impressive and was second best in the continent (to South Africa’s).

The Kenya Revenue Authority will have a job in its hands post rebasing. The rebasing means a lower contribution from tax revenue to GDP, creating a wide gap as to the extent to which the taxman is able to generate revenue to government coffers.

The GDP rebasing is definitely a positive move and a great achievement for the country.

Those charged with managing the economy will now have more access to credible information on the GDP.

Mohamed Wehliye is senior vice-president, financial risk management, Riyad Bank, Saudi Arabia