Tuesday, Jan 31, 2023
International Finance
Economy

Kenya’s betting big on infrastructure

Earlier this year, various organisations placed the East African nation among the fastest growing economies in the world Amoxers Wachira and Veronicah Riba July 10, 2015: Africa has been described as the Dark Continent for many years. However, with economies of a couple of African countries recording growth in recent years, the narrative is quickly changing, with tales of ‘Africa Rising’ growing by the day....

Earlier this year, various organisations placed the East African nation among the fastest growing economies in the world

Amoxers Wachira and Veronicah Riba

July 10, 2015: Africa has been described as the Dark Continent for many years. However, with economies of a couple of African countries recording growth in recent years, the narrative is quickly changing, with tales of ‘Africa Rising’ growing by the day. This is fueled by a renaissance of economies on the back of massive infrastructure development and increased foreign direct investments. Last year, Nigeria overtook South Africa to become the largest economy in Africa after the West African nation recalculated its GDP. In the east, Kenya, the biggest economy in East Africa, has realised achievements of its own.

Earlier this year, various organisations placed Kenya among the fastest growing economies in the world.

According to Bloomberg Survey, Kenya and Nigeria are the only African countries that have made it to the list that ranks China as the fastest growing economy, followed by Philippines.

Ironically, the survey indicates that Kenya will probably grow six per cent in 2015, even as unemployment and poverty remain stubbornly high, with over 40 per cent of Kenyans living below the poverty line. World Bank predictions for 2015 seem to corroborate this report. The latest Kenya Economic Update (KEU) projects the country’s growth to rise from 5.4 per cent in 2014 to up to seven per cent between 2015 and 2017.

This underpins the giant strides that Kenya has taken towards economic prosperity. After re-basing its GDP figures in 2014 to clinch the 10th position among Africa’s biggest economies, Kenya’s economy seems to be on an upward trend. The 2015/16 budget proposals mirror the country’s ambitions. The budget, which topped Kshs 2.1 trillion, has handsome allocations for key areas like infrastructure, which  has been described as one of the growth catalysts that the country, and the continent lacks. Even with the recent robust growth experienced over the past decade, Africa still suffers a major infrastructure deficit.

Kenya’s treasury cabinet secretary Henry Rotich allocated KSh 118. 2 billion for Standard Gauge Railway to be financed by a loan from China.

“We have significantly improved the business environment, rolled out the biggest infrastructure in Kenya’s history — the standard gauge rail, completed key programs in the roads and energy sector and brought down the cost of living.” The minister said the construction of the new railway, initially to run from Mombasa to Nairobi, was progressing well and ahead of schedule.

Other changes to strengthen the financial sector were also introduced.

According to the cabinet secretary, an increase in the minimum core capital (basically, shareholders’ funds) requirement from the current KSh 1.0 billion to Ksh 5.0 billion by December 2018 for banks was proposed in line with best international practices.

This is expected to stir the financial sector as banks seek to meet this requirement.

“Kenya is emerging as one of Africa’s key growth centres with sound economic policies in place for future improvement,” says Diarietou Gaye, the World Bank’s Country Director for Kenya. “To sustain momentum, Kenya needs to continue investing in infrastructure and jobs, improve its business climate, and boost its exports.”

According to Ernst & Young’s Africa Attractiveness survey in 2014, which focused on companies operating or looking to operate in Africa, South Africa, Nigeria and Kenya are considered by businesses to be the most attractive investment destinations in sub-Saharan Africa. South Africa, a member country of the group of fast rising economies referred to as BRICS (Brazil, Russia, India, China and South Africa) has been criticised by experts for its overemphasis on infrastructure, which has apparently not brought down the cost of doing  business. Is Kenya going that way?

“There are no lessons to be learnt from South Africa other than how penal it can prove to fall behind the infrastructure curve,” says Nairobi-based investment analyst Aly Khan Satchu.

The analyst says that beyond the bright prospects that the allocations seem to promise,  there is a huge call for the government to ensure the budget proposals are realised.

“The budget, which topped Kshs 2 trillion for the first time, was bullish and embedded in its calculation was a very high GDP hurdle. Kenyan budgets have an intrinsic bias to undershoot both on expenditure and collection.”

Kenya intends to raise Kshs 1.4 trillion from domestic taxes with a deficit of Kshs 567 billion (9 percent of the GDP) being plugged by external borrowing. According to economists from Institute of Economic Affairs (IEA), a Kenyan think tank, this will have heavy implications on the tax payer.

“Worse still is the trend of having deficit budget when all indicators show that last year alone, more than Kshs 250 billion was returned to the treasury due to low absorption rates for many ministries,” says Raphael Muya, programmes officer at IEA.

Tax implications

Another big disappointment was the lack of change to the personal tax brackets and allowances. With increased inflation and rising cost of living, Kenyans will be worse off.

“We passed a constitution that created a heavy and expensive leadership structure and with the revenue leakages through corruption networks, the common Kenyan is bound to be burdened even more,” says Samson Kivindyo, a young entrepreneur who decries the rising cost of living. The average inflation rate remains 6.87 per cent while the economy does not seem to create more jobs even as it continues to grow.

Future prospects

Despite this, the country seems to be doing well in lowering the cost of doing business. The World Bank ranked Kenya 136th in the world in its latest Doing Business Survey, with Cambodia and Yemen on either side of it, a one point improvement from last year’s ranking.

The bank ranks the economies in 11 areas of business regulations from starting a business, resolving bankruptcy, enforcing contracts, getting electricity, registering property and trading across borders.

Going forward, the government should work on turning around the fortunes of tourism sector, which has been heavily weighed down by global terrorism.

“In addition, the country ought to enter into Public Private Partnerships with local and foreign investors, get tourism back on track by preventing terrorism and, after careful consideration, look into some donor funding in specific areas like health and education,” offers Gitahi Gachahi, the E&Y chief executive for East Africa.

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