Out-Law News 2 min. read

World Bank says ‘investments in business-friendly Kenya set to drive growth’, but risks remain


Kenya’s economy is set to grow next year boosted by several “key drivers” including a vibrant services sector, enhanced construction and increased public investment in energy and transportation, according to a new report from the World Bank.

The bank’s ‘Kenya Economic Update’ (KEU) (196 MB / 102-page pdf), prepared in consultation with the Kenya Economic Roundtable, said the country’s gross domestic product (GDP) is projected to grow above 6% in 2017 and 2018.

The KEU said the positive growth trend is in line with the World Bank Group’s latest Ease of Doing Business Report (96-page / 3.49MB PDF), which pegged Kenya as “a top global improver” for two consecutive years. “Kenya moved up to the 92nd spot compared to 113 in the previous year and is now among the top five economies in sub-Saharan Africa where it is easiest to do business,” the report said.

KEU co-author and lead public sector specialist Jens Kromann Kristensen said Kenya has the potential “to enhance growth prospects beyond the prevailing levels by increasing the productivity of public investments”. However, he said while public investment in a range of infrastructure projects “is generating strong returns, the weak execution of some others holds back what could be an even greater catalytic impact of public investment on economic growth”.

In addition, Kenya’s economy is still “remains vulnerable to potential risks” – including possible knock-on effects of the UK’s decision to leave the European Union.

“With the UK being home to the largest Kenyan diaspora, it is a significant source of remittances for Kenya, accounting for about a third of total remittances,” the KEU said.

“The flow of remittances from the UK to Kenya has nearly doubled from $275 million in 2010 to $520m in 2015, and is the single largest source of foreign exchange (about 2.6% of GDP in 2015),” the KEU said. But with both wage growth in the UK and the pound “expected to be weaker in the light of the UK’s vote to leave the EU, this is likely to dampen remittance inflows to Kenya”.

“We estimate that the growth in total remittances to Kenya could be lower by between 0.9 and 1.3 percent over a two-year period compared to the status quo,” the KEU said.

Capital flows to Kenya are also “likely to be hit from both direct and indirect channels as a result of the UK’s vote to leave the EU”. Directly, the UK is major contributor to capital flows to Kenya, the KEU said. “UK investors are the largest contributors to the stock of foreign direct investment in Kenya. From agriculture, manufacturing to services sectors (including major banks) there are major UK subsidiaries that operate in Kenya, hence a hit to parent companies in the UK could be deleterious to their Kenyan operations.”

Nevertheless, the KEU said Kenya continues to be “one of the bright spots in sub-Saharan Africa”. “With economic growth rates sustained at above 5%, Kenya has outperformed the regional average, for eight consecutive years. Robust domestic demand emanating from private consumption and government investment are the key drivers of growth, underpinned by a stable macroeconomic environment, lower oil prices, diversification, improved security perceptions, and ongoing structural reforms.”

“Medium term economic prospects for Kenya remain robust and ongoing public infrastructure investments will continue to play a ‘crowding-in’ role, easing transport and energy costs, and supporting economic expansion in construction and industry,” the KEU said.

The African Development Bank said in 2014 that recent discoveries of oil, gas and coal could help propel Kenya to “middle-income country status in the medium term”. The bank said in its Country Strategy Paper for Kenya for 2014-18 (53-page / 1.14 MB PDF) that it wanted to work with development partners and the private sector to “leverage funding” for infrastructure development in Kenya, rather than act as a sole financier.

Last year, Kenya announced plans to finance 57 “key infrastructure projects” under private-public partnership schemes.

In a related move, Kenya’s president Uhuru Kenyatta signed into law several new bills which the government said would “revolutionise” the business environment for firms operating in the East African nation. Kenyatta said the government was “dedicated to transforming” requirements for businesses and he called on state agencies and the private sector “to change their approach to doing business”.

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