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Kenya: East Africa’s Economic Powerhouse

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Nairobi Kenya
Kenya’s capital Nairobi is one of East Africa’s largest cities

Another agricultural product that makes Kenya competitive compared to its neighbors is black tea. Kenya is the world’s number-one exporter of black tea. (Tanzania and Uganda are also major producers of black tea.) Kenya is competitive in tea production and export not least due to the fact that is the home of the Mombasa Tea Auction Center, the second largest tea auction venue in the world, which, among its other advantages, provides direct feedback of market prices to factories and farmers. Additionally, favorable weather conditions and tropical rich volcanic soils result in the production of high grade tea that has a unique flavor, making it the best in the world. Incentives offered by the government, such as value-added tax exemptions, withholding tax holidays for firms that process and package tea, and Export Processing Zones that offer favorable conditions for exporters, make Kenya’s tea industry a competitive cluster in the region and in the world.

In terms of intra-East African trade, Kenya ranks at the top, averaging 37 percent in 2011-2012, followed by Uganda at 24. The intra-regional trade is driven by the manufacturing industry, and particularly the Fast-Moving Consumer Goods (FMCGs) and processed products that are major drivers of the economy. Kenya’s competitive edge in this industry stems from the diversification of its exports basket, which makes it less vulnerable to shocks. Additionally, compared to the region, the country’s transport system, including roads, the Mombasa port, and the airports, is more advanced than those of most other countries in the region (though there are bottlenecks at Mombasa). Kenya, Uganda, and Rwanda have recently started building a superhighway from Mombasa to Kigali that will ease the movement of cargo through these countries. The fact that Kenya is one of the only two East African countries that is not landlocked (the other being Tanzania) gives the country a competitive advantage in terms of international trade. Kenya is also the region’s major exporter and importer with the rest of the world.

Kenya is also very competitive in terms of human capital. It ranks at the top in terms of adult literacy rates. The adult literacy rate in Kenya is 87 percent, followed by Uganda at 73.2 percent, Tanzania at 72.9 percent, Rwanda at 70.7 percent and lastly Burundi’s literacy rate is 66.6 percent. In comparison to other East African countries, meanwhile, Kenya has the highest public expenditure in education at 17.7 percent between 2008-2009 and 2011-2012, compared to Uganda, which spends an average of 10 percent. Education plays a major role in increasing productivity and economic growth and reducing poverty and inequality. Studies comparing the state of primary schools in Kenya, Uganda, and Tanzania conclude that a child from a poor household in Kenya is more likely to succeed than a child from a wealthy household from Tanzania or Uganda. Tanzania exhibits the worst performance among the three East African countries. Kenya also ranks on top in terms of enrollment of students in higher education, followed by Uganda and then Tanzania. In 2012, Kenya enacted the Universities Act, which is aimed at improving the quality of education at all levels by promoting separation of governance of universities and other tertiary institutions and strengthening its technical sector by separating it from the university sector. The Global Competitiveness Index (GCI) 2013-2014 ranks Kenya 44th in quality of education out of 148 countries. By comparison, Rwanda ranks 51st, Uganda 82nd, Tanzania 100th, and Burundi 143rd.

Kenya’s private sector has been more dynamic than that of the other members of the community, which has translated into a more competitive and innovative economy relative to its neighbors. The service sector has been a huge contributor to the growth of the private industry in Kenya. This sector is the largest contributor to GDP growth since 2007 in the country, according to the IMF regional economic outlook for Africa. Kenya has emerged as a technological and financial hub for East and Central Africa. A major techno-city project is underway in Konza, 40 miles from Nairobi, that aims to reinforce Kenya’s reputation as the regional technology leader in Africa. The project has been dubbed the “Silicon Savannah.” IBM also set up its first African research lab in Nairobi, following the likes of Google, Microsoft, and Intel, which also have their regional headquarters in Nairobi.

The Nairobi securities exchange (NSE) is among the best in Africa. Participation of foreign investors in the NSE has always been encouraged and their interests protected since independence. This is demonstrated by legislation such as the Foreign Investors Act of 1964, which aimed to protect foreign investors and allowed foreigners to repatriate their earnings. Several institutional changes have been instituted to strengthen the markets, such as the establishment of the Capital Markets Authority (CMA) in 1990. The CMA’s mission is to protect investors’ interests, promote market development through research of new products and institutions, and ensure proper conduct of all licensed persons and market institutions. The introduction of the Central Depository System in 2004 further reinforced the integrity of the financial system by providing clearing and settlement services in the Kenyan Capital Markets by offering a central custody that enables simplified, swift, and secured services to the investors. Moreover, the automation of the trading system in 2006 greatly enhanced the efficiency of the Nairobi Securities Exchange. Just recently the NSE announced that it will upgrade its IT infrastructure to support the diversification of trading securities, including derivatives and futures. Market capitalization increased from $453 million in 1990 to $14.8 billion in 2012. Kenya has the most advanced capital market in the region and has over 60 listed companies on the stock exchange. The rest of the East African countries have less than 20 listed companies; Burundi does not yet have a stock exchange.

It should come as no little surprise that, in 2012, Kenya attracted the most private equity deals in East Africa. These involved investments in firms that have not gone public and are therefore unlisted on the stock exchange. The main reason for this large volume of investment is that Kenya is widely viewed as the regional economic hub because of the financial infrastructure that is already in place.

Another area in which Kenya is doing tremendously well in comparison to the other East African countries and the rest of the world is the mobile money services sector. The country is ranked number one in the world in mobile money. Mpesa, the flagship mobile phone banking product, put Kenya at the forefront of mobile money transfers and mobile banking services. Mpesa’s success in Kenya is attributed to several factors: the need to provide a solution to the high cost of sending money from one place to another; the presence of a dominant player in the market (Safaricom), which was able to develop an efficient agent network; and support from the regulatory body (Central Bank of Kenya), which advocated for regulation to follow innovation.

The other East African countries have made considerable strides in mobile money, but serious challenges remain. In Tanzania, the inefficiency of the agent network and the lack of understanding of mobile money applications by potential and current users present a major problem in the mobile money industry. The major challenge in Uganda arises from the fact that the Ugandans lack a national identification system like the one in Kenya. Transferring money thus becomes a challenge.

Kenya boasts a market-based economy and the most liberal economic system in East Africa. A market-based system, among its other advantages, promotes economic efficiency and competition and encourages foreign investment. Since independence, the market structure has changed from one in which prices are influenced by the government to one in which they are determined by the market forces of supply and demand. Kenya has been a pioneer in embracing freedom of enterprise, and this manifests itself clearly in the broadcasting industry, where Kenya Television Network (KTN), the first non-pay, privately-owned TV station in Africa, was founded in Kenya. Liberalization of the agricultural sector was undertaken in the 1980s and 1990s, reducing government’s control of agricultural production and marketing. This led to an environment that encouraged private sector participation in agriculture.

Moreover, building on the African Growth and Opportunity Act (AGOA), Kenya has developed a textile and apparel industry that exports to the United States. AGOA is a law that was passed in the United States that offers incentives for African countries to export to the United States in an effort to build free markets and open African economies. The World Bank recently hailed Kenya’s private sector as the most vibrant and dynamic in East Africa. The Kenyan economy has been market-based for a longer time than all the other East African economies, and this has given it a competitive edge in attracting foreign investment to the country. Kenya has consistently attracted relatively high levels of foreign direct investment (FDI). FDI flows to Kenya have consistently been to transformative industries such as high technology. The recent FDI flows to Uganda and Tanzania are driven by recently discovered resources and are geared towards extractive industries. Kenya is the main source of FDI to its neighbors; outward investments to other countries have increased from $9 million in 2011 to $16 million in 2012. There are big Kenyan companies that operate throughout the East African region (Equity Bank, Kenya Commercial Bank, Nation Media Group).

The recent planning documents issued by the Kenyan government, The Economic Recovery Strategy (ERS) for Wealth and Employment Creation and Kenya Vision 2030 , detail carefully designed strategies that focus on growing and developing the economy. Vision 2030 in particular aims to transform Kenya to a newly industrialized, middle-income country by 2030. It is based on three pillars: the economic pillar, which seeks to maintain and sustain economic growth of 10 percent per year for 25 years; the social pillar, which seeks to invest in Kenyans so as to improve the quality of life in education, health, and housing (among other public goods); and the political pillar, which focuses on moving the nation forward as one and envisions a democratic system that is issue-based, people-centered, results-oriented, and accountable to the public.

In conclusion, Kenya remains a vibrant and promising economy in East Africa, one that is resilient and has the ability to bounce back after political shocks such as the 2007-2008 election violence and the Westgate Mall terrorist attack in Nairobi. There are challenges that the country still needs to address, above all poverty, inequality, and access to health services. The recent discovery of resources such as oil, base titanium, coal, and underground water, augur well for the country’s future economic performance.

 

By: Mwangi S. Kimenyi and Josephine Kibe

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