April 2019 | Edition No. 19 Inclusive Growth Private Inclusive Growth Sector-led Private growth Sector-led GDP growth Growth GDP Growth Agric Agric Productivity Productivity Interest Rate Caps & Weak Interest Rate Caps & Fiscal Consolidation Weak Fiscal Consolidation Private Sector Credit Private Sector Credit Unbundling the Slack in Private Sector Investment Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction Unbundling the Slack in Private Sector Investment Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction © 2019. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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TABLE OF CONTENTS ABBREVIATIONS........................................................................................................................................................................................................................................................... i FOREWORD...................................................................................................................................................................................................................................................................... ii ACKNOWLEDGEMENTS.......................................................................................................................................................................................................................................... iii EXECUTIVE SUMMARY............................................................................................................................................................................................................................................ v PART 1: THE STATE OF KENYA’S ECONOMY 1. Recent Economic Developments ................................................................................................................................................................................ 2 1.1. Global economic prospects have darkened ............................................................................................................................................................................ 2 1.2. The Kenyan economy rebounded in 2018 and economic activity remains steady in Q1 of 2019.......................................................... 2 1.3. On the demand side, growth is supported by the recovery in private consumption ................................................................................... 5 1.4. Fiscal consolidation is underway although its quality could be improved............................................................................................................ 6 1.5. The macroeconomic environment remains stable but the recovery in private sector credit growth is anemic .......................... 11 1.6. Kenya’s external account has improved....................................................................................................................................................................................... 13 2. Outlook................................................................................................................................................................................................................................. 15 2.1. Kenya’s medium-term outlook remains stable, despite drought challenges and a less favorable external environment ...... 15 2.2. Private consumption is expected to aid growth in the medium term..................................................................................................................... 16 3. Risks to the Outlook......................................................................................................................................................................................................... 17 3.1. Domestic risks .............................................................................................................................................................................................................................................. 17 3.2. External risks................................................................................................................................................................................................................................................... 18 4. Policy options for building resilience and supporting inclusive growth ..................................................................................................... 18 4.1. Rebuilding macroeconomic policy buffers through prudent fiscal policy and reviving potency of monetary policy ............. 18 4.2. Monitoring implementation progress in structural and institutional reforms for the inclusive growth agenda........................... 19 PART 2: SPECIAL FOCUS 5. Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction ................................................................................ 22 5.1. Introduction................................................................................................................................................................................................................................................... 22 5.2. Recent trends in agricultural output in Kenya ......................................................................................................................................................................... 22 5.3. Agricultural productivity and linkages to poverty reduction in Kenya..................................................................................................................... 26 5.4. Factors underlying low productivity............................................................................................................................................................................................... 28 5.5. Policy recommendations to boost agricultural productivity.......................................................................................................................................... 31 REFERENCES ................................................................................................................................................................................................................................................................... 35 STATISTICAL TABLES ................................................................................................................................................................................................................................................................... 37 SPECIAL FOCUS: ANNEX ......................................................................................................................................................................................................................................................... 67 LIST OF FIGURES Figure 1: Global growth prospects have moderated......................................................................................................................................................................... 2 Figure 2: GDP growth in the EAC countries is projected to be robust ................................................................................................................................... 2 Figure 3: The Kenyan economy has rebounded .................................................................................................................................................................................. 3 Figure 4: The rebound was driven by a bumper harvest ................................................................................................................................................................ 3 Figure 5: Output of selected crops has recovered............................................................................................................................................................................... 3 Figure 6: A gradual uptick in industrial activity is underway......................................................................................................................................................... 3 Figure 7: Selected output in manufacturing reveal a sluggish recovery............................................................................................................................... 4 Figure 8: The Purchasing Managers’ Index (PMI) indicates positive business sentiment ............................................................................................ 4 Figure 9: The services sector’s contribution to GDP growth remained resilient .............................................................................................................. 5 Figure 10: Private consumption supported the rebound.................................................................................................................................................................. 5 Figure 11: Private investment contribution to GDP growth remains weak............................................................................................................................. 6 Figure 12: The negative contribution from net exports to growth is moderate.................................................................................................................. 6 Figure 13(a): The overall fiscal balance is narrowing ................................................................................................................................................................................ 6 Figure 13(b): Kenya’s fiscal balance is wider relative to EAC peers .................................................................................................................................................. 6 Figure 14: Government spending has picked up moderately after a steep cut in FY2017/18................................................................................... 7 Figure 15: Yields on government securities have come down ..................................................................................................................................................... 7 Figure 16: Tax revenue collection as a share of GDP is falling.......................................................................................................................................................... 7 Figure 17: Actual revenue growth over time relative to underlying trend (2013-18)....................................................................................................... 9 Figure 18: Public debt has stabilized after a rapid rise in previous years ................................................................................................................................. 9 Figure 19: Pubic debt moderation is driven by a decrease in the primary balance ......................................................................................................... 9 Figure 20: Inflation remains within the target range ............................................................................................................................................................................ 11 Figure 21: Inflation remains low across the EAC .................................................................................................................................................................................... 11 Figure 22: Low food inflation off-set energy inflation resulting in low overall inflation.................................................................................................. 12 Figure 23: The stability in exchange rate continues to provide a nominal anchor to inflationary expectations ........................................... 12 Figure 24: Private sector credit growth remains subdued ................................................................................................................................................................ 13 Figure 25: Synchronized collapse of credit in the EAC region ........................................................................................................................................................ 13 Figure 26: Higher non-performing loans constrain lending conditions................................................................................................................................... 13 Figure 27: Interbank rates and volumes remain volatile..................................................................................................................................................................... 13 Figure 28: The current account deficit has narrowed........................................................................................................................................................................... 14 Figure 29: The nominal and real effective exchange rates are broadly stable ..................................................................................................................... 14 Figure 30: Remittance inflows have increased sharply........................................................................................................................................................................ 14 Figure 31: Government and corporate loans are the major flows financing the current account deficit........................................................... 14 Figure 32: Official foreign reserves buffers are comfortable ............................................................................................................................................................ 15 Figure 33: GDP growth is projected to accelerate slightly over the medium-term........................................................................................................... 16 Figure 34: The ongoing fiscal consolidation is expected to continue into the medium term................................................................................... 16 Figure 35: Sector contribution to GDP growth......................................................................................................................................................................................... 23 Figure 36: Growth rates for agriculture, manufacturing & retail sectors.................................................................................................................................... 23 Figure 37: Subsector contribution to agriculture GDP ........................................................................................................................................................................ 23 Figure 38: Annual growth rate in real agriculture value added ..................................................................................................................................................... 23 Figure 39: Maize yields in selected African countries, 2005-16....................................................................................................................................................... 24 Figure 40: Bean yields in selected African countries, 2005-16......................................................................................................................................................... 24 Figure 41: Agricultural TFP for Kenya and selected countries.......................................................................................................................................................... 24 Figure 42: Key trade indicators for the agro-processing sector, selected countries.......................................................................................................... 25 Figure 43a: Maize yield and poverty by province in 2015/16............................................................................................................................................................. 26 Figure 43b: Bean yields and poverty by province in 2015/16............................................................................................................................................................. 26 Figure 44: Maize yield decile and poverty rates in rural Kenya 2015/16 .................................................................................................................................. 27 Figure 45a: Poverty rates............................................................................................................................................................................................................................................ 27 Figure 45b: Household type by activity............................................................................................................................................................................................................ 27 Figure 46: Major crops produced....................................................................................................................................................................................................................... 28 Figure 47: Percent of cultivated land allocated to each crop........................................................................................................................................................... 28 Figure 48a: Agricultural input use........................................................................................................................................................................................................................ 28 Figure 48b: Agricultural input expenditure.................................................................................................................................................................................................... 28 Figure 49a: Subsistence household input use............................................................................................................................................................................................. 29 Figure 49b: Market-selling household input use........................................................................................................................................................................................ 29 Figure 50: Comparisons of Kenya’s fertilizer consumption against cereal productivity, selected countries...................................................... 29 Figure 51: Trends in DAP fertilizer prices....................................................................................................................................................................................................... 30 LIST OF TABLES Table 1: H1 of FY2018/19 fiscal out-turn (% of GDP)............................................................................................................................................................................ 8 Table 2: Medium term growth outlook (percent, unless otherwise states).......................................................................................................................... 15 Table 3: Implementation progress for structural and institutional reforms........................................................................................................................... 20 LIST OF BOXES Box B.1: The macroeconomic impact of delays in public payment........................................................................................................................................... 10 Box B.2: Economic recovery in the absence of sufficient credit to the private sector.................................................................................................... 12 Box B.3: Using mobile technology to enhance food supply chains by Twiga Foods ..................................................................................................... 25 Box B.4: Challenges facing the general fertilizer subsidy program ............................................................................................................................................ 30 Box B.5: Public Agricultural investments between 2013/14 and 2016/17............................................................................................................................. 32 ABBREVIATIONS AGRA Alliance for a Green Revolution in Africa ASAL Arid and Semi-Arid Land ASTGS Agricultural Sector Transformation and Growth Strategy CBA Commercial Bank of Africa CBK Central Bank of Kenya CBPP Contagious Bovine Pleuropneumonia CBR Central Bank Rate CGD Center for Global Development COMESA Common Market for Eastern and Southern Africa DAP Diammonium phosphate fertilizer DSA Debt Sustainability Analysis EAC East African Community EAGC Eastern Africa Grain Council EMBI Emerging Markets Debt Index EMDE Emerging Markets and Developing Economies EU European Union FoB Free on Board FOs Farmer Organizations FY Fiscal year GDP Gross Domestic Product H1, H2 First, Second Half ha Hectare ICT Information Communication Technology IMF International Monetary Fund KCB Kenya Commercial Bank KEU Kenya Economic Update Kg Kilogram KIHBS Kenya Integrated Household Budget Survey KMRC Kenya Mortgage Refinancing Company KNBS Kenya National Bureau of Statistics KRA Kenya Revenue Authority MFMod Macroeconomic and Fiscal Model MOALFI Ministry of Agriculture; Livestock Fisheries and Irrigation MOH Ministry of Health MoIT Minstry of Industrialization, Trade and Enterprise MoLands State Department of Lands MoPW State Department of Public Works MT Metric Tonnes MTDMS Medium Term Debt Management Strategy NCPB National Cereals and Produce Board NHIF National Health Insurance Fund NPL Non-Performing Loans NSE Nairobi Security Exchange NT National Treasury PDMO Public Debt Management Office PEAS Public Expenditure of Agriculture Sector PMI Purchasing Managers’ Index PPP Purchasing Power Parity PPR Peste des Petit Ruminants SGR Standard Gauge Railway SMEs Small and Medium Enterprises SSA Sub-Saharan Africa TFP Total Factor Productivity US United States VAT Value Added Tax y-o-y Year on year i April 2019 | Edition No. 19 FOREWORD The 19th edition of the Kenya Economic Update comes against a backdrop of a strong rebound in Kenya’s GDP growth supported by favorable harvests in 2018, improved investor sentiment and a stable macroeconomic environment. Nonetheless, delays in the March-May 2019 rainy season and a growing need for emergency interventions to deal with food shortages in several counties is a reminder of the outstanding challenges in managing agricultural risks in Kenya. Against this background, the Special Focus topic makes a timely contribution by highlighting a few of the many factors underlying low agricultural productivity and what can be done to transform the sector and deliver on food and nutritional security. The report has three key messages. First, the Kenyan economy rebounded in 2018-thanks to a recovery in agriculture and a still resilient services sector. Nonetheless, the demand side shows significant slack with growth driven purely by private consumption as private sector investment lags and government spending is slowing due to planned fiscal adjustment. The benign demand pressure is reflected by a lack of adequate credit to the private sector, slow demand for industrial imports, and weak profitability by corporates. The medium-term growth outlook is stable but recent threats of drought could drag down growth. The Bank’s growth projection for 2019 is for a slight decrease to 5.7 percent, before rising to about 5.9 percent over the medium term. Second, boosting credit growth to the private sector and improving fiscal management could help strengthen aggregate demand and economic growth. Regarding private sector credit growth (which stands at 3.4 percent in February 2019), policy could intervene by addressing factors that led to imposition of interest rate caps and by building a consensus for its eventual reform. Making these changes will also restore the potency of monetary policy, which is essential in responding to shocks emanating from changes to the business cycle. With regard to the potential for improving fiscal management, there is scope to enhance revenue mobilization, improve promptness of payments to firms that trade with the government to restore liquidity, and strengthen debt management by putting in place an electronic trading platform for issuance of government securities. Finally, accelerating the implementation of structural reforms aimed at crowding in private sector participation in the Big 4 development agenda remains crucial. Third, and regarding the Special Focus topic, a two-pronged policy suggestion is proposed, including measures to transform agricultural productivity and initiatives to boost farmer’s income with improved farm gate prices. In order to transform the sector’s productivity, there is need to reform the fertilizer subsidy program to ensure it is efficient, transparent and well targeted; invest in irrigation and agricultural water management as well as other enabling infrastructure; and leverage modern agricultural technology to generate a wide range of agricultural support applications, including e-extension services. Secondly, and to boost farm gate prices and farmers’ incomes, policy could seek to end post-harvest losses and marketing challenges by fast-tracking implementation of the national warehouse receipt system and a commodities exchange; and by scaling-up agro-processing and value addition to increase returns on agricultural produce. C. Felipe Jaramillo Country Director for Kenya World Bank April 2019 | Edition No. 19 ii ACKNOWLEDGEMENTS The production of the nineteenth edition of the Kenya Economic Update is a joint effort from a dedicated team of staff from the Macroeconomic Trade and Investment practice. The preparation of the report was led by Peter W Chacha and Allen Dennis. Part one – The State of Kenya’s Economy was written by Angélique Umutesi, Patrick Chege, Celina Mutie, Peter W Chacha, and Sarah Sanya. Part two – Transforming agricultural sector productivity and linkages to poverty reduction was written by Ladisy Chengula, Tim Njagi, Peter W Chacha, Utz Pape, and Alistair Haynes. The team would like to thank Anne Khatimba and Christine Wochieng for providing logistical support, Keziah Muthembwa and Vera Rosauer for managing communication and dissemination, and Robert Waiharo for design and layout of the report. We are also grateful to Paul Clark for excellent editorial support. The report was peer reviewed by Rachel Sebudde (Senior Economist), Aghassi Mkrtchyan (Senior Economist), and Diego Arias Carballo (Lead Agriculture Economist). The team received overall guidance from Abebe Adugna (Practice Manager, Macroeconomic Trade and Investment), Philip Schuler (Lead Economist for Kenya, Rwanda, Uganda, and Eritrea), Johan Mistiaen (Program Leader for Kenya, Rwanda, Uganda, and Eritrea), and Felipe Jaramillo (Country Director for Kenya, Rwanda, Uganda, and Eritrea). We are also grateful to our continued collaboration with key policy makers in Kenya in the production of this Update. Most of the data used in the analysis was obtained from the Kenya National Bureau of Statistics (KNBS), the Central Bank of Kenya (CBK) and the National Treasury. The preliminary findings in this report were shared with the National Treasury and Ministry of Planning, the Kenya Revenue Authority (KRA), and the CBK. Furthermore, in preparation for this report, the team solicited views from a broad range of private sector participants. iii April 2019 | Edition No. 19 EXECUTIVE SUMMARY 1. The Kenyan economy rebounded in 2018 and million (or 5.3 months of import cover) in 2018 relative economic activity in the first quarter of 2019 was healthy, to 2017. This continues to provide a comfortable buffer although emerging drought conditions could curtail against external short-term shocks. GDP growth for the remainder of the year. The economy expanded by 6.0 percent in the first three quarters of 4. The ongoing fiscal consolidation has halted the 2018 compared to 4.7 percent during the same period in rapid rise in the stock of public debt. Notwithstanding 2017 driven by strong private consumption in part due underperformance in revenues, the fiscal deficit narrowed to improved income from agricultural harvests in 2018, to 6.8 percent in FY2017/18 from 8.8 percent of GDP in remittance inflows, and lower food prices. The Bank’s GDP FY2016/17 due to a significant contraction in development growth estimate for 2018 is about 5.8 percent. A strong expenditures and a marginal decrease in recurrent pick-up in economic activity in Q1 of 2019 was reflected expenditures. As a result, public debt remained at about by real growth in consumer spending and stronger 57.5 percent of GDP in 2018, halting the rapid accumulation investor sentiment. Nonetheless, a delayed start to the that had begun in FY2012/13. In FY2018/19, the fiscal deficit March-May 2019 “long” rainy season could affect the is projected to decrease further to 6.3 percent of GDP. The planting season-resulting in poor harvests. In addition, most recent fiscal out-turn shows revenue collection and ongoing emergency intervention to address food expenditure falling below target due to delays in budget shortages in several counties could impose fiscal pressure implementation, which could lead to a ramp-up in constraining capital spending. These developments have expenditure in the latter half of the fiscal year and could slowed the growth forecast for 2019 and for the medium potentially exert pressure on public finances. term relative to our October 2018 Update. 5. The medium-term growth outlook is stable but 2. Inflation remains within the government’s target recent threats of drought could drag down growth. range of 5±2.5 percent. Headline inflation averaged 4.7 GDP growth is projected at 5.7 percent in 2019 (after percent in 2018 compared to 8.0 percent in 2017, primarily accounting for potential drag from drought), rising to 5.9 due to the slowdown in food inflation, which in turn offset and 6.0 percent, respectively in 2020 and 2021, supported a temporary acceleration in energy prices. Further, core by private consumption, a pick-up in industrial activity and inflation has remained below 5 percent, suggesting benign still strong performance in the services sector. Inflation is underlying demand pressures. With low inflation, monetary expected to remain within the government’s target range policy could be more accommodative to support growth while the current account deficit is projected to remain if needed, but with interest rate caps tied to the policy manageable. rate, further loosening would be constrained. The low inflationary pressure has also been supported by a stable 6. The risks to the outlook are tilted to the downside. local currency. The shilling has traded within a narrow band On the domestic front, risks include: Drought conditions of Ksh100/US$-Ksh.103/US$ in 2018, thereby serving as a that could curtail agricultural output-especially if the nominal anchor to inflationary expectations. country’s grain growing counties are affected, and fiscal slippages on account of revenue underperformance 3. The current account deficit narrowed in 2018 and that could compromise macroeconomic stability. On the remains adequately financed. In 2018, the current account external front, risks include: Rising global trade tensions deficit narrowed to 4.9 percent of GDP (from 6.3 percent that could affect Kenya’s exports and remittance inflows, of GDP in 2017) due to stronger diaspora remittance an unanticipated spike in oil prices, and tighter global inflows, improved exports of tea and horticulture, and financial market conditions that could lead to a disorderly strong receipts from tourism. The current account deficit adjustment of capital outflows from Kenya. On the upside, continues to be adequately financed by resilient capital a fast tracking of structural reforms in support of the Big 4 flows (government and corporate loans) resulting in a 9.3 agenda could add positively to growth. percent increase in official foreign reserves to US$8,131 April 2019 | Edition No. 19 iv Executive Summary 7. Several macro and structural reforms, if pursued, adopting a package of measures including improving the could help rebuild resilience and speed-up the pace pricing mechanism for credit, putting in place measures for of poverty reduction. Macro policies could include consumer protection, stemming predatory lending, and enhancing revenue mobilization to support planned fiscal assuring credit flow to previously excluded sectors of the consolidation, reviving the potency of monetary policy economy. and recovery in growth of credit to the private sector, and improving debt management. The following areas, while 11. Address the problem of pending bills (or arrears) to not exhaustive, require special focus from policy makers. restore liquidity and profitability among firms trading with the government and stimulating private sector 8. Enhance revenue mobilization to support planned activity. Public payment delays affect the economy mostly fiscal consolidation. Increasing tax revenue mobilization is through a liquidity channel. Increased delays in public essential to support fiscal consolidation. Domestic revenue payments affect private sector liquidity and profitability mobilization measures could focus on rationalizing tax and ultimately weaken aggregate demand and economic expenditures and putting in place a governance framework growth. There is evidence of a buildup in pending bills that checks the re-creeping of tax exemptions. Additional in Kenya, especially at the county level of government. A work is needed to guard against base erosion and profit decisive policy action to clear pending bills, perhaps in a shifting (for example through transfer pricing). Moreover, phased-out approach in line with funding requirements, improving realism in forecasting revenue from the existing could restore liquidity, stimulate private sector activity and tax base could also help, even as efforts are underway to create jobs. expand the tax net. 12. Improve debt management by putting in place a 9. Fast- track a comprehensive solution to factors that transparent and regular platform for primary issuance led to the imposition of interest rate caps for an eventual of debt instruments. Adopting an electronic platform repeal of the caps and revival of the potency of monetary could improve the primary auction of government policy. The continued retention of interest rate caps has securities. This could promote transparency and enhance constrained monetary policy space. For example, with efficiency in the management of government debt. core-inflation below the mid-target range of five percent, Adoption of this technology could, for instance, hasten the there is space for accommodative monetary policy that settlement period after every auction and reduce liquidity could be used to support growth if needed. Nonetheless, management challenges. With a growing inclination with interest rate caps still tied to the policy rate, the ability towards foreign debt, a clear communication strategy on of monetary policy to do this remains compromised. There the government’s preparedness to tackle upcoming debt is need to repeal interest rate caps and restore the potency repayments (interest and principal), including refinancing of monetary policy, which is essential in responding to strategies, remains critical to sustaining market confidence. shocks emanating from changes to the business cycle Debt management strategy could also focus on rebalancing and stabilizing growth. Efforts seeking a comprehensive the mix of expensive and shorter maturity commercial solution to the broader range of factors that led to the loans by taking advantage of available concessional debt, imposition of the interest rate cap, including through which tends to be more affordable. addressing consumer financial protection concerns, also need to be fast-tracked. 13. Accelerate the implementation of structural reforms to crowd in private sector participation in the 10. Restore credit growth to the private sector to Big 4 development agenda. Since the announcement of support projected private sector investment and the Big 4, the government has made tremendous progress sustainable growth. The private sector requires sufficient within the affordable housing pillar by completing the credit to support desired expansion in real output through legal and regulatory framework for Kenya Mortgage investment. The repeal of interest rate caps could certainly Refinancing Company (KMRC), waiver of stamp duty for provide a conducive environment for lenders to price first time home buyers, and passing through cabinet the risks, thereby curbing the rationing of credit to SME’s and sectional properties bill that will enable titling of plots individuals perceived as riskier by commercial banks. In within multi-story buildings. In agriculture progress has addition, the slow credit growth cycle could be reversed by been achieved in passing warehousing receipt legislation, v April 2019 | Edition No. 19 Executive Summary cabinet approval of the commodities exchange bill, and underlying causes of low agricultural productivity in Kenya the expected new irrigation act for better management of and highlight the following: irrigation schemes and water usage. On universal health coverage, reforms to reduce administrative costs at the 17. First, notwithstanding the government’s fertilizer National Health Insurance Fund (NHIF) are ongoing, while subsidy program, use of fertilizer remains inadequate. in manufacturing a new investment policy providing a With average fertilizer usage at 30kg/ha, it is quite low framework for attracting and retaining foreign investors is compared to the peak of the green revolution in Asia, when being developed. Accelerating implementation of reforms fertilizer utilization averaged over 100kg/ha. The analysis across all the Big 4 priority areas and the enabling sectors also points to evidence that the targeting mechanism could help crowd in the private sector and achieve the for the fertilizer subsidy could be inefficient, benefiting government’s inclusive growth agenda. medium to large scale farmers relative to small scale holders. Thus, reforming fertilizer subsidies to ensure that 14. The Special Focus topic examines ways to transform they are efficient and transparent, and target smallholder agricultural productivity and delivering on the Big 4 farmers remains key in restoring productivity. promise of food and nutritional security and poverty reduction. The agriculture sector is a major driver of the 18. Second, distortions in output markets as seen in the Kenyan economy and the dominant source of employment government’s still outsized role in marketing agriculture for roughly half of the Kenyan people. The analysis provides outputs could result in mis-allocation of resources a snapshot of the performance of the sector, its linkage and crowding out the private sector. The government to poverty reduction, and policy suggestions to enhance still retains a big role in marketing agricultural outputs, sector productivity and boost farm gate prices. especially maize. This creates opportunity for rent-seeking by public officials and political elites and leaves little room 15. Agriculture is a major contributor to poverty for private sector participation in maize marketing. Further, reduction in Kenya. Poverty in Kenya declined from 46.6 National Cereal and Produce Board (NCPB) buys maize percent to 36.1 percent between 2005/06 and 2015/16. at a premium above the price determined by market During the same period rural poverty declined from 50.5 forces. These interventions result in undue fiscal pressures, percent to 38.8 percent. In contrast, urban poverty rates mis-allocation of resources from other potentially high have statistically stagnated, reducing from 32.1 percent productivity expenditures (extension services) and to 29.4 percent. Households that exclusively engaged in disincentivize to private sector participation. agriculture contributed 31.4 percent to the reduction in rural poverty. Furthermore, agricultural income remains 19. Third, declining farm size and limited irrigation the largest income source for both poor and non-poor usage is a binding constraint to improving agricultural households in rural areas. Thus, productivity increases in productivity. Kenyan farms are generally small and the agricultural sector could benefit poor households, shrinking and are becoming uneconomical to operate. The potentially lifting them out of poverty. analysis shows that approximately 87 percent of farmers operate less than 2 ha of land, while 67 percent operate 16. However, Kenya’s agricultural total factor less than 1 ha. Land scarcity is also reflected in the surge productivity (TFP) dropped by at least ten percentage in rental prices of agricultural land. With 83 percent of points between 2006 and 2013 but has since stabilized. Kenya’s land area being Arid and Semi-Arid, one would The analysis finds that real agricultural value added has expect use of irrigation in farming would be a top priority. declined relative to levels attained in 2006, primarily Nonetheless, only two percent of arable land is under due to weather related shocks, prevalence of pests and irrigation compared to an average of six per cent in sub- disease, and dwindling knowledge delivery systems Saharan Africa (SSA) and 37 percent in Asia. The low usage of (i.e. lack of extension services on adoption of modern irrigation means Kenya’s agriculture is fully rain dependent technology). Consequently, Kenya’s agriculture TFP and susceptible to drought shocks. The analysis shows that growth over 2006-2015 lags Rwanda, Ethiopia and investing in irrigation and agricultural water management Tanzania and is also well below levels attained by countries for smallholders can reduce productivity shocks and raise in South Asia and East Asia. The analysis seeks to explain the the sector’s TFP, potentially climate proofing the sector. April 2019 | Edition No. 19 vi vii Executive Summary 20. Fourth, limited access to agricultural financing. incomes and productivity. Further, while value addition While Kenya represents a vibrant and enabling market for to agricultural commodities remains low, increasing Fintech, the more traditional banking that is needed to the agribusiness to agriculture ratio could create more service commercial agriculture is lacking. Only about four jobs and reduce poverty. The analysis shows that agro- percent of commercial bank lending is for agribusiness, processing and other agro-based enterprises provide an despite a majority of Kenyans being employed in agriculture avenue for accumulating skills, stimulating innovation, and or agribusiness. There is also a distinct lack of medium- to strengthening the backward and forward linkages with the long-term agri-related debt in the market. An innovative rest of the economy. Livestock Insurance Program supported by the World Bank targets subsistence farmers. Such innovations could be 22. These policies can directly and indirectly benefit explored to also de-risk investment in more commercially poor rural households as well as – indirectly – poor oriented enterprises. With improved value-chain structure urban households, but it remains critical to make them and performance, there are opportunities for increased accessible and attractive to poor agricultural households. private sector activity in the areas of value-chain finance, Rural households consuming all their agricultural output equipment finance, and various forms of insurance. are more often poorer than rural households able to sell at least part of their agricultural output. Thus, increasing 21. Fifth and finally, poor markets integration and agricultural productivity and market access can enable low value addition. Kenya has many geographically more rural poor households to begin selling agricultural dispersed smallholders that and are not integrated into key output, leading to welfare gains and poverty reduction. agriculture value chains. Dispersion increases production Poor households can also indirectly benefit from policies costs and reduces small farmers’ competitiveness. improving agricultural productivity. For instance, more The analysis shows that stronger farmer organizations jobs can become available on larger farms and increased (FOs) could foster economic inclusion of smallholders productivity should lead to a rise in supply of food, and increase their market power-thereby raising their therefore, reducing food prices. viii April 2019 | Edition No. 19 The mobile technology has improved livelihood and ICT growth remains robust. Photo: © Arne Howel | World Bank RECENT ECONOMIC TRENDS AND OUTLOOK The Kenyan economy has rebounded The rebound was driven by a bumper harvest 7 Contribution to GDP growth 8 6.1 5.9 5.9 5.8 6 5.7 6.2 5.4 5.8 6.0 4.9 6 5.4 Percentage points 5 4.6 4.7 4.7 GDP growth (y-o-y %) 4.7 4 4 3.1 3.2 3.0 3 3.0 3.6 3.2 3.2 2 0.8 0.9 1.0 2 0.5 0.8 0.7 0.8 1.4 1.3 1.0 0.2 0.7 0.3 1 0 0.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018e Agriculture Industry Services Taxes GDP growth Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Note: “e” denotes an is an estimate The services sector’s contribution to GDP growth The Purchasing Managers’ Index (PMI) indicates positive remained resilient business sentiment 60 Contribution to GDP growth 4 PMI Index (3 month moving average) 55 Percentage points 1.6 2.2 50 2.0 1.8 2.0 2 2.0 1.9 0.3 0.2 0.2 45 0.5 0.2 0.1 0.1 0.5 0.4 0.2 0.3 0.5 0.3 0.4 0.6 0.5 0.4 0.5 0.4 0.5 0.4 0.3 40 0 0.1 0.1 0.1 0.2 0.1 0.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2018 35 Accomodation and restaurant Transport and storage Information and communication Financial and insurance Other services Services Jun-16 Oct-16 Feb -17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank Private consumption supported the rebound Private investment contribution to GDP growth remains weak Contribution to GDP growth Contribution to GDP growth 12 4 10 1.3 8 0.9 2 1.0 1.6 Percentage points 6 0.2 1.2 5.5 Percentage points 4 4.4 6.4 3.3 1.4 0 4.0 4.8 2 3.6 2.7 1.8 0.6 0.7 0 0.4 -0.2 -2 -0.3 -0.3 -2.1 -2.0 -1.7 -2 -3.4 -4 -4 -6 2012 2013 2014 2015 2016 2017 2018e -6 Private Gross Fixed Investment Government Investment 2012 2013 2014 2015 2016 2017 2018e Private Consumption Net exports Government Investment Private Gross Fixed Investment Government Consumption GDP Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Note: ”e” denotes an estimate; excludes statistical discrepancy and inventory Note: ”e” denotes an estimate vii April 2019 | Edition No. 19 RECENT ECONOMIC TRENDS AND OUTLOOK Inflation remains within the target range Low food inflation off-set energy inflation resulting of 5 ± 2.5 percent in low overall inflation 15.0 100 12.5 80 Share of overall in ation (%) 10.0 60 Percent Upper bound 7.5 40 5.0 Lower bound 2.5 20 0.0 0 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Overall in ation Core in ation Food In ation Energy In ation Core In ation Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank The current account deficit has narrowed Capital inflows have helped to finance the current account deficit and accumulate reserves 15 16 10 12 5 Percent of GDP 0 Percent of GDP -5.2 8 -5 -6.7 -6.3 -4.9 -8.8 -10.4 -10 4 -15 0 -20 -25 -4 2013 2014 2015 2016 2017 2018* 2013 2014 2015 2016 2017 2018* Services trade Goods trade Current Account Direct Investment Portfolio Investment General Government Income Net Errors and Omissions Non nancial corporations and NPISHs Net Errors and Omissions Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank The medium-term outlook remains stable The ongoing fiscal consolidation is expected to continue into the medium term 8 2016/17 2017/18* 2018/19e 2019/20f 2020/21f 2021/22f 2022/23f 0 5.9 5.8 5.9 6.0 5.7 5.7 GDP growth (y-o -y %) 6 -2 4.9 Percent of GDP -3.0 -4 -3.3 4 -3.9 -5.1 -6 2 -6.3 -6.8 -8 0 -8.8 2015 2016 2017 2018e 2019f 2020f 2021f -10 Source: World Bank Source: The National Treasury Notes: “e” denotes an estimate, “f” denotes forecast. Notes: * indicates preliminary results ,”e” denotes an estimate, “f” denotes forecast April 2019 | Edition No. 19 viii Part 1: The State of Kenya’s Economy Photo: © Simone D. McCourtie | World Bank The State of Kenya’s Economy 1. Recent Economic Developments 1.1. Global economic prospects have darkened 1.1.3. Growth within the East African Community (EAC) continues to outpace the rest of SSA. After 1.1.1. Global economic growth is projected to decelerating in 2017, growth in the EAC recovered in moderate over the medium term. The World Bank 2018. The average real output for the regional trade block expects global growth to ease to 2.9 percent in 2019 expanded from 5.3 percent in 2017 to 5.9 percent1 in from 3 percent in 2018 because of rising trade tensions, 2018 on account of improved agricultural production and weakening industrial production and tighter global ongoing infrastructure investment (Figure 2). Improved financial market conditions (World Bank, 2019a). Growth growth in Kenya and Uganda, which had been lagging in advanced economies is projected to decelerate from the regional average, has complemented the growth 2.2 percent in 2018 to 2.0 percent in 2019 (Figure 1), as the acceleration in Rwanda, lifting average growth. In Kenya fiscal stimulus in the United States fades and monetary and Uganda, growth was supported by both improved policy accommodation is removed (in the US and the agricultural output and ongoing public infrastructure Euro area). Emerging and developing economies (EMDEs) spending, while in Tanzania and Rwanda growth was continue to grow but recovery among commodity driven by a bumper harvest and a rebound in exports. In exporters is much slower against the backdrop of a 2019, average growth for the regional block is projected deteriorating global trade environment. to reach 6.1 percent, driven by recovery in agricultural output and aggregate demand. 1.1.2. Economic activity in the sub-Saharan Africa (SSA) region is projected to continue its recovery in 2019. Supported by a strong recovery in the economies of 1.2. The Kenyan economy rebounded in 2018 commodity-exporting countries, growth in the SSA region and economic activity remains steady in rebounded from a 22-year low of 1.2 percent in 2016 to 2.3 Q1 of 2019 percent in 2018 (World Bank 2019b) and is projected to 1.2.1. Reflecting improved agricultural production reach 3.4 percent in 2012 (Figure 2). The recovery in growth and positive business sentiment, activity in the Kenyan for Angola, Nigeria and South Africa is expected to boost economy rebounded. For the first three quarters of 2018, regional growth over the medium term as investment and economic growth expanded by 6.0 percent on a year-on- consumer spending rebound. Nonetheless, unanticipated year basis compared to 4.7 percent during the same period weaker global growth prospects with associated easing in 2017 (Figure 4). Growth was also lifted by recovery in of commodity prices could exert pressure on the growth private consumption in part due to better returns from of the resource-rich countries, constraining the region’s a bumper harvest, strong remittance inflows and lower growth outlook. food prices. Consequently, full year GDP growth in 2018 Figure 1: Global growth prospects have moderated Figure 2: GDP growth in the EAC countries is projected to be robust 6 10 4.6 8 7.5 4 GDP growth (y-o-y %) 6.4 GDP growth (y-o-y %) 6 6.1 2.8 6.0 5.8 2 1.6 4 1.3 3.4 0 2 2013 2014 2015 2016 2017 2018e 2019f 2020f 2021f 0 -2 2014 2015 2016 2017 2018e 2019f 2020f 2021f USA World EMDE Euro Area Uganda Tanzania Kenya Rwanda EAC Average SSA Source: World Bank, Global Economic Prospects Source: World Bank (MFmod), World Bank (Africa’s Pulse) Notes: “e” denotes an estimate “f” denotes forecast. Notes: “e” denotes an estimate “f” denotes forecast. 1 EAC growth rates are calculated using constant 2010 U.S. dollar weights. South Sudan is excluded from the EAC average due to lack of data. Growth rates incorporate Tanzania’s recently rebased GDP statistics. 2 April 2019 | Edition No. 19 The State of Kenya’s Economy is estimated at 5.8 percent (Figure 3), representing a 0.1 updated weather outlook from the Kenyan Meteorological percent upgrade to the forecast made in the October 2018 Department forecasts a delay in precipitation for the Kenya Economic Update. A healthy pick-up in economic extended March-May rainy season. This could reduce activity continues in Q1 of 2019, partly reflecting solid agricultural production, especially in the grain growing real growth in consumer spending and stronger investor counties of the country. sentiment. Nonetheless, emerging drought conditions could curtail GDP growth in the remainder of 2019. 1.2.3. The Special Focus topic examines in detail, the recent growth trends in agricultural sector and 1.2.2. Favorable weather conditions have contributed linkages to poverty reduction. While favorable weather to a strong recovery in agricultural output. Reflecting explains the 2018 rebound in the sector, the analysis favorable weather conditions in 2018, the sector’s shows that Kenya’s agricultural TFP declined substantially contribution to GDP rose from a meager 0.3 percentage before stabilizing at a relatively low level in recent years. points in the first three quarters of 2017 to 1.3 percentage Real agricultural value added has decreased relative points over the same horizon in 2018, as in Figure 4. The to levels attained in 2006, primarily due to weather recovery in the agriculture sector is broad-based and shocks, prevalence of pests and disease, and dwindling stems from improved maize production and expansion of knowledge delivery systems (i.e. lack of extension services output of key cash crops. For example, output for cane, tea on adoption of modern technology). Nonetheless, and coffee have picked-up in 2018 relative to 2017 (Figure the sector accounts for majority of income for rural 5). While food prices have so far remained low in 2019, households and thus contributed around 30 percent to suggesting good harvests in the past quarter, the recently the reduction of poverty among poor rural households. Figure 3: The Kenyan economy has rebounded Figure 4: The rebound was driven by a bumper harvest 7 Contribution to GDP growth 8 6.1 5.9 5.9 5.8 6 5.7 6.2 5.4 5.8 6.0 4.9 6 5.4 Percentage points 5 4.6 4.7 4.7 4.7 GDP growth (y-o-y %) 4 4 3.1 3.2 3.0 3 3.0 3.6 3.2 3.2 2 0.8 0.9 1.0 2 0.5 0.8 0.7 0.8 1.4 1.3 1.0 0.2 0.7 0.3 1 0 0.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018e Agriculture Industry Services Taxes GDP growth Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an estimate Figure 5: Output of selected crops has recovered Figure 6: A gradual uptick in industrial activity is underway 80 Contribution to GDP growth 1.2 60 1.0 1.0 0.9 40 0.8 Year-to-date growth (%) Percentage points 0.8 0.8 0.8 0.4 0.7 0.3 20 0.6 0.5 0.4 0.4 0.6 0.2 0 0.5 0.2 0.4 0.3 0.1 -20 0.1 0.3 0.2 0.2 0.3 0.1 0.2 0.1 0.1 -40 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -60 -0.2 2017 2018 Feb-16 Aug-16 Feb-17 Aug -17 Feb -18 Aug -18 Nov-18 Mining and quarrying Manufacturing Electricity and water supply Cane Tea Co ee Construction Industry Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank April 2019 | Edition No. 19 3 The State of Kenya’s Economy Indeed, agricultural incomes (from crops, livestock and in the construction sector was about 6.7 percent in fishing) account for 64 percent of the income sources of 2018 on account of ongoing public sector infrastructure the poor and 53 percent of income sources for the non- investment (second phase of the SGR - Standard Gauge poor (World Bank, 2018). The section highlights a few of Railway) and a recovery in credit flows to the sector, the many factors underlying low agricultural productivity which rose from 1.7 percent in 2017 to 10.7 percent in Kenya and what can be done to transform it and deliver in 2018. Favorable rains have contributed to improved on food and nutritional security. water supply and increased generation from hydropower, a cheaper source of energy within Kenya’s electricity 1.2.4. A gradual pick-up in industrial activity is generation mix. As a result, growth in the electricity and underway. Supported by the recovery in business water sub-sectors increased from 5.5 percent in 2017 to sentiment, improvement in private consumption and 7.4 percent in 2018 and is projected to continue in 2019 favorable external demand from the EAC and COMESA given ongoing government development spending in regional markets, the contribution of the industrial sector infrastructure (affordable housing) and the expectation of has risen from 0.5 percentage points of GDP in the first normal rains. three quarters of 2017 to 1.0 percentage points over the same time in 2018 (Figure 6). The contribution from 1.2.6. The services sector continues to account manufacturing to GDP growth has recovered but remains for most of total GDP growth, although there is a below its historical trend of at least 1.2 percentage points. considerable slowdown in the financial services sub- Recovery is supported by both food manufacturing (soft sector. The services sector routinely accounts for at drinks, and sugar) and non-food manufacturing such as least half—and often more than two-thirds—of GDP galvanized sheets (Figure 7). High frequency data shows growth (Figure 9), both because of its larger share in an increase in electricity consumption and imported raw output (approximately 58.5 percent of GDP in 2017), and materials by 3 and 28 percent, respectively in 2018 relative because of high average growth rates (6.5 percent in to 2017, while imports of machinery and equipment 2018 and 6.9 percent in 2017). The growth performance contracted by about 6 percent in 2018-indicating a across the main sub-sectors was broadly strong (Figure gradual recovery in industrial production. Thus far in 9). Economic activity in wholesale and retail trade, 2019 the Purchasing Managers’ Index (PMI) has remained accommodation and transportation sub-sectors, as well expansionary (at the 50-mark) indicating improved orders as the ICT and real estate sub-sectors remained buoyant. as the manufacturing sector recovers (Figure 8). However, reflecting an anemic business environment for the financial services sector, including introduction of 1.2.5. Construction, electricity and water supply sub- interest rate caps, growth decelerated from 4.4 percent sectors (of industry) continue to perform well. Growth in 2017 to 2.5 percent in 2018. Figure 7: Selected output in manufacturing reveal a sluggish Figure 8: The Purchasing Managers’ Index (PMI) indicates recovery positive business sentiment 250 60 PMI Index (3 month moving average) 200 55 150 Y-o-y growth (%) 100 50 50 45 0 -50 40 -100 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Nov-18 35 Soft drinks Sugar Galvanized sheet Jun-16 Oct-16 Feb -17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Source: Kenya National Bureau of Statistics and World Bank Source: CFC Stanbic and World Bank 4 April 2019 | Edition No. 19 The State of Kenya’s Economy Figure 9: The services sector’s contribution to GDP growth Figure 10: Private consumption supported the rebound remained resilient Contribution to GDP growth Contribution to GDP growth 4 12 10 1.3 8 0.9 1.0 1.6 Percentage points Percentage points 6 0.2 1.2 5.5 1.6 2.2 4 6.4 3.3 1.4 2.0 4.4 4.0 4.8 2.0 1.8 2 2.0 1.9 2 3.6 1.8 2.7 0 0.6 0.4 -0.2 0.7 0.3 -0.3 -0.3 -2.1 -2.0 -1.7 0.2 0.2 0.1 -2 0.5 0.2 0.2 0.1 0.5 0.5 0.4 -3.4 0.3 0.4 0.3 -4 0.6 0.5 0.4 0.5 0.4 0.5 0.4 -6 0.3 0.1 0.1 0.1 0.2 0.1 0.2 0 2012 2013 2014 2015 2016 2017 2018e Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2018 Private Gross Fixed Investment Government Investment Accomodation and restaurant Transport and storage Information and communication Private Consumption Net exports Financial and insurance Other services Services Government Consumption GDP Source: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics and World Bank *Note: excludes statistical discrepancy and changes in inventory 1.3. On the demand side, growth is supported points of GDP in FY2014/15 to about [0.4] percent of GDP by the recovery in private consumption in FY2018/19 (Figure 11). The slowdown in the pace of public investment is associated not only with completion 1.3.1. A pick-up in private consumption has so far of flagship infrastructure development (e.g. the first phase contributed to the economic rebound and is expected of SGR) but also with a government policy decision to to support growth in 2019. The three-year average focus resources on completing existing projects and contribution to GDP growth from household consumption limiting funding of new projects to those aligned with the increased from 4.4 percentage points of GDP in 2017 to 4.7 Big 4 development agenda, such as affordable housing. percentage points in 2018 driven by improved incomes The environment of waning public investment makes the from agricultural harvests2, lower food inflation (estimated need for a significant acceleration in private investment at 1.6 percent in 2018 relative to 13.5 percent in 2017), growth all the more important. and strong remittance inflows. The three-year average contribution to GDP growth from private investment 1.3.3. The rebound in exports made a modest decreased from 2.7 percentage points in 2017 to 0.7 percentage points in 2018 (Figure 10). Although 2019 contribution to the recovery in GDP growth. A more data on household consumption is not yet available, high favorable external environment boosted export revenue frequency data suggest strong growth. For example, real from tea, horticulture, and tourism. The special Focus sales of VAT-applicable goods in the formal economy Topic shows that agriculture is responsible for most of increased by 12 percent between January 2018 and the country’s exports, accounting for up to 65 percent of January 2019. Kenya’s merchandise exports in 2017. Meanwhile, import growth has moderated on account of slowing private 1.3.2. The contribution of public investment to GDP investment but also due to a base effect, as food imports growth is decreasing in part due to completion of key have slowed significantly following a bumper harvest of flagship public investment projects but also due to the Kenya’s staple food (maize) (Figure 12). On balance, net narrowing of fiscal space. In FY2017/18 total government exports exerted less of a drag on GDP growth in 2018 than spending grew at 0.1 percent compared to average in 2017 (Figure 10). In 2019, strong growth in Kenya’s sub- annual growth of 17.1 percent in the previous four years. regional markets is expected to support manufacturing Consequently, government’s investment contribution to exports, while limited increases in oil prices are expected GDP growth has decreased from a high of 2 percentage to reduce the drag from net exports. 2 The Special Focus topic shows that agricultural income remains the most important income source for both the poor and non-poor households and a bumper harvest is typically associated with improved income and household consumption. April 2019 | Edition No. 19 5 The State of Kenya’s Economy Figure 11: Private investment contribution to GDP growth Figure 12: The negative contribution from net exports to remains weak growth is moderate Contribution to GDP growth Contribution to GDP growth 4 4 Percentage ponts 2 2 Percentage points 0 0 -2 -2 -4 -4 -6 -6 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2012 2013 2014 2015 2016 2017 2018e Government Investment Private Gross Fixed Investment Imports, GNFS Exports, GNFS Net exports Source: World Bank Source: Kenya National Bureau of Statistics and World Bank Notes: “e” denotes an estimate Notes: “e” denotes an estimate 1.4. Fiscal consolidation is underway although This level of spending, together with a projected recovery its quality could be improved in revenue collection, are expected to result in a narrower 1.4.1. Reflecting government’s commitment to fiscal fiscal deficit estimated at 6.3 percent of GDP in FY2018/19. consolidation, the overall fiscal deficit decreased for Nonetheless, with limited discretionary budget (total a second fiscal year. The overall fiscal deficit (including expenditure and net lending less non-discretionary grants) was reduced to 6.8 percent in FY2017/18 from budget), the scope for achieving fiscal adjustment through 8.8 percent of GDP in FY2016/17 (Figure 13a), surpassing expenditure cuts without hurting priority spending and the targeted budget deficit of 7.2 percent of GDP. growth is narrowing. Notwithstanding progress in consolidation, Kenya’s fiscal deficit is elevated relative to EAC peers (Figure 13b). 1.4.3. Reflecting the fiscal consolidation effort, yields on government bonds have come down, creating 1.4.2. Although government spending has dropped, space for the private sector to borrow. The yields on the full burden of fiscal adjustment was shouldered by government securities have come down in the first two cuts in development spending. Government spending months of 2019 (Figure 15). Nonetheless, credit growth to decreased from 27.5 percent of GDP in FY2016/17 to 23.9 the private sector remains modest and recovery in private percent in FY2017/18 with development expenditure investment is less buoyant (Figure 11). Although the slow falling from 8.4 percent of GDP to 5.3 percent of GDP growth in credit requires a more technical analysis on (or by 2.5 percentage points) over the same horizon. the factors undermining faster response, the retention of In FY2018/19, government spending is estimated at interest rate caps and a still strong government presence approximately 24.9 percent of GDP with a projected pick- in domestic borrowing could be constraining recovery in up in capital spending to 6.3 percent of GDP (Figure 14). credit to the private sector in Kenya. Figure 13(a): The overall fiscal balance is narrowing Figure 13(b): Kenya’s fiscal balance is wider relative to EAC peers 2013/14 2014/15 2015/16 2016/17 2017/18* 2018/19e 2014/15 2015/16 2016/17 2017/18 2018/19e 0 -2 -2 -4 Percent of GDP Percent of GDP -4 -6 -6 -6.1 -6.3 -6.8 -8 -7.3 -8 -8.1 -8.8 -10 -10 Uganda Tanzania Rwanda Kenya EAC Average Source: The National Treasury Source: The National Treasury and Africa Development Bank Notes: * indicates preliminary results ‘e’ denotes an estimate ‘e’ denotes an estimate 6 April 2019 | Edition No. 19 The State of Kenya’s Economy Figure 14: Government spending has picked up moderately Figure 15: Yields on government securities have come down after a steep cut in FY2017/18 Government securities yield curve 30 14.0 13.5 3.9 4.0 13.0 4.1 3.8 3.7 3.6 12.5 2.9 3.5 3.3 12.0 20 2.7 3.8 Percent of GDP 3.7 11.5 Yield (%) 5.1 4.4 4.7 11.0 5.5 4.2 4.4 10.5 6.7 7.2 10.0 10 7.5 9.5 6.6 7.0 7.2 9.0 8.5 8.7 8.4 8.0 6.3 7.0 6.3 5.3 7.5 0 7.0 2013/14 2014/15 2015/16 2016/17 2017/18* 2018/19e 3M 6M 1 3 5 7 9 11 13 15 17 19 21 23 25 Development and Net Lending Other recurrent Wages and salaries Years to maturity Interest payments County allocation 29 -Jun-18 28 -Sep -18 08 - Feb -19 Source: The National Treasury Source: Central Bank of Kenya Notes: * indicates preliminary results ‘e’ denotes an estimate 1.4.4. The recent increase in the government’s percent of GDP) – Kenya’s largest sources of tax revenue pending bills or/ and arrears could affect profitability [Figure 16]. The Finance Act of 2018 introduced several and working capital for vendors that trade with both tax policy measures to improve revenue mobilization, the National and County governments, potentially including an [8] percent value added tax on petroleum curtailing private sector activity. Increased delays in products, a presumptive tax of 15 percent on the single public payments can affect private sector liquidity and business permit, an increased excise tax on voice calls and profits and ultimately economic growth.3 The 2018 internet data, and new withholding taxes on winnings enterprise survey for Kenya finds that approximately 12 (betting and gaming) among others. These measures are percent of the 1,001 firms surveyed (or 120 firms) have expected to yield approximately 0.9 percent of GDP in had a contract with government that was in arrears (Kenya additional revenues and could help reverse the downward Enterprise Survey, 2018). The total value of pending bills is trend in revenue collection, especially if accompanied by estimated to have increased from 0.9 percent of GDP apt administration. in FY2015/16 to 1.6 percent in FY2017/18 (Box B.1). Figure 16: Tax revenue collection as a share of GDP is falling This, if allowed to persist, could reduce firm liquidity and cause postponement of new investments or any 20 hiring plans. It could also increase firms’ default rate 1.3 1.3 1.2 1.2 (in business to business transactions), which can be 16 2.0 2.0 2.1 2.2 1.1 1.2 1.3 1.3 1.3 1.9 2.1 associated with a rise in non-performing loans for 1.2 1.1 Percent of GDP 12 1.2 4.6 4.5 4.4 the banking sector (which stands at 12.8 percent in 4.4 4.1 4.3 February 2019). This trend underscores the importance 8 of curbing pending bills and arrears for fiscal prudence, 4 8.9 8.7 8.6 8.2 7.3 7.7 without which an economy could descend into weaker 0 growth prospects as private sector activity and aggregate 2013/14 2014/15 2015/16 2016/17 2017/18* 2018/19e demand are curtailed. Income tax Value added tax Other revenue Excise duty Import duty (net) Source: The National Treasury 1.4.5. Further fiscal consolidation will require Notes: * indicates preliminary results ‘e’ denotes an estimate improving domestic revenue mobilization. Tax revenue fell to 15.4 percent of GDP in FY2017/18 from 18.1 percent 1.4.6. Nonetheless, the fiscal out-turn for H1 in FY2013/14, although revenue is estimated to recover FY2018/19 shows revenue collection and expenditure to 16.4 percent of GDP in FY2018/19 (Figure 14). The falling below target. Tax revenue underperformed by improvement in tax revenue is expected to come from 0.5 percent of GDP to close at 7.2 percent of GDP for income tax (0.4 percent of GDP), VAT (0.2 percent of GDP), the H1 of 2018/19 (Table 1). This under-collection arose excise duty (0.3 percent of GDP), and import duty (0.1 from deficiencies in income tax (0.4), excise duty (0.2), 3 See Checherita et al. 2015. April 2019 | Edition No. 19 7 The State of Kenya’s Economy Table 1: H1 of FY2018/19 fiscal out-turn (% of GDP) Actual Target Deviation (In percent of GDP) Total Revenue 7.7 8.6 (0.8) Ordinary Revenue 7.2 7.8 (0.5) Import duty 0.5 0.6 (0.1) Excise Taxes 0.9 1.1 (0.2) Income Tax 3.3 3.7 (0.4) VAT 1.9 2.1 (0.1) Other Revenue 0.6 0.4 0.2 Total expenditure 10.7 11.3 (0.6) Recurrent Expenditure 6.6 7.7 (1.1) Domestic Interest 1.3 1.9 (0.5) Foreign Interest 0.5 0.6 (0.1) Net issues (O&M) 4.2 4.3 (0.1) Wages & Salaries 2.1 2.1 0.0 Development 2.9 2.3 0.6 Grants 0.1 0.2 (0.1) Deficit incl. grants (Cash basis) (2.9) (2.5) (0.3) Total Financing 2.9 2.5 0.3 Net Foreign 1.4 0.3 1.1 Net Domestic 1.5 2.2 (0.6) Primary balance deficit (1.1) (0.1) (1.0) Nominal GDP estimate 2018/19 (Ksh billion) 9,990 9,990 Source: The National Treasury Note: Nominal GDP is for FY2018/19 VAT (0.1), and import duty (0.1). Income tax collection fell The gap between actual real revenue and underlying below target due to low withholding tax on winnings, trend revenue growth was about 10.8 percent for income declining corporate tax installments from commercial tax, 5.7 percent for VAT, 1 percent for import duty, and banks (even with high reported profits) due to deductions 7.8 percent for excise duty (Figure 17). This implies that carried forward from the previous year. However, with if actual revenue from the main tax heads were made to the delay in budget implementation, expenditures and grow at their structural rate, then the underperformance in net lending have also fallen below target (0.6 percent of revenue relative to target would have been much smaller. GDP). Consequently, the fiscal deficit at the end of July- Reflecting the challenges of realistic revenue forecasting4, December 2018 was 2.9 percent of GDP relative to the the envisioned rebound in FY2018/19 may prove overly target of 2.5 percent of GDP. With a significant delay in optimistic and risk attainment of the fiscal deficit target. budget implementation, this could lead to a ramp-up Additional tax policy reforms as contemplated in the in expenditure in the latter half of the year, potentially revised Income Tax bill, whose aim is to rationalize tax exerting pressure on public finances. expenditures, may limit tax base erosion and profit shifting, and its enhanced administrative measures could 1.4.7. The growth in revenue for Kenya’s main tax also assist in bridging the tax collection gap. heads lags the underlying potential growth rate, implying scope for reforms to accelerate revenue 1.4.8. The ongoing fiscal consolidation has halted mobilization. There is a broad-based deviation in the the rapid rise in the stock of public debt. Because of growth of actual revenues from their underlying potential years of fiscal expansion, overall public debt rose from trend (derived using the HP filter), at least for FY2017/18. about 42.1 percent of GDP in FY2013/14 to 57.6 percent 4 The World Bank is providing revenue modelling and forecasting Technical Assistance (TA) to the authorities to improve realism in revenue forecasting. 8 April 2019 | Edition No. 19 The State of Kenya’s Economy Figure 17: Actual revenue growth over time relative to underlying trend (2013-18) Real Income Tax Real VAT 20 20 15 15 10 Percent Percetnt 10 5 5 0 -5 0 -10 -5 -15 2010/11 2012/13 2014/15 2016/17 2018/19* 2010/11 2012/13 2014/15 2016/17 2018/19* Potential Actual Potential Actual Real Import Duty Real Excise Duty 40 35 30 30 25 20 Percent 20 Precent 15 10 10 0 5 -10 0 -5 -20 2010/11 2012/13 2014/15 2016/17 2018/19* 2010/11 2012/13 2014/15 2016/17 2018/19* Potential Actual Potential Actual Source: The National Treasury and World Bank Note: a) Underlying trend revenues are obtained using the HP filter on deflated annual revenue series. Revenues are deflated using the CPI series. b) Projected growth in tax revenue in FY 2018/19 of GDP in FY2016/17 before stabilizing in FY2017/18 at percent in FY2017/18 (Figure 19) slowed the pace of debt 56.5 percent of GDP (Figure 18). This is partly attributed accumulation. However, interest payments’ contribution to a narrowing of the fiscal deficit in FY2017/18, but also to debt stock increased from an average of 2.9 percent of due to growth in GDP and a relatively stable exchange GDP in FY2015/16 to an average of 3.4 percentage points rate. The drop in primary deficit from an average of 5.0 of GDP over the FY2017/18 period. percent of GDP in FY2015/16 to an average of about 3.0 Figure 18: Public debt has stabilized after a rapid rise in Figure 19: Pubic debt moderation is driven by a decrease in the previous years primary balance 80 12 8 60 55.5 57.6 57.2 56.5 48.8 4.2% Percent 47.8 4 3.1% Percent of GDP 2.2% 2.6% 43.1 42.1 1.5% 1.4% 40.6 40 0 -0.6% -4 20 -8 2012 2013 2014 2015 2016 2017 2018 0 2010/11 2012/13 2014/15 2016/17 2018/19e Primary bal. Seignorage Growth e ect Change in debt_t Domestic External Total public debt (Gross) Interest Revaluation Residual Source: The National Treasury Source: The National Treasury and World Bank Notes: * indicates preliminary results April 2019 | Edition No. 19 9 The State of Kenya’s Economy Box B.1: The macroeconomic impact of delays in public payments Data from latest enterprise survey for Kenya and other government data sources show that national and country level governments are increasingly delaying their payments to vendors. The 2018 enterprise survey for Kenya finds that approximately 12 percent of the 1,001 firms surveyed (or 120 firms) have had a contract with government that was in arrears (Kenya Enterprise Survey, 2018). The total value of pending bills has increased from 0.9 percent of GDP in FY2015/16 to 1.6] percent in FY2017/18. Governments accumulate pending bills for various reasons, Figure B.1: Delays in public payments and economic performance including for purposes of achieving a lower public debt or fiscal deficit. But the literature shows that delaying payments Weak Aggregate Demand to deal with funding shortages or debt limits is costly because of the consequences for the rest of the economy Delays in payment (B2B), low profits, low (Checherita et al. 2016, Diamond and Schiller, 1993, Ramos, Low jobs creation liquidity & rising NPLs 1998 Flynn and Pessao, 2014). Furthermore, efforts to Economic impact of accelerate payments could help boost the economy, revamp delays in government payments(G2B) tax revenue collection and create jobs. Rising Skittishness among lenders and preference to pack money on government Slow pick-up in Private bonds Public payment delays affect the economy mostly through Investment the liquidity channel. Increased delays in public payments reduces vendors’ liquidity and profitability, which in turn Subdued credit growth to the Private sector weakens aggregate demand and economic growth (Figure B.1). Consequently, curbing pending bills and arrears constitutes a prudent fiscal surveillance program for any country. For example, the EU has a directive (since March 2013) imposing a maximum delay for new government payments of 30 days (60 days for a limited set of exceptions) and an 8 percent surcharge for infringement. There is an inverse relationship between public payment delays and overall economic performance. This can be explained as follows: Firstly, delays tend to reduce corporate profits as unexpected delays change the present discounted value of payments. If no or a low interest rate surcharge applies, this reduces supplier profitability. Secondly, the size of the corporate sector could be affected if liquidity-constrained firms (e.g. SMEs) go bankrupt or stop servicing debt, leading to deterioration in bank’s portfolio. Third, a higher failure rate of firms could increase the cost of capital (risk premia) and the government’s cost of future orders could rise as suppliers build in the anticipated financing costs. As the business environment deteriorates, firms become liquidity constrained, delay hiring and ultimately lay off workers. Consequently, aggregate demand, and finally growth, could be negatively impacted. 1.4.9. The accumulation of total public debt markets in 2019. The proceeds from any new issuances are included both external and domestic components, expected to help refinance upcoming bullet payments on as government borrowed widely to finance large external debt obligations. infrastructure projects. In FY2018/19, the split between external and domestic debt in the total debt stock 1.4.10. An update of the Debt Sustainability Analysis is about 51:49. However, reflecting higher domestic (DSA)5 shows Kenya’s risk of external debt distress has interest rates, debt servicing charges on the domestic increased from low to moderate. The rating assessment debt stock are about three times higher than from is based on breach of three key liquidity indicators, the external debt stock. Kenya continues to access namely: External debt service to export ratio, external international markets to refinance its external debt. For debt service-to-revenue ratio, and the present value of example, in February 2018 it successfully issued a US$2 external debt to export ratio. The rating reflects the fact billion Eurobond (US$1 billion for 10 years and US$1 billion that Kenya could face a few risks in meeting its near- for 30 years at 7.25 and 8.25 percent respectively) and term repayment obligations. However, given continued is expected to maintain a presence in the international access to international financial markets, a comfortable 5 The thresholds are set based on the country’s CPIA score. Kenya’s score places it at medium range with debt-to-GDP threshold of 74 percent as an indicator of solvency. 10 April 2019 | Edition No. 19 The State of Kenya’s Economy level of official foreign exchange reserves, together in agriculture brought down food inflation from about with ongoing fiscal consolidation, mitigates this 14 percent in 2017 to 2.3 percent in 2018. The low risk. Furthermore, Kenya’s public debt is expected to food inflation in turn offset a temporary acceleration gradually decline over the medium term in line with in energy prices resulting in a lower overall consumer continued fiscal consolidation. price index. Further, core inflation, which excludes food and energy prices, has remained below mid target of 5 1.4.11. A regular update of primary auction percent reflecting an economy where underlying demand guidelines, automation and improved transparency pressures are still benign (Figure 20). The low inflationary could enhance efficiency in the management of public pressure has also been supported by a stable local debt. The government remains committed to prudent currency. The shilling has traded within a narrow band management of public debt as articulated in its regularly of Ksh.100/US$-Ksh.103/US$ in 2018 (Figure 23), thereby published Medium Term Debt Management Strategy serving as a nominal anchor to inflationary expectations. (MTDMS). Nonetheless, for this to be realized there is need to strengthen the institutional framework for cash 1.5.2. The Kenyan economic recovery has not been and debt management and especially the Public Debt accompanied by a pick-up in private sector credit Management Office (PDMO). PDMO did not have a duly growth. Thus far, the recovery of the real sector has not appointed head for a while, which affected its capacity to translated into a rebound in credit growth to the private carry out operations. This was remedied in January 2019 sector. As of December 2018, credit growth stood at with the appointment of substantive director general. 2.4 percent, well below its ten-year average of about Further, leveraging technology including adoption of an 19 percent (Figure 24). In real terms, credit growth in electronic platform could improve primary auction of Kenya is actually negative. Although credit growth has government securities and hasten the settlement period also been weak across the EAC (Figure 25), some factors for primary auctions. behind the slowdown in credit growth in Kenya could be country specific. These include a sharp depreciation 1.5. The macroeconomic environment remains of the Kenyan shilling in 2015, earlier bank liquidations stable but the recovery in private sector that created uncertainty in the banking sector and credit growth is anemic tightening of prudential regulations. All of these were 1.5.1. Inflation has remained within the government’s further compounded by the interest rate caps that Kenya target range of 5±2.5 percent. Headline inflation imposed in the last quarter of 2016. Moreover, with averaged 4.7 percent in 2018 compared to [8.0] percent interest rate caps tied to the policy rate, the effectiveness in 2017, representing the lowest inflation rate over the of monetary policy in supporting growth through the last seven years (Figure 20). Sufficient rains and a rebound credit channel has been compromised.6 Figure 20: Inflation remains within the target range Figure 21: Inflation remains low across the EAC 15.0 14 12.5 10 10.0 Percent Upper bound Percent 7.5 6 5.0 Lower bound 2 2.5 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 0.0 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 -2 Overall in ation Core in ation Rwanda Uganda Kenya Tanzania Sources: Kenya National Bureau of Statistics and World Bank Source: Kenya National Bureau of Statistics, National Institute of Statistics Rwanda, Uganda Bureau of Statistics and Tanzania National Bureau of Statistics 6 For instance, under the new regime, a lowering of the policy rate - an action often taken by Central Banks globally if they want to stimulate economic activity - could lead to the opposite effect since the lowering of the cap further narrows the spread between yields on risk free government securities and the maximum allowed lending rates. April 2019 | Edition No. 19 11 The State of Kenya’s Economy Figure 22: Low food inflation off-set energy inflation resulting Figure 23: The stability in exchange rate continues to provide a in low overall inflation nominal anchor to inflationary expectations 100 180 160 80 Share of overall in ation (%) 140 60 120 40 100 20 80 0 60 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Food In ation Energy In ation Core In ation Ksh / US$ Ksh / Pound Sterling Ksh / Euro Sources: Kenya National Bureau of Statistics and World Bank Sources: Central Bank of Kenya 1.5.3. The interest rate cap limits the appropriate of the interest rate cap including through addressing pricing of risk, therefore effectively rationing out consumer financial protection concerns. This is being done lending to SME’s and individuals perceived as riskier. through supporting the various financial sector regulators The government is aware of unintended consequences to develop conduct regulations under their respective associated with this policy and seeks to allow banks legal frameworks, including for non-deposit taking credit to appropriately price risks. Nonetheless, a proposal to providers and FinTech. Concurrently, the government has remove interest caps contained in the Finance Bill 2018 in recent years strengthened credit information sharing was unsuccessful as it was voted out by Parliament. The mechanism through credit bureaus as well as Kenya’s Government is now seeking a comprehensive solution electronic movable asset collateral registry to help reduce to the broader range of factors that led to the imposition the costs for SMEs. Box B.2: Economic recovery in the absence of sufficient credit to the private sector In a creditless recovery, real output typically recovers well ahead of a trough in credit. Creditless recoveries imply episodes where real credit growth is negative in the initial years following a recession, mainly as a result of impaired financial intermediation. Creditless recoveries are more common in low-income countries and emerging markets (Calvo et al. 2006) than in advanced economies and the probability of such an event occurring increases when a downturn in GDP growth is preceded by a credit boom, a banking crisis, and/or real estate boom-bust cycle (Claessens et al. 2009; Abiad et al. 2011). There are three possible explanations for creditless recoveries. Firstly, private consumption outpaces recovery in private investment. Private consumption is often the most important contributor to output growth during recoveries because investment (especially non-residential) recovers only with a lag. Secondly, firms and households can get external financing from sources other than commercial banks. These sources are not captured in the aggregate credit series in reported statistics. Third and finally, credit reallocation among firms/sectors could switch from more to less credit-intensive sectors in such a way that overall credit does not expand, yet, because of productivity gains, output increases. Similarly, banks may cut credit to some sectors/firms and extend to others and if the sector/firm receiving credit is more productive, allowing overall output to increase even when aggregate credit is weak. Some of the issues typical of creditless recoveries are also relevant in Kenya. For example, the incomplete recovery in private investment relative to consumption could be the result of low credit growth and structural factors that contribute to inflexibility in the supply of credit (rising NPLs, interest rate cap). While earlier bank liquidations may not have led to a full-blown banking crisis, at least three banks were liquidated, which could have created some uncertainty in the banking sector and contributed to entrenched interbank market segmentation. Further, GDP growth has been primarily driven by a rebound in agriculture-which is somewhat less credit intensive relative to industry and services. Finally, although data is not yet available, the increase in fintech loans to households—through mobile payment platforms—suggests access to credit that may not be reflected in reported statistics. This underscores the need for further empirical research on this topic. 12 April 2019 | Edition No. 19 The State of Kenya’s Economy Figure 24: Private sector credit growth remains subdued Figure 25: Synchronized collapse of credit in the EAC region 40 35 30 25 Year-on- year growth (%) Year-on-year growth (%) 20 20 15 10 0 Jan -16 Jun-16 Nov-16 Apr-17 Sep-17 Feb -18 Jul-18 Dec -18 5 0 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 -20 -5 Private sector credit Government (Net) Uganda Rwanda Tanzania Kenya Source: Central Bank of Kenya Source: Central Bank of Kenya, National Bank of Rwanda, Bank of Uganda and Bank of Tanzania 1.5.4. Banks continue to face elevated levels of rates on the same day can be as high as [8] percent with non-performing loans, although they remain highly small Banks facing much higher borrowing rates. This is profitable and well capitalized. High levels of non- driven in part by liquidity segmentation in the banking performing loans (NPLs), estimated at 12.8 percent in system and structural factors that feed into the volatility February 2019, continue to constrain lending across of rates and transactions. In addition, the large differences key sectors such as trade, manufacturing, construction, between the policy rate and the interbank market rate agriculture, and transport and communications (Figure complicates the assessment of liquidity conditions in the 26). While headwinds from the low-growth environment economy and ultimately the ability of monetary policy in 2017 reduced bank profitability, their return on assets to steer the economy. So far in the first quarter of 2019, remained sizeable and capital adequacy ratios remain quoted interbank rates have come down, indicating eased high at 18.4 percent in December 2018. Nonetheless, liquidity conditions. smaller banks face a difficult operating environment as interest rate controls have significantly eroded 1.6. Kenya’s external account has improved operating margins. 1.6.1. The current account deficit has narrowed and remains adequately financed. In 2018, the current 1.5.5. The interbank market remains volatile. account deficit narrowed to 4.9 percent of GDP compared Currently, both the interbank rate and trading volumes on to 6.3 percent of GDP in 2017 (Figure 28) due to stronger the interbank lending market exhibit significant volatility diaspora remittance inflows, and increased export (Figure 27). For example, the difference in quoted interbank revenue from tea, horticulture and tourism. Nonetheless, Figure 26: Higher non-performing loans constrain lending Figure 27: Interbank rates and volumes remain volatile conditions 100 14 40,000 80 35,000 12 Ksh. Billions 60 30,000 10 Intebank volume 40 25,000 Percent 8 20 20,000 0 6 Real estate Trade Personal/Household Manufacturing Building & Construction Transport & Communication Agriculture Energy and water Financial services Tourism, restaurant & hotels Mining & quarying 15,000 4 10,000 2 5,000 0 0 2016-01-04 2016-08-19 2017-04-04 2017-11-23 2018-07-13 2019-02-27 Mar -18 Jun -18 Volume (RHS) CBR (LHS) Interbank rate (LHS) Source: Central Bank of Kenya Source: Central Bank of Kenya April 2019 | Edition No. 19 13 The State of Kenya’s Economy Figure 28: The current account deficit has narrowed Figure 29: The nominal and real effective exchange rates are broadly stable 15 140 10 5 120 Jan 2010=100 Percent of GDP 0 -5.2 100 -5 -6.7 -6.3 -4.9 -8.8 -10.4 -10 80 -15 -20 60 -25 2013 2014 2015 2016 2017 2018* 40 Services trade Goods trade Current Account Apr-10 Dec-10 Aug-11 Dec-12 Apr-14 Aug-15 Dec-16 Apr-18 Dec-18 Income Net Errors and Omissions REER NEER Source: Central Bank of Kenya Source: Central Bank of Kenya Notes: * indicates preliminary results Kenya’s manufacturing exports destined to the EAC sub- appreciation of the shilling could have implications on region have contracted, in part reflecting competitiveness Kenya’s export competitiveness in its main export markets. challenges for Kenya’s manufacturing sector. Broadly, the current account deficit continues to be adequately 1.6.3. The financial account recorded a surplus financed by resilient capital flows (government and following favorable capital flows that were adequate to corporate loans) resulting in an increase in official foreign finance the current account deficit and to accumulate reserves by 9.3 percent to US$8,131 million (or 5.3 months foreign exchange reserves. The financial account of import cover) in 2018 relative to 2017. improved to 6.5 percent of GDP in the year to June 2018, compared to 6.1 percent of GDP in June 2017 (Figure 31). In 1.6.2. The Kenyan shilling has remained generally terms of the breakdown of capital flows, net foreign direct stable with a slight appreciation. A relatively lower import investment inflows improved slightly in part reflecting bill, strong remittance inflows (Figure 30), a rebound in the recovery of the global economy. Although official tourism, and government borrowing in foreign currency foreign exchange reserves have decreased from US$ have continued to support a stable exchange rate market 9,103.1 million (5.6 months of import cover) in September with a moderate appreciation of the Kenyan shilling 2018 to US$ 8,131 million (5.3 months of import cover) against the US dollar in late 2018. Nonetheless in the last in December 2018, the level remains adequate and a quarter of 2018 and to some extent the first quarter of comfortable buffer against short-term external shocks 2019, both nominal and real exchange rates have tended (Figure 32). Resilient capital inflows reflect ongoing foreign to appreciate (Figure 29) driven by narrowing current investor confidence in the Kenyan economy and global account deficit and improving terms of trade. A further search for yield amongst investors. Figure 30: Remittance inflows have increased sharply Figure 31: Government and corporate loans are the major flows financing the current account deficit 3,000 16 2,500 12 Percent of GDP 2,000 8 US$ miillion 1,500 4 1,000 0 500 -4 2013 2014 2015 2016 2017 2018* 0 Direct Investment Portfolio Investment General Government Sep-14 Jan-15 Sep-15 Jan-16 Sep-16 Jan-17 Sep-17 Jan-18 Sep-18 Jan-19 Non nancial corporations and NPISHs Net Errors and Omissions Source: Central Bank of Kenya Source: Central Bank of Kenya Note: * Indicates provisional 14 April 2019 | Edition No. 19 The State of Kenya’s Economy Figure 32: Official foreign reserves buffers are comfortable 7 9000 6 8000 Reserves (US$ million) 5 Months of Import cover 7000 4 6000 3 5000 4000 2 3000 1 2000 0 May -14 Oct -14 Mar -15 Aug -15 Jan-16 Jun -16 Nov -16 Apr -17 Sep -17 Feb -18 Jul -18 Dec -18 Reserves (US$ million) Months of Import cover (Average of last 3 years) Source: Central Bank of Kenya 2. Outlook 2.1. Kenya’s medium-term outlook remains down to 5.7 percent in 2019 before recovering to 5.9 and stable, despite drought challenges and a 6.0 percent, respectively in 2020, and 2021 (Table 2, Figure less favorable external environment 33). Growth is supported by ongoing key investment 2.1.1. The medium-term growth outlook remains to support implementation of the Big 4 development stable despite emerging drought challenges and a less agenda and improved business sentiment. Growth could favorable external environment. Reflecting emerging have been stronger in the absence of interest rate caps drought challenges, GDP growth is projected to slow that continue to derail recovery in private credit growth. Table 2: Medium term growth outlook (percent, unless otherwise states) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 5.9 4.9 5.8 5.7 5.9 6.0 Private Consumption 4.7 7.2 6.2 6.1 6.6 6.7 Government Consumption 8.5 8.5 7.6 7.1 6.1 6.2 Gross Fixed Capital Investment -9.4 6.3 5.8 6.9 6.8 7.1 Exports, Goods and Services -2.6 -6.2 5.1 6.8 7.1 7.1 Imports, Goods and Services -6.3 8.4 8.7 8.9 9.0 9.0 Real GDP growth, at constant factor prices 5.9 4.6 5.8 5.7 5.9 6.0 Agriculture 4.7 1.6 5.3 4.3 4.6 4.8 Industry 5.7 3.6 5.0 5.4 5.4 5.7 Services 6.5 6.2 6.3 6.4 6.6 6.7 Inflation (Consumer Price Index) 6.3 8.0 4.7 5.7 6.5 6.9 Current Account Balance (% of GDP) -5.2 -6.3 -4.9 -5.5 -5.8 -6.0 Net Foreign Direct Investment (% of GDP) 0.3 0.5 0.5 0.7 0.6 0.8 Fiscal Balance (% of GDP) a -7.3 -8.8 -6.8 -6.3 -5.1 -3.9 Debt (% of GDP) a 57.6 57.2 56.5 55.8 54.0 51.2 Primary Balance (% of GDP) a -4.0 -5.3 -3.1 -2.5 -1.3 -0.3 International poverty rate ($1.9 in 2011 PPP) b,c 36.4 35.3 34.6 33.8 32.9 32.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) b,c 66.0 65.5 65.2 64.8 64.3 63.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) b,c 86.4 86.1 85.9 85.6 85.4 85.1 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. (a) Data for fiscal balance, debt, and primary balance is sourced from National Treasury and presented in Fiscal Years (2015 = 2014/15) (b) Calculations based on 2005-IHBS and 2015-IHBS. Actual data: 2015. Nowcast: 2016-2018. Forecast are from 2019 to 2021. (c) Projection using annualized elasticity (2005-2015) with pass-through = 1 based on private consumption per capita in constant LCU. April 2019 | Edition No. 19 15 The State of Kenya’s Economy 2.1.2. On the supply side, delays in the long March- 2.2. Private consumption is expected to aid May 2019 rainy season could affect the planting season growth in the medium term and performance of agriculture. The Special Focus topic 2.2.1. On the demand side, private consumption underscores agriculture as a key driver of growth, jobs is expected to continue spurring growth even as and poverty reduction in Kenya. Still, a large share of government consumption tapers due to fiscal agriculture is rain dependent implying that in years with consolidation. Recovery in private consumption is drought (as is likely in 2019), poor harvests are possible- underpinned by improving purchasing power (a growing potentially pushing poor households into poverty. Over middle class), low inflation and solid remittances inflows the medium term, ongoing policy and institutional (even though growth prospects in the advanced reforms (including irrigation, post-harvest losses economies have deteriorated). In addition, the ongoing management, enhanced input markets) are expected to boom in fintech and the advancement of digital loans are bear fruit and improve management of agriculture risks enabling households to offset weak credit growth from stemming from frequent droughts. The industrial sector the banking sector. These developments are helping (manufacturing, construction, and electricity and water) to smooth consumption in the face of shocks and is projected to pick-up slightly in 2019 due to inherent also to boost total consumption growth. For example, pent-up investment demand and ongoing government the January 2019 launch of the Fuliza7 mobile money infrastructure projects. overdraft service has attracted 7.7 million subscriptions and disbursed Ksh 2.2 billion in two months-all repayable 2.1.3. Performance in the services sector is projected in two-three days. On the other hand, the growth in to remain stable. The services sector is projected to grow government consumption is expected to decelerate in at an average rate of 6.5 percent over the medium term. line with fiscal consolidation. Wholesale and retail trade are expected to continue their strong growth as credit growth to this sector is rising. 2.2.2. The contribution to growth from private Reforms in the ICT sector, particularly those that support investment is projected to remain constrained by the improved delivery of government services, enhance lack of credit. The KEU’s baseline assumes that private connectivity and broadband access, will lower the cost sector investment in 2019 and over the medium term will of doing business and support improvements in total remain subdued. A return to previous levels will require factor productivity over the medium term. However, the adequate credit to the private sector, especially SMEs.8 contribution to growth from the financial services sector is Interest rate caps are expected to continue undermining forecast to remain relatively weak, reflecting a challenging private investment growth.9 environment for doing business, including retention of interest rate caps and weak aggregate demand. Figure 33: GDP growth is projected to accelerate slightly over Figure 34: The ongoing fiscal consolidation is expected to the medium-term continue into the medium term 8 2016/17 2017/18* 2018/19e 2019/20f 2020/21f 2021/22f 2022/23f 0 5.9 5.8 5.9 6.0 5.7 5.7 GDP growth (y-o -y %) 6 -2 4.9 Percent of GDP -3.0 -4 -3.3 4 -3.9 -5.1 -6 2 -6.3 -6.8 -8 0 -8.8 2015 2016 2017 2018e 2019f 2020f 2021f -10 Source: World Bank Source: The National Treasury Notes: “e” denotes an estimate, “f” denotes forecast Notes: e” denotes an estimate “f” denotes forecast 7 Fuliza is a continuous overdraft service that allows you to complete M-PESA transactions when you have insufficient funds as an overdraft facility, which was launched on January 5, by Safaricom together with Commercial Bank of Africa (CBA) and KCB Group. 8 Abdul Adiad et al (2011). Creditless Recoveries. IMF Working Paper. WP/11/58. 9 IMF (2018). SSA Regional Outlook. May 2018. 16 April 2019 | Edition No. 19 The State of Kenya’s Economy 2.2.3. The government is committed to fiscal conditions could usher another round of high food adjustment over the medium term. The medium-term inflation, especially is food production is affected by fiscal framework projects a narrowing of the overall drought in 2019. Still, both overall and core inflation fiscal deficit, including grants, from 6.8 percent of are expected to stay within the target range, providing GDP in FY2017/18 to 6.3 percent in FY2018/19 and an ample monetary policy space to react in the event of eventual stabilization at 3.3 percent of GDP in FY2021/22 unanticipated demand pressure on prices. (Figure 34).10 The authorities aim to achieve this through containment of spending growth and boosting domestic 2.2.5. Though the current account deficit is projected revenue mobilization. The decreased deficit should help to widen, it is expected to be adequately financed. reduce the stock of debt (as a share of GDP) and ultimately Exports are projected to improve only marginally over the reduce the cost of servicing debt. The rationalization medium term, in the context of a less favorable growth of corporate income exemptions through the revised prospects in Kenya’s trading partners. Further, receipts from Income Tax Act is expected to safeguard the tax base and tourism and remittances are projected to remain steady yield additional tax revenues. amidst a deteriorating external environment. However, the trade balance is expected to remain negative while 2.2.4. Inflation is expected to stay within the the current account deficit is projected to widen between government’s target band of 5±2.5 percent. Barring 2019 and 2021. The projected widening of the current unanticipated price shocks, this provides scope for account deficit is driven by a higher import bill arising a more accommodative monetary policy stance to from a pick-up in domestic demand over the forecast support growth if needed. The expected slowdown in horizon. A steady level of capital inflows (government global growth may also result in lower oil prices, a key and corporate loans) is expected to finance the projected driver of energy prices. Nonetheless, adverse weather current account deficit. 3. Risks to the Outlook 3.1. Domestic risks the medium term. However, if severe drought recurs, that poses a downside risk to agricultural output and the 3.1.1. Fiscal slippages could reduce the fiscal medium-term growth. A recent update to the weather space needed for the Big 4 agenda and potentially outlook by the Kenya Meteorological Department compromise macro-stability. The baseline assumes that indicates risk of drought to be high and already some the government will adhere to its medium-term fiscal consolidation targets. If it does not, however, expanded counties have started experiencing incidents of famine. government borrowing would tend to crowd out the If the March-May 2019 long rains disappoint, especially private sector’s access to credit and limit much-needed for the grain growing regions, then this could result into private sector investment. Fiscal slippages could also further downward revision of growth for 2019 (by at least increase the cost of servicing government domestic 0.6 percentage points), in line with the typical decline debt. Further, fiscal slippages could compromise in growth observed in Kenya in years of poor rains. The macroeconomic stability, thereby restricting government Special Focus topic discusses policy interventions that if resources and its ability to catalyze the Big 4 agenda as implemented could improve management of agriculture well as disincentivizing private sector investment. risks, including reducing vulnerability to drought. 3.1.2. A recurrence of drought would reduce 3.1.3. A rise in terror-related incidents could dampen agricultural output, presenting a downside risk to the robust growth of the tourism and accommodation growth prospects. The projections assume that the sector. While taking note of the terrorist attack in January grain growing regions of Kenya will receive normal rains, 2019, the baseline assumes improved security over the albeit with some delays in 2019 before normalizing over medium term. However, in the unlikely event of a new 10 The government’s intentions are outlined in the Budget Policy Statement (issued in February 2019) and the Budget Estimates for FY2018/19, which have been approved in parliament. April 2019 | Edition No. 19 17 The State of Kenya’s Economy attack, a deterioration of security (reinforced by the However, if a sharper and unexpected rise in oil prices issuance of negative travel advisories) would weaken occurs, this presents a significant downside risk as it could investor confidence and dampen growth, particularly in exert pressure on Kenya’s terms of trade, compelling both the tourism industry. energy prices and inflation to rise. Higher inflation would erode purchasing power and dampen domestic demand, 3.2. External risks and overall economic growth. 3.2.1. Tighter global financial conditions as a result of unexpectedly rapid normalization of monetary policy in 3.2.3. Escalating trade tensions could weaken global advanced economies presents a risk to financial flows growth, including amongst Kenya’s major trading to Kenya. Our baseline assumes an orderly adjustment to partners. The risks of rising trade protectionism remain higher interest rates in advanced economies. Nonetheless, high with adverse effects on global trade and investment. continued jitteriness among global investors regarding Weaker global growth could weaken demand for Kenya’s emerging and frontier markets including Kenya suggests exports, reduce remittance inflows and tourist arrivals, continuing vulnerability to changing sentiments and thereby dampening growth prospects in Kenya beyond contagion from financial stress. Kenya’s vulnerabilities our projected forecast. could intensify given the upcoming bullet payments for its Eurobonds. However, given a comfortable level of foreign 3.2.4. On the upside, several factors not considered exchange reserves and the recent commencement of in our baseline assumptions could surprise with an fiscal consolidation, these risks are assessed as low. upswing to projected growth. These include fast-tracked structural reforms in support of the Big 4 agenda, stronger 3.2.2. A faster and unexpected increase in oil prices than anticipated recovery in credit to the private sector presents a downside risk to the projected growth. The and an unexpected acceleration in global growth. Overall, baseline assumes the recent stability in oil prices will the balance of risks to the outlook is tilted to the downside. hold following less buoyant global economic prospects. 4. Policy options for building resilience and supporting inclusive growth 4.1.0. With emerging drought challenges and a governance framework that checks the re-creeping of less favorable external growth prospects, rebuilding tax exemptions. Additional work to guard against base macroeconomic policy buffers and fast-tracking erosion and profit shifting (for example through transfer structural reforms are needed to rebuild resilience and pricing) need to be done. Moreover, improving realism in support the government’s inclusive growth agenda. In forecasting revenue from the existing tax base, even as this section we summarize the key policy messages from efforts are underway to expand the tax net, could help. the analysis in sections one and two. Several macro and structural reforms, if pursued, could help rebuild resilience, 4.1.2. Fast-track a comprehensive solution to factors create fiscal space for implementation of the Big 4 agenda, that led to imposition of interest rate caps for eventual and speed-up the pace of poverty reduction. repeal of the caps and revival of the potency of monetary policy. The continued retention of interest 4.1. Rebuilding macroeconomic policy buffers rate caps has constrained monetary policy space. For through prudent fiscal policy and reviving example, with core-inflation below the mid-target range potency of monetary policy of 5 percent, there is space for accommodative monetary 4.1.1. Enhance revenue mobilization to support policy that could be used to support growth if needed. planned fiscal consolidation. Increasing tax revenue Nonetheless, with interest rate caps still tied to the policy mobilization is essential to support fiscal consolidation. rate, the ability of monetary policy to do this remains Domestic revenue mobilization measures could focus constrained. There is need to repeal interest rate caps on rationalizing tax expenditures and putting in place a and restore the potency of monetary policy, which is 18 April 2019 | Edition No. 19 The State of Kenya’s Economy extremely essential in responding to shocks emanating efficiency in the management of government debt. from changes to the business cycle and stabilizing Adoption of this technology could, for instance, hasten the growth. The effort to seek a comprehensive solution to the settlement period after every auction and reduce liquidity broader range of factors that led to the imposition of the management challenges. With a growing inclination interest rate cap including through addressing consumer towards foreign debt, a clear communication strategy financial protection concerns could be fast-tracked. on the government’s preparedness to tackle upcoming debt repayments (interest and principal), including 4.1.3. Restore credit growth to the private sector refinancing strategies, remains critical to sustaining market to support projected private sector investment and confidence. Debt management strategy could also focus sustainable growth. The private sector requires sufficient on rebalancing the mix of expensive and shorter maturity credit to support desired expansion in real output commercial loans. This could be done, for example, through investment. The repeal of interest rate caps could through taking advantage of concessional debt, which is certainly provide a conducive environment for lenders more affordable and with longer maturity profiles. to price risks, thereby curbing the rationing of credit to SME’s and individuals perceived as riskier by commercial 4.2. Monitoring implementation progress in structural and institutional reforms for the banks. In addition, the slow credit growth cycle could be inclusive growth agenda reversed by adopting a package of measures including improving the pricing mechanism for credit, putting 4.2.1. Advancing structural reforms can help crowd in place measures for consumer protection, stemming in the private sector to achieve the inclusive growth predatory lending, and assuring credit flow to previously agenda. Since the announcement of the Big 4, the excluded sectors of the economy. government has made tremendous progress within the affordable housing pillar by completing the legal and 4.1.4. Address the problem of pending bills (or regulatory framework for KMRC, waiver of stamp duty for arrears) to restore liquidity and profitability among firms first time home buyers, and passing through cabinet the trading with the government and stimulating private sectional properties bill that will enable titling of plots sector activity. Public payment delays affect the economy within multi-story buildings. In agriculture, progress has mostly through a liquidity channel. Increased delays been achieved in passing warehousing receipt legislation, in public payments affect private sector liquidity and cabinet approval of the commodities exchange bill, and profitability and ultimately weaken aggregate demand the expected new irrigation act for better management and economic growth. There is evidence of a buildup in of irrigation schemes and water usage. On universal pending bills in Kenya, especially at the county level of health coverage, reforms to reduce administrative costs government. A decisive policy action to clear pending at the NHIF is ongoing, while within manufacturing bills, perhaps in a phased-out approach in line with a new investment policy providing a framework for funding requirements, could restore liquidity, stimulate attracting and retention of foreign investors is underway. private sector activity and create jobs. Accelerating implementation of reforms across all the Big 4 priority areas and enabling sectors could help crowd in 4.1.5. Improve debt management by putting in place private sector and achieve the inclusive growth agenda of a transparent and regular platform for primary issuance the government. Table 3 summarizes policy and structural of debt instruments. Adopting an electronic platform reforms lined up for implementation and highlights could improve the primary auction of government progress made to date. securities. This could promote transparency and enhance April 2019 | Edition No. 19 19 The State of Kenya’s Economy Table 3: Implementation progress for structural and institutional reforms Incomplete Progress on structural policy and institutional reforms to advance MDA Completed Progress Limited the Big 4 responsible progress Affordable Housing Issue the Mortgage Refinance Companies Regulation to provide a NT/CBK X framework to operationalize the business of mortgage refinancing Enacted an amendment to the CBK Act to empower the CBK to license NT/CBK X and supervise Mortgage Refinancing Businesses Waive stamp duty for first time home buyers NT/MoLands X Pass amendments to the Sectional Property Act to allow for individual MoLands X titling of units in multistory buildings Enact the Built Environment Bill which provides that changes be made to the building regulations on construction materials to address safety of MoPW X the built environment Enact through its parliament, the Building Surveyors Act with the objective to improve building standards including in low-income housing Housing X units Agriculture Restructured the fertilizer subsidy program from a manual program to an MOALFI X e-voucher subsidy program Enact through its parliament the Warehouse receipt System Act providing MOALFI X the legal framework for the establishment of a warehouse receipt system Established the Warehouse Receipt Council to operationalize the MOALFI X Warehouse receipt Act Cabinet approved the structure for the establishment of Commodities MOALFI X Exchange and registered the Company Enacted the Irrigation Act, which supports better use and harnessing of MOALFI X water resources for irrigation Universal Health Care Approve Health Financing Policy MOH X Implement action plan to reduce NHIF administrative costs MOH X Manufacturing Finalization of intellectual property rights MoIT X Anti-counterfeit measures MoIT X Cabinet approved the Kenya Investment Policy, which simplifies the process of investor entry, establishment, aftercare, and retention services MoIT X and support green investments Review regulations implementing the Special Economic Zones Act 2015 to provide mandate of the regulator, and guidelines for developers and MoIT X enterprises Notes: NT=National Treasury; MoLands=State department of lands; MoPW=state department of public works; Housing =State department of housing; MoALFI=Ministry of Agriculture; Livestock Fisheries and Irrigation; MoH=ministry of health; MoIT=Minstry of industrialization, trade and enterprise. 20 April 2019 | Edition No. 19 Part 2: Special Focus Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction Photo: © Dasan Bobo | World Bank Special Focus 5. Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction 5.1. Introduction part of the Big 4 priority sectors which are expected to 5.1.1. The agriculture sector is a major driver of drive the government’s inclusive growth agenda over the growth for the Kenyan economy and a dominant medium term. The Big 4 agenda for agriculture is to attain source of employment for roughly half of the Kenyan 100 percent nutritional and food security for all Kenyans people. The sector is pivotal for the country to achieve by 2022. the formidable goals established in the government’s Vision 2030,11 which are to transform Kenya into a globally 5.1.4. Nonetheless, the sector faces formidable competitive, prosperous country with a high quality of life challenges and risks that could weaken its potential to by 2030. It accounts for about 51 per cent of GDP (26 per contribute towards achievement of the Big 4 agenda. cent directly and 25 per cent indirectly through its linkage The sector’s performance over the last two decades with other sectors). Further, approximately nine million has been erratic with productivity of food crops falling Kenyans (or 56 percent) of total employment (KNBS,2018) rapidly relative to growing demand, leaving many poor were employed in agriculture in 2017. Agriculture is also households without adequate access to food. The flagging responsible for most of the country’s exports, accounting productivity of cereal crops such as maize, wheat and rice for up to 65 percent of merchandise exports in 2017. has resulted in rising import bills to plug the food deficit Consequently, the sector remains central to GDP growth, and widening of the current account deficit. Furthermore, with years of strong agricultural sector growth reflecting climate change is increasingly becoming a threat to in overall GDP growth. agricultural output with negative implications for food security, livelihoods, and economic growth. The Center 5.1.2. Agricultural households contributed one third for Global Development (CGD) ranks Kenya 13th out of 233 countries for “direct risks” arising from “extreme weather” to the reduction of poverty among rural households and 71st of 233 for “overall vulnerability” to climate change in the past decade. Poverty declined in Kenya from 46.6 (after adjusting for coping ability) (CGD, 2018). Other percent in 2005/06 to 36.1 percent in 2015/16, driven by challenges facing the sector include scarcity of arable the large decline in rural poverty from 50.5 percent to land, lack of access to credit, poor infrastructure, and lack 38.8 percent. In contrast, urban poverty rates statistically of integrated markets. This Special Focus examines the remained stagnant at 32.1 percent in 2005/06 and 29.4 recent developments in the agricultural sector, its linkage percent in 2015/16. Rural-urban migration does not to poverty reduction, and policy suggestions to transform explain the stark decline in rural poverty, as households the sector’s ability to deliver on the Big 4 agenda. who migrate from rural to urban areas were not from the bottom part of the wealth distribution. Rather, improved 5.2. Recent trends in agricultural output in livelihoods in rural areas allowed households to escape Kenya poverty. In fact, agricultural households contributed 31.4 5.2.1. The contribution of agriculture to real GDP percent of the reduction in rural poverty.12 growth has decreased over the past five years (2013- 2017) while year-on-year growth has dropped due 5.1.3. Recognizing the importance of agriculture in economic development and poverty reduction, the to the impact of the last drought. The sector’s average government has recently launched the Agricultural contribution to real GDP growth has decreased from Sector Transformation and Growth Strategy (ASTGS) about 23.9 percent (2008-2012) to 21.9 percent (2013- that is expected to guide sector programs over the next 2017) (Figure 35). Furthermore, the sector’s year-on-year ten years. The strategy has three main pillars: Raising the growth exhibits significant volatility (Figure 36), in part incomes of small-scale farmers, pastoralists and fisherfolks; due to weather shocks and prevalence in pests and increasing agricultural output and value-added; and disease (including the attack from the Fall Armyworm in boosting household food resilience. The sector is also 2017). For example, after rebounding strongly in 2010 11 Republic of Kenya (2008). 12 World Bank, 2018. 22 April 2019 | Edition No. 19 Special Focus Figure 35: Sector contribution to GDP growth Figure 36: Growth rates for agriculture, manufacturing & retail sectors 40 14 12 20 Contribution to GDP growth (%) 10 8 0 6 Percent -20 4 2 -40 0 -60 -2 -4 -80 -6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Agriculture Manufaturing Wholesale & retail Agriculture Manufacturing Wholesale and retail trade Source: Kenya National Bureau of Statistics Source: Kenya National Bureau of Statistics (reaching 6.4 percent), the sector’s growth slowed down value added has contracted in recent years mainly due to to about 1.6 percent in 2017 because of a prolonged volatility in production because of shocks. The shocks have drought. Reflecting sector interlinkages, the slowdown in mainly been weather-related in the form of increasingly agriculture is also associated with anemic annual growth unreliable rainfall and prevalence of pests and diseases in manufacturing, and also in the wholesale and retail (such as the Fall Armyworm and Rift Valley Fever). The sectors (2005-2018). decreasing trend in real agricultural value added is also seen across SSA countries (Figure 38). 5.2.2. Crops production accounts for the largest share of real output in the sector while livestock, forestry and 5.2.3. Maize and beans are the predominate crops fisheries follow in that order. Over the past 10 years, grown in Kenya, with 85 percent of Kenya’s cultivated crop production accounted for about 73 percent of the land devoted to growing these two staples in 2015/16. value added in agriculture, while livestock accounted for Kenya’s productivity in maize and beans has stagnated, about 20 percent. Forestry and fishing made up the rest whilst neighboring countries have experienced increases (Figure 37). A diverse array of produce is farmed in Kenya, in productivity between 2005/06 and 2015/16 (Figure including cash crops (tea, coffee, horticulture, sugarcane, 39 and Figure 40). Furthermore, there are differences in cotton, pyrethrum, and sisal), and food crops (maize, yields across provinces and genders, with female headed rice, wheat, beans, millet, sorghum, potatoes, cabbages, households having lower productivity in both beans and tomatoes and bananas). Nonetheless, real agriculture maize crops13. Figure 37: Subsector contribution to agriculture GDP Figure 38: Annual growth rate in real agriculture value added 100 12 90 10 80 8 Percentage share to Agriculture 70 6 60 4 Percent 50 2 40 0 -2 30 -4 20 -6 10 -8 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Ethiopia Kenya Rwanda Tanzania Crops Livestock Support activities to agric Forestry and logging Fishing Uganda Sub-Saharan Africa Source: Kenya National Bureau of Statistics Source: World Bank 13 World Bank, 2018. April 2019 | Edition No. 19 23 Special Focus Figure 39: Maize yields in selected African countries, 2005-16 Figure 40: Bean yields in selected African countries, 2005-16 6000 1800 1600 5000 1400 4000 1200 Kg/hectare Kg/hectare 1000 3000 800 2000 600 400 1000 200 0 0 2005 2016 2005 2016 Kenya Rwanda South Africa Uganda Ethiopia Kenya South Africa Tanzania Ethiopia Source: World Bank based on FAO data. Source: World Bank based on FAO data. 5.2.4. Kenya’s agricultural total factor productivity in Figure 42, only 16 percent of Kenya’s agricultural (TFP) dropped at least ten percentage points between exports are processed, compared with 57 percent for 2006 and 2013 before stabilizing thereafter (Figure 41). imports. Likewise, Kenya exports only US$11 of processed Kenya’s TFP growth lags Rwanda, Ethiopia and Tanzania and agricultural products per capita, compared with US$83 is well below that recorded for South Asia and South East in South Africa and US$77 in Côte D’Ivoire. This is partly Asian countries (Figure 41a and Figure 41b). The decline in a result of the fact that many of Kenya’s major cash TFP14 was among other factors associated with ineffective crops either do not require processing (for example, cut knowledge delivery system (poor agricultural extension flowers) or require only primary processing prior to export and advisory services), inability to adopt high yield seeds (for example, coffee, tea). Of processed exports, only and improved fertilizer usage. Rwanda and Ethiopia have pineapples (US$100 million per year) and beans (US$50 benefited from increased investments in agriculture, million per year) have achieved any significant scale. specifically in terms of knowledge dissemination through extension services and use of technologies 5.2.6. There is great potential to expand processed such as improved seed and fertilizer. For Kenya to raise exports in fruit purees (mangoes, passion fruit), its agricultural productivity levels, increased use of inputs processed vegetables, and nuts (macadamia), with must be coupled with knowledge dissemination. longer-term potential in meat. For the domestic market, a wider range of agro-processing growth opportunities 5.2.5. The share of value addition compared to exist, including in fruit purees, potatoes and other agricultural production is relatively low in Kenya. As shown vegetables, fish (for example, canned, smoked), meat, Figure 41: Agricultural TFP for Kenya and selected countries a) Agricultural TFP (2006-2015) relative to EAC b) Agricultural TFP (2006-2015) relative to S/East Asian countries 140 135 130 125 Ag TFP Index (2005=100) Ag TFP Index (2005=100) 120 115 110 100 105 90 95 80 85 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Kenya Indonesia Malaysia Kenya Ethiopia Rwanda Philippines Thailand Viet Nam Tanzania Uganda India Source: USDA, 2018 (Economic Research Service) Source: USDA, 2018 (Economic Research Service) 14 See Special Focus Annex Table 1 for detailed decomposition. 24 April 2019 | Edition No. 19 Special Focus Figure 42: Key trade indicators for the agro-processing sector, selected countries Agro exports per capita ($ per capita, 2013) Agriculture Processed 32% 7% 52% 86% 16% 21% 27% 34% 1% 240 212 158 163 197 75 108 15 67 77 83 93 56 37 24 31 22 16 29 18 21 21 11 8 6 11 0 Cote d'Ivoire Ghana South Africa Indonesia Kenya Nigeria Tanzania Uganda Ethiopia Agro imports per capita ($ per capita, 2013) 102 22 73 19 50 57 4 28 44 37 81 54 19 12 46 20 18 13 29 25 25 8 2 5 12 16 9 Cote d'Ivoire Ghana South Africa Indonesia Kenya Nigeria Tanzania Uganda Ethiopia Source: Kenya Country Private Sector Diagnostic (CPSD) dairy and, to a lesser degree, tea and coffee. Few firms are for farmers, to driving logistical efficiencies for input active in this space mainly due to production issues that suppliers and buyers, as well as providing traceability is, securing sufficient quantity and quality of raw material opportunities across the value chain. Kenya is ahead of to justify capital-intensive processing investments. the curve on innovation, and the agribusiness sector is no Opportunities also exist to expand processing of imported exception (Box B.3). Other innovations include Safaricoms’ commodities for the local market (for example, vegetable digifarm and Masoko. The former enables farmers to obtain oils, wheat into pasta, and so on) but such initiatives face information on soil types, markets, and credit, while the constraints related to the cost and reliability of power and latter connects sellers to buyers overcoming search and access to finance. matching costs. Thus, there is a clear will and capacity of entrepreneurs in Kenya for market-based innovation and 5.2.7. Leveraging modern technology could spin-off adoption of agro-based technologies that could enhance a wide range of agricultural applications, from providing farmer access to information and boost productivity and weather updates, market data and access to finance farmer incomes. Box B.3: Using mobile technology to enhance food supply chains by Twiga Foods Launched in 2014, Twiga Foods is a fast-growing Kenya based enterprise using mobile technology and logistics to enhance food supply chains by more effectively and rapidly consolidating highly fragmented, informal market supply and demand (thereby reducing food prices and spoilage). The company’s clients include both farmers, to whom it provides a guaranteed offtake (currently 5,600 farmers with 600+ percent year-on-year growth), and small-scale vendors (for example, street sellers, kiosks) to whom it provides distributed wholesale services (currently 4,300). Twiga started off with bananas but has since grown to include other fresh fruit and vegetables (mangoes, potatoes, onions, tomatoes, and so on). The logistics solutions provided across the value chain (including cold-storage packhouse facilities) are described in more detail in the diagram below. April 2019 | Edition No. 19 25 Special Focus 5.3. Agricultural productivity and linkages to their consumption or start selling surplus output to poverty reduction in Kenya the market. Furthermore, households that already sell 5.3.1. While households with diversified incomes are agricultural output can produce more and, therefore, less likely to be poor, agricultural incomes remain the sell greater amounts in the market. Poor households most important income source for rural households. may also indirectly benefit from increased agricultural Poverty rates are higher among households that focus productivity, either through increased agricultural wages solely on agriculture compared to households engaged or reduced food prices brought about through increased in non-agricultural activities. Diversifying away from supply. However, it is important to keep in mind that net- agricultural activities allows a household to mitigate producing agricultural households can be negatively against adverse agricultural shocks such as drought. affected by lower food prices if they cannot increase their Despite an increase in the income share from wage productivity. Therefore, it is important that agricultural employment in the service sector, agricultural income policies are also targeted to poor agricultural households remains the most important income source for both poor allowing them to improve productivity. (64 percent) and non-poor (53 percent) households in rural areas. 5.3.4. The rural poor are less likely to be selling agricultural produce than rural non-poor households. 5.3.2. In Kenya, households with higher agricultural Rural households that engage in agriculture in Kenya can productivity are less often poor. Provinces with higher be divided into two groups: Subsistence households who maize and bean yields generally have lower poverty rates produce output purely for their own consumption, and (Figure 43a and b). Similarly, counties with higher farm market-selling households who sell some of their output productivity within a given province have lower poverty in the market. Selling outputs on the market enables rates. Likewise, in each province poverty rates tend to be households to avoid poverty as only 26 percent of market lower in households in higher yield deciles (Figure 44).15 sellers are poor compared to 38 percent of subsistence Thus, increases in crop yields can reduce rural poverty households. While half of non-poor households are selling given the strong negative correlation between yields and agricultural output, only 34 percent of poor households poverty rates in Kenya. bring their produce to market (Figure 45). 5.3.3. Productivity increases in the agricultural 5.3.5. Market-selling and subsistence households sector can benefit poor households-lifting them grow similar crops; however, market-selling households out of poverty. Productivity gains can directly benefit have greater diversity in the crops they grow. Around poor agricultural households. Households producing half of both market-selling and subsistence agricultural agricultural output purely for consumption will be able to households grow beans, legumes and nuts as their main produce greater yields and, therefore, be able to increase crop.16 More subsistence households grow maize and Figure 43a: Maize yield and poverty by province in 2015/16 Figure 43b: Bean yields and poverty by province in 2015/16 2500 600 Eastern Rift Valley Rift Valley 500 2000 Central Western Nyanza Yield (kg/hectare) 400 Yield (kg/hectare) Western North 1500 Central Coast Eastern Eastern Nyanza 300 1000 North Eastern 200 Coast 500 100 0 0 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 Poverty rate (percent) Poverty rate (percent) Source: Kenya Poverty and Gender Assessment, World Bank (2018). Source: Kenya Poverty and Gender Assessment, World Bank (2018). 15 World Bank, 2018. 17 The main crop is defined as the crop which received over 50 percent of the total cultivated land. 26 April 2019 | Edition No. 19 Special Focus Figure 44: Maize yield decile and poverty rates in rural Kenya 2015/16 55 50 Poverty Rate (percent) 45 40 35 30 25 20 15 10 5 1 2 3 4 5 6 7 8 9 10 Yield Decile Central Eastern Nyanza Rift Valley Western Source: Kenya Priority and Gender Assessment, World Bank (2018) other cereals as their main crop compared to market- subsistence households. Furthermore, market-selling selling households. In contrast, market-selling households households spend larger amounts than subsistence more frequently grow all other crop types as their main farmers on agricultural inputs, suggesting that credit crop, with the exception of other cash crops (Figure 46).17 constraints may be restricting subsistence household’s Market-selling households also allocate land to a more input use (Figure 48). diverse range of crops. Subsistence households grow almost exclusively maize and cereals, and beans, legumes 5.3.7. Access to credit increases the use of inorganic and nuts (94 percent of cultivated land; Figure 47). fertilizer in both subsistence and market-selling households. The provision of credit may help low-income 5.3.6. Market-selling households have a greater households overcome financial constraints to purchase usage rate of inorganic fertilizer and irrigation while agricultural inputs. Having access to a farmer’s credit spending larger amounts on inputs. Increased use of group in the community is associated with high usage inorganic fertilizer can lead to increased yields, with rates of inorganic fertilizer in both market-selling and households who applied chemical fertilizer experiencing subsistence households (Figure 49). This suggests that a 20 percent increase in their maize yields between 2000 access to credit helps increase agricultural households’ and 2010. While the application of chemical fertilizer is usage rates of agricultural inputs through the removal of also positively associated with higher bean yields, the credit constraints. Irrigation usage rates remain similar, yield increase is negligible. Market-selling households regardless of whether there is an availability of credit. are also more likely to cover a greater percentage of their Therefore, low usage rates may be caused by a lack of land parcels with inorganic fertilizer and irrigation than supply, rather than financial constraints. Figure 45a: Poverty rates Figure 45b: Household type by activity 100 100 26% 31% 80 80 60 60 Percent Percent 50% 37% 40 40 20 31% 20 24% 0 Non- Poor Poor 0 Market-Seller Subsistence Subsistence Market -Seller Non- Agriculture Source: World Bank using KIHBS 2015/16 data Source: World Bank using KIHBS 2015/16 data 17 World Bank, 2018. April 2019 | Edition No. 19 27 Special Focus Figure 46: Major crops produced Figure 47: Percent of cultivated land allocated to each crop 100 90 80 Subsistence 70 Percent 60 50 40 30 Market -Seller 20 10 0 20 40 60 80 100 0 Maize & Other Beans, Tubers & Other Cash Other Crops Fruits & Tea & Co ee Percent Cereals Legumes & Roots Crops Vegetables Nuts Maize & cereals Beans, legumes & nuts Tubers & roots Subsistence Market-seller Tea & co ee Fruits & vegetables Other cash crops Other crops Source: World Bank using KIHBS 2015/16 data Source: World Bank using KIHBS 2015/16 data Figure 48a: Agricultural input use Figure 48b: Agricultural input expenditure 100 14,000 12,000 10,000 80 8,000 66% KES Land parcels covered, % 6,000 60 53% 4,000 2,000 40 0 27% 30% Labor Machine Hire Inorganic Fertilizer Tractor/Oxen Organic Fertilizer Irrigation Herbicide Pesticides Small Farm Implements 20 7% 1% 0 Inorganic Fertilizer Organic Fertilizer Irrigated Market-seller Subsistence Market-seller Subsistence Source: World Bank using KIHBS 2015/16 data Source: World Bank using KIHBS 2015/16 data 5.3.8. To summarize, agricultural income remains the Pleuropneumonia (CBPP)), poor soil health (acidity due to most important income source for both poor and non- excessive use of nitrogen-based fertilizers), poor delivery poor households. Productivity increases in the agricultural of extension services, and low investment in infrastructure sector could benefit poor households, lifting them out (irrigation, drainage, rural roads). The following section of poverty. The analysis shows that rural households highlights a few of these. classified as market selling are characteristically different from subsistence farmers. Market selling households have 5.4.2. Fertilizer use remains low and the greater diversity in crops grown and demonstrate greater government’s efforts to increase fertilizer use through usage of fertilizer. Access to credit and more widespread subsidy programs has not resulted in productivity use of fertilizer enables subsistence households to sell gains. Fertilizer remains a key input to reversing output, potentially lifting them out of poverty. low productivity. Current average fertilizer use in Kenya is 30 Kg/ha, which although high compared to 5.4. Factors underlying low productivity regional peers (Figure 50a), is quite low compared to 5.4.1. Low agricultural productivity results from the peak of the green revolution in Asia, when fertilizer several underlying causes, including lack of quality utilization averaged over 100 Kg/ha (David & Otsuka, inputs, (seeds, breeds and fertilizers), distorted input and 1994). Nonetheless, cereal productivity in Kenya lags output markets, minimal adoption of modern production that of its regional peers, an indicator of inefficiencies in technologies (mechanization, greenhouse, ICT), high the utilization of fertilizer (Figure 50b). Despite being a incidence of pests and diseases (Fall Armyworm, Rift Valley cereals production leader in the 1980s and 1990s, Kenya Fever, Peste des Petit Ruminants (PPR), Contagious Bovine now has the lowest grain yields in East Africa. This is due 28 April 2019 | Edition No. 19 Special Focus Figure 49a: Subsistence household input use Figure 49b: Market-selling household input use Subsistence: Input use and access to credit Seller: Input use and access to credit 100 100 78% 83% 80 80 62% Percent Percent 60 60 46% 40 32% 29% 40 28% 24% 20 20 6% 7% 1% 2% 0 0 Inorganic Fertilizer Organic Fertilizer Irrigation Inorganic Fertilizer Organic Fertilizer Irrigation Credit No credit Credit No credit Source: World Bank using KIHBS 2015/16 data Source: World Bank using KIHBS 2015/16 data Figure 50: Comparisons of Kenya’s fertilizer consumption against cereal productivity, selected countries a) Fertilizer consumption (Kg/ha) b) Cereal yield (Kg/ha) F ertilizer cons umption (kilogra ms per hecta re) 2500 40 C erea l Y ield (kg per Hecta re) 30 2000 20 1500 10 1000 0 2000 2005 2010 2015 2000 2005 2010 2015 Year Year Ethiopia Kenya Tanzania Uganda Ethiopia Kenya Tanzania Uganda Source: World Bank, 2018 Source: World Bank, 2018 to production-related shocks and lackluster results from Figure 51 shows the increasing price differential between ongoing government interventions to promote fertilizer the subsidy price and commercial retail prices for DAP use. More worryingly, implementation of the fertilizer fertilizer, which incentivizes diversion and reselling. The subsidy program is not yielding the desired impact of subsidized fertilizer is also skewed towards maize growing raising utilization and productivity (Box B.4). areas. Makau et al., (2016) found that the probability of purchasing fertilizer from commercial markets was 5.4.3. The pervasive use of input subsidies that reduced by 30 percent in major maize growing areas in are not targeted tend to crowd out other core Kenya. Rising expenditure on input subsidies is potentially expenditures that are essential to raise productivity. limiting spending on other essential services such as The most recent Public Expenditure of Agriculture extension and rural infrastructure that could have a Sector (PEAS) report shows that on average 22 percent positive impact on productivity (Box B.5). of expenditures in the sector are directed to input subsidies, mainly to fertilizers and seeds. These subsidies 5.4.4. Despite market liberalization reforms of are highly distortionary and crowd out the private sector the 1990s, the government retains an outsized role from investing in fertilizer importation and distribution in marketing agriculture outputs, especially maize (Box B.4). The targeting mechanism is inefficient to the through the NCBP. This heavy government presence extent that farmers holding medium-to large sized farms creates opportunities for rent seeking by public officials are benefiting from subsidized fertilizers at the expense of and political elites and leaves little room for private smallholders. Moreover, the design of the subsidy program sector participation in maize marketing. NCPB’s buying also provides incentives for diversion to retail markets. operation is based on depots spread around Kenya but April 2019 | Edition No. 19 29 Special Focus Box B.4: Challenges facing the general fertilizer subsidy program The general fertilizer subsidy program was established in 2008 following rapid and significant increases in fertilizer prices because of the international oil price shock. The program was designed to be available to all farmers after going through a verification process. Farmers can access subsidized fertilizer from NCPB. Since 2008, the national fertilizer subsidy program purchased and distributed about 1.3 billion MT of fertilizer at the cost of Ksh.31 billion (approximately US$310 million at current exchange rate). Since distribution of the fertilizer is through a NCPB Figure B.4: Distribution of the general fertilizer subsidy between 2010 and 2014 stores, the subsidy program became synonymous with maize. (Figure B.4) shows that the fertilizer distribution 60 Percentage distribution of NCCPB-subsidized fertilizer between 2010 and 2014 was concentrated in the maize 50 48.6 producing areas. 40 The government procured and delivered bulk fertilizer to 30 the NCPB depots (which on average are located about 22.2 25 Km from farming households) (Tegemeo Institute, 20 15.7 2015) at Ksh 1,500 for DAP, which was less than half the 9 10 price offered by an agrovet next door selling at Ksh 3,200. 4.2 0.3 Despite the huge subsidy, the program is ineffective due to 0 North South Lake Northern Nairobi Coast poor targeting of beneficiaries, late delivery, and inefficient Rift Rift /Western /Eastern distribution resulting in leakages and low standards of 2010/2011 2011/2012 2012/2013 2013/2014 Average delivered fertilizer (Makau, et al., 2018). In addition, the Source: (Makau, et al., 2016) subsidy program led to crowding out of private sector retail fertilizer markets in the maize growing areas (Makau, et al., 2016). Despite the program, maize yields (1,628 Kg/ha in 2015) remain lower than its neighbors (Ethiopia and Uganda) and even lower than yield levels achieved two decades ago (1,918 Kg/ha in 1994). is centered in the maize-surplus zones of the northern Kenya following successive drought years. These market Rift Valley and Western Kenya. NCBP is buying maize at a intervention measures are not only causing fiscal strain premium above the price offered by the market resulting but also creating disincentives for the private sector to in double subsidy to farmers who also received subsidized participate in maize marketing activities. fertilizers. NCBP also releases stocks by selling to milling companies at a discounted price leading to financial 5.4.5. Kenyan farms are generally small and losses. For example, in 2017 the NCBP purchased maize shrinking and are becoming uneconomical to operate. at Ksh 3,200/Kg and released the stocks to millers at Ksh Because 83 percent of Kenya’s land area is in the ASAL 2,600/Kg despite incurring transport and storage costs. region, only 17 percent of the country is suitable for In 2018, the government had to subsidize maize flour crop production. Further, increasing population in rural due to the price spike caused by shortage of maize in areas and rising urbanization means that 80 percent of the population lives on arable land, reducing per capita Figure 51: Trends in DAP fertilizer prices arable land from about 0.7 acres in the mid-1970s to 0.3 6000 acres in 2015. Consequently, land scarcity is becoming a 5000 binding constraint to agriculture growth and is leading to unsustainable forms of agricultural production (Muyanga & Price KES (50Kg bag 4000 Jayne, 2017; Muyanga & Jayne, 2014). For example, about 3000 87 percent of farmers operate less than 2 hectares, and approximately 67 percent operate less than 1 hectare. 2000 Since 20 percent of farmers with the smallest holdings 1000 generate 57 percent of their incomes from farming 0 activities, the decline in the availability of arable land 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 demonstrates the importance of improving productivity DAP commercial DAP Subsidized DAP FOB Price to ensure food security. Source: World Bank, USDA 30 April 2019 | Edition No. 19 Special Focus 5.4.6. In Kenya, many geographically dispersed 539,000 ha based on surface water and another 800,000 smallholders are not integrated into key agriculture ha if groundwater and water harvesting are considered. value chains. Dispersion increases production costs However, since only about 120,000 ha are currently under and reduces small farmers’ competitiveness, while small irrigation, massive investments would be needed in small- production volumes increase purchaser transaction costs. scale farmer-managed irrigation schemes to spur the Stronger Farmer Organizations (FOs) can foster economic sector’s growth. This would also require the development inclusion of smallholders and increase their market power. and maintenance of rural roads and the establishment of Vertical integration between FOs, (representing small marketing and storage facilities (warehouses, cold rooms, farmers as members) off-takers and aggregators can help milk collection centers), both of which are additional overcome the challenges of processing, branding and binding constraints to growth in the sector. retailing high value and perishable commodities such as fruits, vegetables and dairy products. By organizing 5.4.9. Irrigation remains a key enabler for building production and facilitating quality grading by integrating resilience and climate proofing the sector. Studies have producers into processing firms, challenges of branding shown that returns to public spending on smallholder can be overcome (Delgado, 1999). irrigation schemes could be significant (Government of Kenya, 2018). For instance, in SSA returns to irrigation 5.4.7. Value addition to agricultural commodities range from 17 percent for large-scale farmers to 43 remains low and sector growth is largely coming percent for small-scale farmers, and could triple per from increasing production and marketing activities. capita farm incomes, with significant impacts on poverty Although the sector contributes nearly two-thirds (65 reduction. As such, there is need to boost investment in percent) of merchandise exports, almost 91 percent of small holder irrigation schemes and to promote private these agricultural exports are in raw or semi-processed sector investment in irrigation. Reforming water use policy form. This means the country foregoes significant could also allow the private sector to price and sell water income by not adding value to its products and exports to small-scale producers. manufacturing jobs. However, global experience suggests that an increasing agribusiness-to-agriculture 5.4.10. Limited access to credit and financial services ratio has been an important driver of poverty reduction for the agricultural sector. The agricultural sector suffers and generating more productive employment. This is from low levels of credit and financing (Njagi, et al., 2017) illustrated by the experiences of Israel in the 1960s, and and commensurately sub-optimal levels of investment Thailand and Brazil in the 1980s. Agro-processing and (Government of Kenya, 2018). Many farmers are often other forms of agro-enterprise activity provide avenues hindered in the purchase of productivity-enhancing for the accumulation of skills, stimulating product and inputs (e.g., seed, fertilizer, pesticides etc.) due to limited process innovations, and strengthening the backward and access to finance. Alliance for a Green Revolution in forward linkages with the rest of the economy. Africa (AGRA) and the Government of Kenya estimate that in 2015 the annual credit needs of key commodity 5.4.8. Although infrastructure enjoys the largest chains amounted to Ksh 130 billion, whereas credit to share of the budgetary allocation, averaging 26 percent the sector was only Ksh 40 billion. One potential area (2013-2017), more resources are needed to attain of reform to help ease the situation could be through a suitable level of investment for improved returns passing and implementation of the warehouse receipts in agriculture. Despite 83 percent of Kenya being in bill that would allow farmers to use receipts as collateral. ASALs, only two percent of arable land is under irrigation Improving the use of crop and livestock insurance as compared to an average of six per cent in SSA and 37 collateral would also be welcome as another way to percent in Asia. According to the National Water Master increase agricultural credit. Plan (1992), Kenya’s irrigation potential is estimated at April 2019 | Edition No. 19 31 Special Focus Box B.5: Public Agricultural investments between 2013/14 and 2016/17 Table B.5 shows the share of expenditure for agricultural functions at the national level between 2013 and 2016 based on PEAS analysis. On average, infrastructure has the highest share of public expenditure at the national level (26%), followed by subsidies (22%), knowledge expenditures (21%) and multipurpose projects (20%). Table B.5: Share of agricultural functions as a share of the national budget 2013-14 2014-15 2015-16 2016-17 Average 21% 23% 21% 25% 22% Capital subsidies 0% 0% 1% 0% 0% Input subsidies 12% 13% 16% 13% 13% Storage subsidies 8% 10% 4% 12% 8% Knowledge 12% 24% 26% 22% 21% Research 6% 15% 20% 15% 14% Extension and advisory services 3% 4% 1% 1% 2% Training 0% 1% 1% 2% 1% Inspection/quality control 3% 5% 3% 5% 4% Infrastructure 34% 21% 25% 24% 26% Feeder Roads 0% 0% 0% 0% 0% Irrigation 26% 20% 23% 18% 21% Other infrastructure 3% 0% 0% 2% 1% Processing and marketing 5% 1% 2% 4% 3% Multipurpose 26% 18% 14% 22% 20% Multipurpose projects 14% 6% 8% 10% 9% Multipurpose - SAGA 12% 12% 7% 13% 11% Administrative costs 7% 14% 15% 7% 10% Total 100% 100% 100% 100% 100% Source: Comprehensive Public Expenditure Review, 2018 A closer look shows that irrigation accounted for the lion’s share of infrastructure expenditure. An examination of the irrigation budget reveals that most spending was on two large-scale flagship irrigation projects, the Galana-Kulalu Food Security Project and the Thika dam project. Reorienting these expenditures to improvements in road and market infrastructure, investments in small-scale irrigation and water harvesting technologies, as well as enhancements in storage infrastructure could have a greater impact on smallholder farmers and rural economies. 5.5. Policy recommendations to boost insecurity and increased employment, especially among agricultural productivity the rural poor subsistence-oriented smallholders). 5.5.1. To transform the agricultural sector and build resilience to climate change, a two-fold agricultural 5.5.2. Reform the fertilizer subsidy programs to transformation strategy is needed. One focusing on ensure that they are efficient and transparent, and commercially-oriented smallholders and large farmers target smallholder farmers. This is the best way of raising and the other on subsistence-oriented smallholders. These the yields and incomes of subsistence farmers, improving different sets of policy actions and strategic investments household and national food security, and realizing the are necessary to achieve both the development aspired “green revolution” benefits experienced elsewhere in in Kenya Vision 2030, which emphasizes growth in the world. The government could reform the NCBP to agricultural productivity and commercialization (medium- streamline its Strategic Food Reserves (SFR) function to large-scale farmers), and to achieve the parallel goal and ensuring its gradual exit from fertilizer import and of shared prosperity through reduced poverty and food distribution activities. Both reforms could create space for 32 April 2019 | Edition No. 19 Special Focus the private sector to engage in fertilizer marketing, as well a land-use master plan (both at national and county as offtake of cereals. Biometric registration of recipients levels), and investing in institutions should be a priority. of fertilizer subsidies and electronic (e-Voucher) systems In addition, the government could consider divestiture or for delivering the subsidy could be adopted to improve subdivision of large public farms where there is unused targeting and effectiveness of the scheme. The role of or underutilized land. This land could be used to resettle NCPB influencing maize prices and milling activities, as smallholders from farming areas where no more land can well as distributing maize seeds could also be revised to be brought under cultivation. minimize market distortions in these connected markets that are key for productivity and food security. 5.5.5. Address limited access to agricultural financing. While Kenya represents a vibrant and enabling 5.5.3. There is need to improve the post-harvest market for Fintech, the more traditional banking that and marketing challenges that farmers face. Kenya’s is needed to service commercial agriculture is lacking. agriculture sector is constrained by inefficiencies in the Only about four percent of commercial bank lending is commodities supply chain due to limited post-harvest for agribusiness, despite a majority of Kenyans being handling infrastructures and inefficient price discovery employed in agriculture or agribusiness. An innovative systems that lead to low farm gate prices and Livestock Insurance Program supported by the World Bank exploitation of small holder farmers. Currently, NCPB and targeting subsistence farmers is one approach to and Eastern Africa Grain Council (EAGC) are operating de-risking investment in more commercially oriented pilot systems which involve certifying warehouses agricultural enterprises. With improved value-chain that receive grain deposits and issue tradable and structure and performance, there are opportunities transferable warehouse receipts. However, the systems for increased private sector activity in the areas of are challenged by the lack of a legal and regulatory value-chain finance, equipment finance, and various framework that can create an enabling trading forms of insurance. environment for warehouse receipts. In this regard, one of the targeted areas of reforms under the ASTGS 5.5.6. Scaling up agro-processing and value addition is the establishment of Structured Commodity Trading is essential to increase returns on agricultural produce. to minimize inefficiencies that continue to be a big The share of value addition compared to agricultural drawback to enhanced performance of agricultural production is relatively low in Kenya. Only 16 percent of value chains and transformation of small holder farmers Kenya’s agricultural exports are processed, compared with from subsistence into successful agribusinesses. Thus, 57 percent for imports. Likewise, Kenya exports only US$11 fast-tracking implementation of the national Warehouse of processed agricultural products per capita, compared Receipt System and a Kenya Commodity Exchange with US$83 in South Africa and US$77 in Côte D’Ivoire. This could reduce post-harvest losses and boost farm gate is partly a result of the fact that many of Kenya’s major cash prices for farmers. crops either do not require processing (for example, cut flowers) or require only primary processing prior to export 5.5.4. Developing policies and strategies that will (for example, coffee, tea). There is potential to expand increase access to land is critical to providing on-farm processed exports in fruit purees (mangoes, passion fruit), employment and commercialization. Access to land could processed vegetables, and nuts (macadamia), with longer- have a major influence on whether many new entrants— term potential in meat. especially those who are unskilled or semi-skilled—will be able to earn viable livelihoods in agriculture. Otherwise, 5.5.7. Leveraging modern technology could spin-off new entrants will be pushed into poverty-wage jobs in a wide range of agricultural applications. From providing the informal sector and contribute to the problems of weather updates, market data and access to finance for urbanization without income growth. Policies to improve farmers, to driving logistical efficiencies for input suppliers land tenure security, land use and development, and and buyers, as well as providing traceability opportunities sustainable conservation of the environment could be across the value chain. Kenya is ahead of the curve on helpful. On the technical side, creating a consolidated, geo- innovation, and the agribusiness sector is no exception. referenced land registry, developing and implementing There is a clear will and capacity of entrepreneurs in April 2019 | Edition No. 19 33 Special Focus Kenya for market-based innovation and adoption of agro- and enabling farmers to switch to higher-value crops. based technologies that could enhance farmer access to Farm output and incomes can be further increased information and boost productivity and farm gate prices. because water management itself justifies the use of additional yield-enhancing inputs. The government could 5.5.8. Investing in irrigation and agricultural water support several interventions in small-scale irrigation and management for smallholders can reduce income water harvesting infrastructure. This could be done by poverty directly and indirectly. Agricultural water rehabilitating viable and sustainable irrigation (small and management can increase farm output and incomes by medium scale) schemes both in the ASAL counties and in increasing yields, allowing for greater cropping intensity counties with greater agriculture potential. Agricultural water management can increase farm output and incomes by increasing yields, allowing for greater cropping intensity and enabling farmers to switch to higher-value crops Photo: © Arne Howel | World Bank REFERENCES Abdul Abiad, G. Dell’Ariccia, and Bin Li. 2011. Creditless Recoveries. IMF Working Paper. WP/11/58 Bachewe, F. N., Berhane, G., Minten, B. & Taffesse, A. S., 2015. Agricultural growth in Ethiopia (2004-2014): Evidence and drivers., Washington, D.C.: International Food Policy Research Institute (IFPRI). ht. Centre for Global Development (2018). Commitment to Development Index 2018. https://www.cgdev.org/commitment- development-index-2018. 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S. et al., 2010. Challenges of the maize seed industry in eastern and southern Africa: A compelling case for private–public intervention to promote growth. Food Policy, Volume 35, pp. 323-331. Makau, J., Kirimi, L., Opiyo, J. & Njagi, T., 2018. Kenya Fertilizer Subsidy Programs: Constraints, Opportunities and Lessons, Nairobi: Tegemeo Institute. Makau, J. M., Irungu, P., Nyikal, R. A. & Kirimi, L. W., 2016. An assessment of the effect of a national fertiliser subsidy programme on farmer participation in private fertiliser markets in the North Rift region of Kenya. African Journal of Agricultural and Resource Economics , 11 (4), pp. 292-304 . Ministry of Agriculture Livestock and Fisheries, 2015. Economic Review of Agriculture, Nairobi: Ministry of Agriculture, Livestock and Fisheries. April 2019 | Edition No. 19 35 References Minten, B., Barrett, C.B., 2008. Agricultural Technology, Productivity, and Poverty in Madagascar. World Development 36, 797–822. Morris, M., Kelly, V. 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Washington: The World Bank Group. 36 April 2019 | Edition No. 19 STATISTICAL TABLES Statistical Tables Table 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e GDP growth rates (percent) 3.3 8.4 6.1 4.6 5.9 5.4 5.7 5.9 4.9 5.8 Agriculture -2.3 10.1 2.4 3.1 5.4 4.3 5.3 4.7 1.6 5.3 Industry 3.7 8.7 7.2 4.2 5.3 6.1 7.3 5.7 3.6 5.0 Manufacturing -1.1 4.5 7.2 -0.6 5.6 2.5 3.6 2.7 0.2 Services 6.2 7.3 6.1 4.7 5.4 6.0 6.4 6.5 6.2 6.3 Fiscal Framework (percent of GDP)/ a Total revenue 19.4 19.1 18.7 19.2 19.2 19.0 18.7 18.6 17.3 18.3 Total expenditure 24.0 23.8 23.7 25.1 25.6 28.1 27.2 27.6 24.4 25.1 Grants 1.0 0.6 0.4 0.5 0.5 0.5 0.5 0.4 0.3 0.5 Budget deficit (including grants) -5.8 -3.5 -4.5 -5.7 -6.1 -8.1 -7.3 -8.8 -6.8 -6.3 Total debt (gross) 40.7 43.1 40.6 42.1 47.8 48.8 55.5 57.6 57.2 56.5 External account (percent of GDP) Exports (fob) 12.2 13.1 13.9 12.3 10.6 10.1 9.3 8.1 7.3 6.8 Imports (cif ) 25.6 28.7 33.8 30.8 29.2 28.6 22.4 18.9 20.2 18.1 Current account balance -4.6 -5.9 -9.1 -8.3 -8.8 -9.8 -6.7 -5.2 -6.3 -4.9 Financial account -10.2 -8.1 -8.2 -11.0 -9.4 -11.4 -6.1 -5.8 -5.8 -6.8 Capital account 0.7 0.6 0.6 0.5 0.3 0.4 0.4 0.3 0.2 0.3 Overall balance -3.0 -0.4 2.1 -2.4 -0.7 -2.4 0.4 -0.2 0.2 -1.2 Prices Inflation 9.2 4.0 14.0 9.4 5.7 6.9 6.6 6.3 8.0 4.7 Exchange rate (average Ksh/$) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 101.5 103.4 101.3 Source: Kenya National Bureau of Statistics, National Treasury, Central Bank of Kenya and World Bank Note: a) Figures for 2017 are actuals for 2017/18 b) End of FY in June (e.g 2009 = 2009/2010) 38 April 2019 | Edition No. 19 Statistical Tables Table 2: GDP growth rates for Kenya and EAC (2011-2018) 2011 2012 2013 2014 2015 2016 2017 2018e Kenya 6.1 4.6 5.9 5.4 5.7 5.9 4.9 5.8 Uganda 9.4 7.2 3.7 5.8 6.6 4.6 3.9 5.9 Tanzania 7.7 4.5 6.8 6.7 6.2 6.9 6.8 6.0 Rwanda 8.0 8.2 4.6 8.1 8.9 6.0 6.1 7.6 Average 7.8 6.1 5.3 6.5 6.8 5.8 5.4 6.3 Source: World Bank Note: a) “e” denotes an estimate b) Average excludes Burundi and South Sudan Table 3: Kenya annual GDP GDP, GDP, 2009 GDP/capita, Years GDP growth current prices constant prices current prices Ksh millions Ksh millions US$ Percent 2007 2,151,349 2,765,595 839 6.9 2008 2,483,058 2,772,019 917 0.2 2009 2,863,688 2,863,688 920 3.3 2010 3,169,301 3,104,303 967 8.4 2011 3,725,918 3,294,026 987 6.1 2012 4,261,370 3,444,339 1,155 4.6 2013 4,745,090 3,646,821 1,229 5.9 2014 5,402,647 3,842,186 1,335 5.4 2015 6,284,185 4,061,901 1,355 5.7 2016 7,194,147 4,300,302 1,463 5.9 2017 8,196,666 4,509,896 1,595 4.9 Source: Kenya National Bureau of Statistics and World Development Indicators April 2019 | Edition No. 19 39 Statistical Tables Table 4: Broad sector growth (y-o-y, Percent) Year Quarterly Agriculture Industry Services GDP Q1 3.1 5.2 4.3 4.1 Q2 2.2 2.1 5.3 4.2 2012 Q3 3.1 5.2 4.4 5.2 Q4 4.2 4.2 4.9 4.7 Q1 5.3 9.4 4.0 6.1 Q2 6.8 6.9 6.7 7.5 2013 Q3 5.8 6.2 5.8 6.4 Q4 3.6 -0.6 5.2 3.5 Q1 4.2 5.8 5.6 5.2 Q2 4.4 9.9 5.8 6.0 2014 Q3 7.1 3.5 5.1 4.6 Q4 1.8 5.3 7.5 5.6 Q1 7.8 6.4 5.2 5.7 Q2 4.4 7.0 6.3 5.6 2015 Q3 4.0 9.1 7.0 6.1 Q4 4.5 6.6 5.5 5.5 Q1 4.5 4.6 6.9 5.3 Q2 7.7 6.4 6.5 6.2 2016 Q3 4.7 5.9 6.4 5.7 Q4 1.0 5.8 7.2 6.3 Q1 0.9 4.1 7.2 4.7 Q2 0.8 3.6 7.0 4.7 2017 Q3 3.7 2.5 6.1 4.7 Q4 1.5 4.1 7.0 5.4 Q1 5.3 4.1 6.8 5.8 2018 Q2 5.4 4.7 6.9 6.2 Q3 5.2 5.3 6.0 6.0 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Agriculture = Agriculture, forestry and fishing Industry = Mining and quarrying + Manufacturing+Electricity and water supply+Construction Services = Whole sale and retail trade + Accomodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Proffessional administration and support services + Real estate + Education + Health + Other services + FISIM 40 April 2019 | Edition No. 19 Table 5: Contribution by Broad sub-sectors (percentage points) Industry by sub sector contribution Service by sub sector contribution Agriculture Quarterly contribution Industries Accommo- Information Services Mining and Electricity and Transport and Financial and Statistical Tables to GDP Manufacturing Construction dation and Real estate and communi- Other quarrying water supply storage insurance restaurant cation Q1 0.8 0.1 -0.1 0.2 0.7 0.9 0.2 0.5 0.4 0.4 0.0 0.5 1.9 Q2 0.5 0.2 -0.2 0.1 0.3 0.4 0.0 0.5 0.3 -0.2 0.3 1.4 2.4 2012 Q3 0.6 0.2 0.1 0.2 0.5 1.0 0.0 -0.1 0.3 -0.4 0.4 2.0 2.1 Q4 0.8 0.2 0.0 0.2 0.4 0.9 0.1 -0.1 0.3 0.5 0.6 0.9 2.4 Q1 1.4 0.2 1.0 0.1 0.4 1.7 -0.5 -0.6 0.3 0.4 0.6 1.5 1.8 Q2 1.7 -0.2 0.8 0.2 0.4 1.3 0.0 0.1 0.3 0.3 0.6 1.7 3.0 2013 Q3 1.1 0.0 0.6 0.2 0.4 1.2 0.2 0.2 0.4 0.4 0.4 1.3 2.8 Q4 0.7 -0.1 0.1 0.1 -0.1 -0.1 0.0 0.7 0.4 0.5 0.3 0.7 2.5 Q1 1.1 0.1 0.5 0.1 0.3 1.1 -0.3 0.2 0.4 0.4 0.4 1.4 2.5 Q2 1.1 0.2 0.8 0.1 0.7 1.8 -0.3 0.4 0.4 0.3 0.4 1.4 2.6 2014 Q3 1.4 0.0 0.1 0.2 0.4 0.7 -0.4 0.6 0.5 0.6 0.5 0.7 2.5 Q4 0.3 0.2 -0.3 0.2 0.9 1.0 0.0 0.3 0.5 0.7 0.6 1.6 3.7 Q1 2.0 0.1 0.3 0.2 0.6 1.2 -0.1 0.5 0.5 0.3 0.6 0.6 2.3 Q2 1.1 0.1 0.3 0.3 0.6 1.3 0.0 0.6 0.5 0.2 0.5 1.0 2.9 2015 Q3 0.8 0.2 0.5 0.2 0.8 1.7 0.0 0.7 0.6 0.2 0.7 1.1 3.4 Q4 0.8 0.1 0.4 0.1 0.7 1.3 0.1 0.4 0.7 0.3 0.4 0.8 2.7 Q1 1.2 0.1 0.1 0.2 0.4 0.9 0.1 0.5 0.7 0.4 0.5 0.7 2.9 Q2 1.8 0.1 0.5 0.3 0.4 1.2 0.1 0.5 0.7 0.3 0.5 0.9 2.9 2016 Q3 0.9 0.1 0.4 0.2 0.5 1.2 0.1 0.4 0.7 0.3 0.4 1.2 3.1 Q4 0.2 0.2 0.1 0.1 0.7 1.1 0.2 0.7 0.7 0.5 0.3 1.3 3.7 Q1 0.2 0.1 0.1 0.1 0.4 0.8 0.3 0.6 0.5 0.5 0.3 1.1 3.2 Q2 0.2 0.1 0.0 0.2 0.5 0.7 0.1 0.5 0.5 0.3 0.2 1.5 3.2 2017 Q3 0.7 0.1 0.0 0.1 0.3 0.5 0.1 0.4 0.5 0.4 0.1 1.5 3.0 Q4 0.3 0.1 0.0 0.1 0.6 0.8 0.1 0.5 0.6 0.5 0.2 1.7 3.6 Q1 1.4 0.1 0.2 0.1 0.4 0.8 0.2 0.4 0.6 0.5 0.2 1.3 3.1 April 2019 | Edition No. 19 2018 Q2 1.3 0.0 0.3 0.2 0.3 0.9 0.1 0.5 0.5 0.4 0.1 1.5 3.2 41 Q3 1.0 0.1 0.3 0.2 0.4 1.0 0.2 0.4 0.5 0.3 0.2 1.4 3.0 Source: World Bank, based on data from Kenya National Bureau of Statistics Note: Other = Wholesale and retail trade + Public administration + Professional, administration and support services + Education + Health +Other services + FISIM Table 6: Quarterly growth rates (percent) 42 Agriculture Industry Services GDP Year Quarter Four Four Four Four Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter Quarter- Year-on- Quarter on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving on-Quarter Year Moving Average Average Average Average Q1 48.2 3.1 2.6 -4.6 5.8 6.7 -1.0 4.4 5.2 7.5 4.7 5.4 Q2 -10.2 2.2 2.3 -1.2 2.0 4.6 -1.3 5.3 5.2 -3.5 4.3 4.8 2012 April 2019 | Edition No. 19 Q3 -21.9 3.1 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.5 4.5 4.5 Q4 0.3 4.2 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.6 Q1 49.8 5.3 3.3 -0.6 8.8 4.9 -1.8 3.9 4.6 8.3 5.5 4.8 Q2 -8.9 6.8 4.7 -2.8 7.0 6.2 1.3 6.7 4.9 -1.8 7.0 5.6 2013 Q3 -22.7 5.8 5.7 3.7 6.8 6.7 4.3 5.8 5.3 -1.7 7.2 6.2 Q4 -1.9 3.6 5.6 -0.8 -0.7 5.3 1.5 5.3 5.4 -1.1 3.5 5.9 Q1 50.7 4.2 5.4 5.9 5.8 4.6 -1.6 5.6 5.8 10.1 5.2 5.8 Q2 -8.7 4.4 4.7 0.9 9.9 5.4 1.6 5.8 5.6 -1.0 6.0 5.5 2014 Q3 -20.7 7.1 4.8 -2.4 3.5 4.6 3.6 5.1 5.5 -2.9 4.6 4.9 Q4 -6.6 1.8 4.4 0.9 5.3 6.1 3.8 7.5 6.0 -0.2 5.6 5.4 Q1 59.8 7.8 5.5 7.0 6.4 6.2 -3.7 5.2 5.9 10.3 5.7 5.5 Q2 -11.5 4.4 5.5 1.4 7.0 5.6 2.6 6.3 6.1 -1.2 5.6 5.4 2015 Q3 -21.1 4.0 4.8 -0.4 9.1 7.0 4.3 7.0 6.5 -2.5 6.1 5.7 Q4 -6.4 4.5 5.3 -1.4 6.6 7.3 2.3 5.4 6.0 -0.7 5.5 5.7 Q1 59.7 4.5 4.4 5.1 4.6 6.8 -2.5 6.7 6.4 10.1 5.3 5.6 Q2 -8.9 7.7 5.3 3.2 6.4 6.6 2.3 6.4 6.4 -0.3 6.2 5.8 2016 Q3 -23.3 4.7 5.4 -0.9 5.9 5.9 4.4 6.4 6.2 -3.0 5.7 5.7 Q4 -9.5 1.0 4.7 -1.5 5.8 5.7 3.2 7.4 6.7 -0.2 6.3 5.9 Q1 59.5 0.9 3.5 3.3 4.1 5.6 -2.7 7.2 6.9 8.4 4.7 5.7 Q2 -9.0 0.8 1.7 2.8 3.6 4.8 2.1 7.0 7.0 -0.3 4.7 5.3 2017 Q3 -21.0 3.7 1.5 -1.9 2.5 4.0 3.5 6.1 6.9 -3.0 4.7 5.1 Q4 -11.5 1.5 1.6 0.0 4.1 3.6 4.1 7.0 6.9 0.5 5.4 4.9 Q1 65.5 5.3 2.9 3.3 4.1 3.6 -3.0 6.8 6.7 8.8 5.8 5.2 2018 Q2 -8.9 5.4 4.2 3.4 4.7 3.9 2.2 6.9 6.7 0.2 6.2 5.5 Q3 -21.2 5.2 4.6 -1.4 5.3 4.6 2.7 6.0 6.7 -3.2 6.0 5.8 Statistical Tables Source: World Bank and Kenya National Bureau of Statistics Statistical Tables Table 7: Growth Outlook Annual growth (percent) 2016 2017 2018e 2019f 2020f 2021f BASELINE GDP Revised projections 5.9 4.9 5.8 5.7 5.9 6.0 Revised projections (KEU 18) 5.9 4.9 5.7 5.8 6.0 Revised projections (KEU 17) 5.8 4.8 5.5 5.9 6.1 Private consumption 4.7 7.2 6.2 6.1 6.6 6.7 Government consumption 8.5 8.5 7.6 7.1 6.1 6.2 Gross fixed capital investment -9.4 6.3 5.8 6.9 6.8 7.1 Exports, goods and services -2.6 -6.2 5.1 6.8 7.1 7.1 Imports, good and services -6.3 8.4 8.7 8.9 9.0 9.0 Agriculture 4.7 1.6 5.3 4.3 4.6 4.8 Industry 5.7 3.6 5.0 5.4 5.4 5.7 Services 6.5 6.2 6.3 6.4 6.6 6.7 Inflation (Consumer Price Index) 6.3 8.0 4.7 5.7 6.5 6.9 Current Account Balance, % of GDP -5.2 -6.3 -4.9 -5.5 -5.8 -6.0 Fiscal balance, % of GDP -7.3 -8.8 -6.8 -6.3 -5.1 -3.9 Debt (% of GDP) 57.6 57.2 56.5 55.8 54.0 51.2 Primary Balance (% of GDP) -4.0 -5.3 -3.1 -2.5 -1.3 -0.3 Sources: World Bank and the National Treasury Notes: “e” denotes and estimate, “f” denotes forecast * Fiscal Balance is sourced from National Treasury and presented as Fiscal Years April 2019 | Edition No. 19 43 Statistical Tables Table 8: National Fiscal position Actual (percent of GDP) 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19* Revenue and Grants 19.7 19.1 19.7 19.7 19.5 19.2 18.9 17.6 18.7 Total Revenue 19.1 18.7 19.2 19.2 19.0 18.7 18.6 17.3 18.3 Tax revenue 18.0 17.1 17.2 18.1 17.7 17.7 17.1 15.5 16.5 Income tax 7.9 7.8 8.3 8.9 8.7 8.6 8.2 7.3 7.7 VAT 5.0 4.4 4.1 4.6 4.5 4.4 4.4 4.1 4.3 Import Duty 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.2 Excise Duty 2.3 2.0 1.9 2.0 2.0 2.1 2.2 1.9 2.1 Other Revenues 1.5 1.6 1.7 1.3 1.3 1.3 1.1 1.2 1.1 Railway Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.2 Appropriation in Aid 1.1 1.7 2.0 1.1 1.3 1.0 1.3 1.6 1.5 Grants 0.6 0.4 0.5 0.5 0.5 0.5 0.4 0.3 0.5 Expenditure and Net Lending 23.8 23.7 25.1 25.6 28.1 27.2 27.6 24.4 25.1 Recurrent 16.9 16.3 18.1 14.8 14.8 15.6 15.2 15.4 15.1 Wages and salaries 5.7 5.5 6.1 5.5 5.1 4.7 4.4 4.4 4.2 Interest Payments 2.3 2.1 2.7 2.7 2.9 3.3 3.5 3.7 3.8 Other recurrent 8.9 8.8 9.3 6.6 6.7 7.5 7.3 7.2 7.0 Development and net lending 6.8 7.4 6.8 6.3 8.7 7.0 8.4 5.3 6.3 County allocation 0.2 3.8 3.9 4.1 3.7 3.5 3.1 Contigecies 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0 Parliamentary Service 0.4 0.4 0.3 0.3 0.3 0.4 Judicial Service 0.3 0.2 0.2 0.2 0.1 0.1 Fiscal balance Deficit including grants (cash -3.5 -4.5 -5.7 -6.1 -8.1 -7.3 -8.8 -6.8 -6.3 basis) Financing 3.5 4.5 5.7 6.1 8.1 7.3 9.1 7.2 6.3 Foreign Financing 0.8 2.8 3.8 4.0 4.4 3.1 4.1 3.1 3.1 Domestic Financing 2.7 1.6 1.9 2.1 3.7 4.1 5.0 4.0 3.2 Total Public Debt (gross) 43.1 40.6 42.1 47.8 48.8 55.5 57.6 57.2 56.5 External Debt 21.0 19.6 18.7 22.4 24.4 27.6 30.0 29.1 28.7 Domestic Debt 22.2 21.5 23.3 25.3 24.4 27.9 27.6 28.2 27.8 Memo: GDP (Fiscal year current market 3,448 3,994 4,503 5,074 5,828 6,566 7,658 8,793 10,030 prices, Ksh bn) Source: 2019 Budget Policy Statement (BPS) and Quarterly Budgetary Economic Review (First Quarter, Financial Year 2018/2019), National Treasury Note: *indicate Preliminary results 44 April 2019 | Edition No. 19 Table 9: Kenya’s Public and Publicly Guaranteed Debt, June 2014 to June 2018 KShs. Millions Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 TOTAL PUBLIC DEBT (Net) 2,723,628 2,844,004 2,938,291 3,210,775 3,276,654 3,448,699 3,675,734 3,972,526 4,048,978 4,217,515 4,304,497 4,529,996 4,638,932 4,834,753 Statistical Tables Lending (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) (5,701) Government Deposits (208,869) (305,496) (320,041) (394,856) (426,911) (373,016) (364,909) (428,774) (432,113) (350,924) (573,884) (503,337) (501,404) (432,049) Total Public Debt (Gross) 2,938,199 3,155,200 3,264,033 3,611,331 3,709,266 3,827,417 4,046,344 4,407,001 4,486,793 4,574,140 4,884,082 5,039,034 5,146,037 5,272,503 External Debt 1,550,233 1,615,183 1,617,506 1,796,198 1,854,711 1,896,443 2,101,391 2,294,736 2,310,198 2,353,795 2,512,431 2,560,199 2,605,333 2,723,734 Bilateral 482,203 481,282 478,883 548,351 545,652 641,763 689,119 724,823 742,064 782,588 800,912 816,119 812,545 894,046 Multilateral 754,599 751,154 762,089 798,842 839,936 781,256 806,922 841,899 842,814 841,847 836,766 820,966 877730 874680 Commercial Banks 295,642 366,231 360,175 432,377 452,495 458,122 594,140 712,100 708,231 712,274 858,062 906,389 898349 938151 Suppliers Credit 17,788 16,516 16,359 16,628 16,628 15,302 11,210 15,914 17,089 17,086 16,691 16,725 16,709 16,857 Domestic Debt 1,387,966 1,540,017 1,646,527 1,815,133 1,854,555 1,930,973 1,944,953 2,112,265 2,176,595 2,220,345 2,371,651 2,478,835 2,540,704 2,548,769 Central Bank 107,637 101,386 102,648 99,856 58,945 85,528 85,316 55,061 79,201 96,797 93,583 110,782 90210 118196 Commercial Banks 682,694 764,399 829,688 927,307 969,790 947,030 975,803 1,141,889 1,148,296 1,124,950 1,226,866 1,266,457 1315333 1289558 Non Banks & Nonresidents 597,635 674,232 714,192 787,970 825,820 898,415 883,834 915,316 949,098 998,598 1,051,202 1,101,596 1135161 1141015 (%) of Total public debt(gross) External Debt 52.8 51.2 49.6 49.7 50.0 49.5 51.9 52.1 51.5 51.5 51.4 50.8 50.6 51.7 Domestic Debt 47.2 48.8 50.4 50.3 50.0 50.5 48.1 47.9 48.5 48.5 48.6 49.2 49.4 48.3 % of External debt Bilateral 31.1 29.8 29.6 30.5 29.4 33.8 32.8 31.6 32.1 33.2 31.9 31.9 31.2 32.8 Multilateral 48.7 46.5 47.1 44.5 45.3 41.2 38.4 36.7 36.5 35.8 33.3 32.1 33.7 32.1 Commercial Banks 19.1 22.7 22.3 24.1 24.4 24.2 28.3 31.0 30.7 30.3 34.2 35.4 34.5 34.4 Suppliers Credit 1.1 1.0 1.0 0.9 0.9 0.8 0.5 0.7 0.7 0.7 0.7 0.7 0.6 0.6 % of Domestic debt Central Bank 7.8 6.6 6.2 5.5 3.2 4.4 4.4 2.6 3.6 4.4 3.9 4.5 3.6 4.6 Commercial Banks 49.2 49.6 50.4 51.1 52.3 49.0 50.2 54.1 52.8 50.7 51.7 51.1 51.8 50.6 Non Banks & Nonresidents 43.1 43.8 43.4 43.4 44.5 46.5 45.4 43.3 43.6 45.0 44.3 44.4 44.7 44.8 Source: National Treasury (Quarterly Economic Budgetary Review,February 2019) April 2019 | Edition No. 19 Note: *Provisional 45 46 Table 10: 12-months cumulative balance of payments BPM6 Concept (US$ million) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 A. Current Account, n.i.e. (505) (796) (1,821) (1,713) (2,371) (3,821) (4,205) (5,517) (6,447) (4,291) (3,697) (5,016) (4,406) Merchandise A/C (3,243) (4,222) (5,593) (4,952) (6,216) (8,355) (9,315) (10,309) (10,780) (8,377) (7,665) (10,202) (10,172) Goods: exports f.o.b. 3,509 4,153 5,067 4,526 5,248 5,834 6,212 5,780 6,149 5,981 5,748 5,792 6,152 Goods: imports f.o.b. 6,752 8,375 10,659 9,479 11,464 14,189 15,527 16,089 16,929 14,358 13,413 15,994 16,325 April 2019 | Edition No. 19 Oil 1,745 1,919 3,051 2,192 2,673 4,082 4,081 3,838 4,026 2,500 2,087 2,728 3,386 Services 1,013 1,263 1,377 1,084 1,744 1,994 2,602 2,318 1,676 1,317 1,421 1,558 1,697 Services: credit 2,431 2,938 3,260 2,904 3,789 4,131 4,990 5,130 5,023 4,636 4,154 4,651 5,571 Services: debit 1,418 1,675 1,883 1,820 2,045 2,138 2,387 2,813 3,347 3,319 2,733 3,093 3,874 Income 1,725 2,162 2,395 2,156 2,101 2,540 2,507 2,475 2,657 2,769 2,547 3,627 4,069 B. Capital Account, n.i.e. 168 157 94 261 240 235 235 158 275 262 206 185 254 C. Financial Account, n.i.e. (677) (2,247) (1,423) (3,782) (3,252) (3,425) (5,542) (5,204) (7,398) (3,914) (4,137) (4,606) (6,156) Direct investment: net (27) (1,001) (384) (1,452) (1,117) (1,364) (1,142) (920) (746) (382) (235) (415) (935) Portfolio investment: net 21 16 25 (81) (156) 1 (218) (273) (3,716) 156 385 775 (625) Financial derivatives: net - - - - - - - - - - - - - Other investment: net (671) (1,262) (1,064) (2,249) (1,979) (2,062) (4,182) (4,011) (2,936) (3,688) (4,286) (4,966) (4,595) D. Net Errors and Omissions 235 (805) (189) (1,215) (947) (734) (348) 523 227 (139) (516) 76 (959) E. Overall Balance (575) (802) 493 (1,115) (174) 896 (1,223) (369) (1,453) 255 (129) 150 (1,044) F. Reserves and Related Items 575 802 (493) 1,115 174 (896) 1,223 369 1,453 (255) 129 (150) 1,044 Reserve assets 618 941 (480) 1,322 154 246 1,455 859 1,333 (361) 38 (227) 885 Credit and loans from the IMF (6) 116 (17) 199 (34) 284 193 177 (119) (107) (91) (77) (159) Exceptional financing 48 23 30 8 13 858 38 312 - - - - - Gross Reserves (USD Million) 3,331 4,557 4,641 5,064 5,123 6,045 7,160 8,483 9,738 9,794 9,588 9,646 11,516 Official 2,415 3,355 2,875 3,847 4,002 4,248 5,702 6,560 7,895 7,534 7,573 7,332 8,231 Commercial Banks 916 1,202 1,765 1,217 1,121 1,797 1,458 1,923 1,843 2,259 2,015 2,314 3,286 Imports cover (36 mnths import) 3.9 4.4 3.1 3.9 3.9 3.4 4.0 4.5 5.1 4.8 5.0 5.0 5.4 Memo: Annual GDP at Current prices (USD 25,826 31,958 35,895 37,022 40,000 41,953 50,411 55,097 61,448 64,007 70,875 74,938 89,163 Million) Source: Central Bank of Kenya Statistical Tables Statistical Tables Table 11: Inflation Year Month Overall Inflation Food Inflation Energy Inflation Core Inflation January 7.8 12.7 2.9 5.4 February 7.1 10.8 1.7 5.4 March 6.5 9.4 2.1 5.4 April 5.3 6.8 2.0 5.2 May 5.0 6.6 1.8 4.7 June 5.8 8.9 1.4 4.5 2016 July 6.4 10.8 0.9 4.4 August 6.3 10.9 0.1 4.6 September 6.3 10.9 0.2 4.6 October 6.5 11.0 0.1 4.6 November 6.7 11.1 0.6 4.7 December 6.3 11.2 0.1 3.8 January 7.0 12.5 0.7 3.3 February 9.2 16.7 3.0 3.3 March 10.3 18.8 3.3 3.3 April 11.5 21.0 3.7 3.5 May 11.7 21.5 3.5 3.6 June 9.2 15.8 3.4 3.5 2017 July 7.5 12.2 2.9 3.5 August 8.0 13.6 3.1 3.4 September 7.1 11.5 3.3 3.2 October 5.7 8.5 3.0 3.2 November 4.7 5.8 4.8 3.4 December 4.5 4.7 5.4 3.6 January 4.8 4.7 6.1 4.0 February 4.5 3.8 6.2 4.2 March 4.2 2.2 8.2 4.1 April 3.7 0.3 10.2 4.1 May 4.0 0.3 11.4 3.9 June 4.3 0.9 11.9 4.0 2018 July 4.4 0.5 12.4 4.1 August 4.0 1.2 14.2 4.3 September 5.7 0.5 17.4 4.5 October 5.5 0.5 16.5 4.7 November 5.6 1.7 14.3 4.4 December 5.7 2.5 13.8 4.0 January 4.7 1.6 11.9 4.2 2019 February 4.1 1.6 12.1 3.4 Source: World Bank, based on data from Kenya National Bureau of Statistics April 2019 | Edition No. 19 47 Table 12: Credit to Private Sector Growth (%) Total Private Transport Manufactur- Building and Finance and Mining and Private Consumer Business Other Year Month sector annual Agriculture Trade and commu- Real estate ing construction insurance quarrying households durables services activities growth rates nication 48 January 16.6 17.3 15.9 28.4 25.3 30.2 12.2 9.1 -9.3 14.6 12.8 13.8 4.1 February 15.5 21.0 18.7 25.4 20.5 27.7 11.1 10.2 1.7 12.0 7.3 16.2 -3.8 March 15.2 18.6 20.6 21.8 23.2 22.6 10.8 15.0 12.5 10.1 10.0 13.4 -8.6 April 13.2 15.5 15.2 21.8 23.1 20.5 13.4 13.4 5.3 10.2 7.5 7.8 -15.5 May 10.7 20.2 12.2 18.1 16.1 16.9 8.1 10.1 3.2 7.8 9.5 8.5 -18.7 June 8.9 13.7 13.3 12.3 13.2 14.1 9.1 11.9 -1.6 5.7 2.5 5.1 -11.8 2016 July 7.0 6.1 12.5 13.8 9.2 12.4 13.5 8.8 -4.5 3.1 4.3 -4.4 -12.9 April 2019 | Edition No. 19 August 5.3 1.8 -0.3 16.4 8.3 16.8 -2.5 9.4 -32.8 7.2 9.2 -11.1 -17.1 September 4.4 -0.5 -2.0 15.2 1.3 13.6 2.7 8.9 -33.7 10.5 5.6 -10.2 -24.3 October 4.6 0.4 -4.3 12.8 -4.9 14.7 1.2 9.3 -36.4 10.1 10.1 -2.0 -20.1 November 4.2 3.5 -4.1 15.7 -5.3 16.1 0.1 8.8 -21.3 10.6 10.6 -11.7 -30.6 December 4.1 0.9 -2.4 15.9 -2.8 14.9 16.7 11.0 -19.1 19.7 11.3 -34.8 -27.0 January 3.9 -2.6 -6.8 13.4 -0.8 10.2 -0.6 10.3 -17.5 14.7 11.1 -13.0 -31.3 February 3.5 1.4 -8.6 10.1 8.3 8.0 -4.6 9.7 -25.5 15.6 11.1 -13.7 -29.2 March 3.0 -7.7 -7.8 11.6 0.6 9.6 -9.2 12.4 -34.0 13.3 10.1 -15.5 -23.5 April 2.2 -8.8 -6.8 8.0 -2.3 7.6 -11.9 13.2 -34.2 10.4 11.9 -15.1 -19.8 May 1.9 -12.6 -5.2 8.8 2.5 5.6 -2.8 11.8 -39.5 9.8 11.3 -21.8 -20.0 June 1.5 -12.3 -7.1 10.7 -0.7 3.2 -4.4 10.1 -37.8 10.9 7.5 -15.8 -25.0 2017 July 1.4 -11.6 -6.6 9.0 0.5 0.6 -8.5 11.8 -41.0 12.1 3.3 -10.8 -28.1 August 1.6 -7.6 3.3 4.3 -1.5 -2.3 5.4 9.7 -7.6 6.2 -1.6 -6.5 -27.4 September 1.7 -2.0 6.1 6.9 1.8 -4.9 -1.4 8.9 -0.8 1.9 -0.5 -6.4 -28.6 October 2.0 -1.1 10.2 11.5 4.0 -8.2 -1.3 10.0 9.2 2.9 0.1 -19.2 -35.0 November 2.7 -7.7 10.6 10.0 3.1 -8.0 1.5 9.3 -3.2 2.7 -0.4 -7.6 -23.1 December 2.4 -7.9 13.0 9.0 4.8 -7.2 -4.3 8.6 -5.5 -1.5 -1.6 -6.4 -7.5 January 1.9 -7.6 12.0 5.1 5.4 -10.9 -1.3 8.2 -6.7 -1.4 1.4 0.0 -10.6 February 2.2 -12.9 13.1 6.8 4.8 -13.9 4.9 8.4 -6.7 -2.7 2.3 -0.3 -2.2 March 2.1 -6.2 11.2 5.4 12.6 -18.4 11.6 4.5 -2.7 -0.7 4.7 -0.5 -6.3 April 2.9 -4.4 10.1 5.0 14.3 -17.8 10.1 3.6 -4.4 2.6 5.0 2.8 -2.2 May 3.9 -3.3 12.1 6.8 9.2 -14.9 2.6 3.7 -3.5 3.8 5.5 11.0 -7.5 June 4.3 -4.7 12.2 8.5 13.3 -12.7 3.8 3.8 -9.1 2.9 7.8 6.7 -7.9 2018 July 4.3 -6.5 11.5 6.5 13.5 -10.7 8.5 4.3 0.2 2.9 9.1 3.3 -5.8 August 4.3 -4.3 13.2 6.9 14.7 -11.0 3.5 0.9 -9.1 2.7 11.5 6.5 -4.6 September 3.8 -6.0 11.9 3.2 11.1 -9.1 6.6 1.7 -15.5 5.1 7.8 4.3 2.7 October 4.4 -5.6 14.8 4.0 7.1 -7.7 9.1 1.2 -11.6 5.1 7.6 12.1 -12.4 November 3.0 -0.1 10.6 3.2 8.9 -10.7 5.3 -1.1 -10.6 5.4 8.9 9.5 -23.4 Statistical Tables December 2.4 -2.0 6.5 2.9 1.8 -9.4 17.5 -0.5 -10.7 6.8 11.0 8.0 -34.8 2019 January 3.0 -0.2 6.5 6.6 1.4 -6.5 15.4 -2.6 -14.5 5.6 15.4 0.0 -27.2 Source: Central Bank of Kenya Statistical Tables Table 13: Mobile payments Number of Number of Value of Year Month Number of Agents customers transactions transactions (Millions) (Millions) (Billions) January 146,710 29.1 95.5 243.4 February 148,982 29.5 101.0 257.2 March 150,987 30.7 107.9 273.6 April 153,762 31.4 105.5 269.8 May 156,349 31.3 107.8 277.9 June 162,465 31.4 106.3 271.0 2016 July 167,072 32.3 110.5 281.9 August 173,774 32.8 114.2 296.9 September 173,731 33.4 112.6 283.9 October 181,456 34.0 122.5 292.1 November 162,441 34.3 120.9 291.2 December 165,908 35.0 126.3 316.8 January 152,547 33.3 122.0 299.5 February 154,908 33.3 117.5 279.4 March 157,855 33.9 133.3 320.2 April 160,076 34.3 128.9 297.4 May 164,674 34.2 132.5 315.4 June 165,109 34.2 125.9 299.8 2017 July 169,480 34.6 128.1 308.9 August 167,353 35.3 120.6 286.3 September 167,775 35.5 128.5 300.9 October 170,389 36.0 134.2 299.0 November 176,986 36.4 131.7 299.0 December 182,472 37.4 139.9 332.6 January 188,029 37.8 136.7 323.0 February 192,117 38.4 132.3 300.9 March 196,002 39.3 147.5 337.1 April 201,795 40.3 142.1 313.0 May 202,387 41.7 141.0 329.0 June 197,286 42.6 137.4 317.7 2018 July 200,227 42.6 143.1 332.4 August 202,627 43.6 149.5 348.9 September 203,359 44.3 146.0 327.7 October 211,961 45.4 155.2 343.2 November 206,312 46.2 153.2 343.9 December 205,745 47.7 155.8 367.8 Source: Central Bank of Kenya April 2019 | Edition No. 19 49 Statistical Tables Table 14: Exchange rate Year Month USD UK Pound Euro January 102.3 147.5 111.1 February 101.9 145.9 113.0 March 101.5 144.2 112.6 April 101.2 144.8 114.8 May 100.7 146.3 114.0 June 101.1 144.3 113.7 2016 July 101.3 133.4 112.1 August 101.4 132.9 113.7 September 101.3 133.2 113.5 October 101.3 125.4 111.9 November 101.7 126.3 110.0 December 102.1 127.7 107.7 January 103.7 128.0 110.2 February 103.6 129.5 130.4 March 102.9 126.9 109.9 April 103.3 130.4 110.7 May 103.3 133.5 114.8 June 103.5 132.5 116.2 2017 July 103.9 134.9 119.4 August 103.6 134.2 122.2 September 103.1 137.1 122.9 October 103.4 136.4 121.6 November 103.6 136.8 121.4 December 103.1 138.2 122.0 January 102.9 141.9 125.4 February 101.4 141.7 125.3 March 101.2 141.2 124.7 April 100.6 141.9 123.7 May 100.7 135.7 119.0 June 101.0 134.2 118.0 2018 July 100.7 132.6 117.5 August 100.6 129.7 116.2 September 100.8 131.7 117.7 October 101.1 131.6 116.2 November 102.4 132.1 116.4 December 102.3 129.7 116.4 January 101.6 130.8 115.9 2019 February 100.2 130.3 113.8 Source: Central Bank of Kenya 50 April 2019 | Edition No. 19 Statistical Tables Table 15: Exchange rate (Index January 2016 = 100) Year Month NEER REER USD January 100.0 100.0 100.0 February 100.1 100.4 99.6 March 100.0 100.5 99.2 April 100.6 100.7 98.9 May 99.9 99.8 98.5 June 100.3 99.5 98.9 2016 July 99.9 98.5 99.0 August 100.6 99.4 99.1 September 100.6 99.0 99.0 October 99.7 98.0 99.0 November 99.3 97.0 99.4 December 98.7 95.8 99.8 January 100.4 96.6 101.4 February 100.8 95.8 101.3 March 100.2 94.0 100.5 April 101.0 93.2 101.0 May 101.6 93.0 100.9 June 102.3 94.8 101.2 2017 July 103.2 96.6 101.5 August 103.7 97.0 101.2 September 103.6 98.7 100.8 October 103.2 98.1 101.1 November 103.3 98.6 101.2 December 103.3 98.0 100.8 January 104.4 97.7 100.6 February 103.4 96.1 99.1 March 103.1 94.5 98.9 April 96.8 88.8 98.3 May 95.6 87.3 98.4 June 95.4 88.2 98.7 2018 July 99.8 92.0 98.4 August 99.2 91.7 98.3 September 99.2 91.6 98.6 October 98.9 91.5 98.8 November 94.9 89.2 100.0 December 95.0 88.8 100.0 January 99.3 2018 February 98.0 Source: Central Bank of Kenya and World Bank April 2019 | Edition No. 19 51 Statistical Tables Table 16: Nairobi Securities Exchange (NSE 20 Share Index, Jan 1966=100, End - month) Year Month NSE 20 Share Index January 3,773 February 3,862 March 3,982 April 4,009 May 3,828 June 3,641 2016 July 3,489 August 3,179 September 3,243 October 3,229 November 3,247 December 3,186 January 2,794 February 2,995 March 3,113 April 3,158 May 3,441 June 3,607 2017 July 3,798 August 4,027 September 3,751 October 3,730 November 3,805 December 3,712 January 3,737 February 3,751 March 3,845 April 3,705 May 3,353 June 3,286 2018 July 3,297 August 3,203 September 2,876 October 2,810 November 2,797 December 2,834 2019 January 2,958 Source: Central Bank of Kenya 52 April 2019 | Edition No. 19 Statistical Tables Table 17: Central Bank Rate and Treasury Bills Year Month Central Bank Rate 91-Treasury Bill 182-Treasury Bill 364-Treasury Bill January 11.5 11.2 13.0 14.1 February 11.5 10.6 12.8 13.7 March 11.5 8.7 12.6 12.3 April 11.5 8.9 11.7 11.8 May 10.5 8.2 10.7 11.6 June 10.5 7.3 10.2 10.8 2016 July 10.5 7.4 9.9 10.9 August 10.0 8.5 10.8 11.7 September 10.0 8.1 10.8 11.0 October 10.0 7.8 10.3 10.4 November 10.0 8.2 10.3 10.8 December 10.0 8.4 10.5 10.6 January 10.0 8.6 10.5 11.0 February 10.0 8.6 10.5 10.9 March 10.0 8.6 10.5 10.9 April 10.0 8.8 10.5 10.9 May 10.0 8.7 10.4 10.9 June 10.0 8.4 10.3 10.9 2017 July 10.0 8.2 10.3 10.9 August 10.0 8.2 10.4 10.9 September 10.0 8.1 10.4 10.9 October 10.0 8.1 10.3 11.0 November 10.0 8.0 10.5 11.0 December 10.0 8.0 10.5 11.1 January 10.0 8.0 10.6 11.2 February 10.0 8.0 10.4 11.2 March 9.5 8.0 10.4 11.1 April 9.5 8.0 10.3 11.1 May 9.5 8.0 10.3 11.1 June 9.5 7.8 9.9 10.8 2018 July 9.0 7.7 9.3 10.3 August 9.0 7.6 9.0 10.0 September 9.0 7.6 8.8 9.8 October 9.0 7.6 8.5 9.6 November 9.0 7.4 8.3 9.5 December 9.0 7.3 8.4 9.7 January 9.0 7.2 8.9 10.0 2019 February 9.0 7.0 8.6 9.6 Source: Central Bank of Kenya April 2019 | Edition No. 19 53 Statistical Tables Table 18: Interest rates Short-term Long-term Overall Year Month Average Interest 91-Treasury Central weigheted Interbank deposit Savings Rate Bill Bank Rate lending rate Spread rate January 6.4 11.2 11.5 7.6 1.6 18.0 10.4 February 4.5 10.6 11.5 7.5 1.4 17.9 10.4 March 4.0 8.7 11.5 7.2 1.4 17.9 10.7 April 3.9 8.9 11.5 6.9 1.5 18.0 11.1 May 3.6 8.2 10.5 6.4 1.6 18.2 11.8 June 4.9 7.3 10.5 6.8 1.6 18.2 11.4 2016 July 5.5 7.4 10.5 6.6 1.7 18.1 11.5 August 5.0 8.5 10.0 6.4 1.7 17.7 11.2 September 4.9 8.1 10.0 6.9 3.8 13.9 7.0 October 4.1 7.8 10.0 7.8 6.1 13.7 5.9 November 5.1 8.2 10.0 7.6 6.5 13.7 6.0 December 5.9 8.4 10.0 7.3 6.4 13.7 6.4 January 7.7 8.6 10.0 7.2 6.1 13.7 6.5 February 6.4 8.6 10.0 7.7 6.8 13.7 6.0 March 4.5 8.6 10.0 7.1 5.9 13.6 6.5 April 5.3 8.8 10.0 7.0 5.7 13.6 6.6 May 4.9 8.7 10.0 7.1 5.9 13.7 6.6 June 4.0 8.4 10.0 7.2 5.6 13.7 6.5 2017 July 6.8 8.2 10.0 7.4 6.4 13.7 6.3 August 8.1 8.2 10.0 7.7 5.9 13.7 6.0 September 5.5 8.1 10.0 7.7 6.4 13.7 6.0 October 7.8 8.1 10.0 8.0 6.9 13.7 5.7 November 8.9 8.0 10.0 8.1 6.9 13.7 5.6 December 7.3 8.0 10.0 8.2 6.9 13.6 5.4 January 6.2 8.0 10.0 8.3 7.0 13.7 5.4 February 5.1 8.0 10.0 8.3 7.0 13.7 5.4 March 4.9 8.0 9.5 8.2 6.8 13.5 5.3 April 5.4 8.0 9.5 8.2 6.7 13.2 5.1 May 4.9 8.0 9.5 8.1 6.6 13.2 5.2 June 5.0 7.8 9.5 8.0 6.6 13.2 5.2 2018 July 4.8 7.7 9.0 8.0 6.5 13.1 5.1 August 6.6 7.6 9.0 7.8 6.5 12.8 5.0 September 4.5 7.6 9.0 7.8 6.3 12.7 4.9 October 3.5 7.6 9.0 7.6 5.7 12.6 5.0 November 4.1 7.4 9.0 7.4 5.4 12.6 5.1 December 8.0 7.3 9.0 January 3.3 7.2 9.0 2019 February 7.0 9.0 Source: Central Bank of Kenya 54 April 2019 | Edition No. 19 Statistical Tables Table 19: Money aggregate Year Growth rates (yoy) Money supply, M1 Money supply, M2 Money supply, M3 Reserve money January 10.9 10.8 11.1 9.1 February 9.9 10.0 9.3 9.2 March 10.9 10.7 11.2 16.1 April 10.6 9.9 9.5 9.0 May 12.8 9.8 8.6 7.6 June 13.4 9.2 8.1 4.9 2016 July 9.4 7.8 6.9 4.3 August 9.5 6.9 6.8 6.8 September 26.1 8.8 8.0 4.3 October 24.3 6.8 6.8 -7.4 November 25.3 6.2 6.2 0.5 December 28.1 4.8 3.7 4.8 January 21.9 5.3 5.2 5.1 February 23.7 4.5 5.4 2.9 March 22.1 5.7 6.4 3.2 April 23.6 6.3 7.1 9.0 May 21.8 6.2 6.7 5.2 June 22.5 5.4 6.0 2.9 2017 July 24.6 7.5 8.3 5.0 August 22.5 7.5 7.7 7.7 September 11.6 7.5 7.7 8.1 October 9.5 7.0 7.9 3.8 November 7.8 7.4 7.8 6.2 December 6.7 7.5 8.9 6.7 January 7.2 8.9 9.7 8.3 February 7.6 9.0 8.7 6.3 March 3.5 6.2 6.6 0.8 April 3.2 6.0 6.2 2.7 May 3.1 6.5 8.2 5.5 June 2.5 8.1 11.1 7.4 2018 July 3.9 8.4 10.8 2.1 August 2.1 7.8 9.9 6.6 September -0.2 6.8 9.2 6.0 October 3.0 8.1 9.8 7.4 November 1.6 7.1 9.1 9.0 December 5.8 8.6 10.9 12.1 Source: Central Bank of Kenya and World Bank April 2019 | Edition No. 19 55 Statistical Tables Table 20: Coffee production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 3,432 462 2,449 1,184 February 5,220 486 3,277 1,636 March 6,835 437 4,169 2,206 April 4,513 340 4,804 2,540 May 4,735 263 4,814 2,170 June 1,747 268 4,983 2,369 2016 July 569 324 3,987 1,798 August 3,723 431 3,719 1,637 September 3,284 437 3,173 1,399 October 1,573 410 3,116 1,489 November 2,374 468 3,929 1,691 December 1,666 514 2,886 1,252 January 5,190 590 3,214 1,553 February 6,081 606 3,868 2,094 March 5,460 507 5,447 3,231 April 4,563 299 4,201 2,698 May 1,639 276 5,424 3,117 June - - 4,443 2,501 2017 July 762 420 3,598 1,971 August 2,319 443 2,649 1,311 September 2,465 457 3,134 1,516 October 1,619 409 2,335 1,121 November 2,310 419 3,196 1,566 December 1,320 453 1,955 775 January 5,112 527 2,509 1,286 February 5,832 577 2,834 1,612 March 4,913 478 3,936 2,237 April 4,194 305 4,550 2,822 May 4,620 217 5,573 3,209 June - - 4,649 2,664 2018 July 1,221 357 4,683 2,457 August 2,235 337 2,973 1,547 September 2,299 289 2,520 1,141 October 2,493 321 3,521 1,467 November 2,334 368 4,619 1,730 December 1,577 404 2,312 921 Source: Kenya National Bureau of Statistics 56 April 2019 | Edition No. 19 Statistical Tables Table 21: Tea production and exports Exports value Year Month Production MT Price Ksh/Kg Exports MT Ksh Million January 50,308 279 36,575 11,013 February 43,969 253 43,292 12,200 March 45,330 234 37,571 9,887 April 37,571 214 39,313 9,517 May 36,573 223 44,901 10,658 June 35,603 243 52,175 12,613 2016 July 29,285 246 42,751 10,679 August 29,462 234 39,673 9,993 September 36,785 236 33,528 8,454 October 41,342 243 29,656 7,548 November 39,903 273 41,138 11,123 December 45,103 273 39,396 10,811 January 32,991 316 46,434 14,072 February 22,605 317 33,898 10,880 March 34,498 300 33,662 10,693 April 31,458 297 32,091 9,991 May 38,822 304 39,329 12,354 June 40,538 325 42,370 13,485 2017 July 31,565 310 41,437 13,442 August 32,693 300 29,628 9,269 September 38,386 305 43,469 13,570 October 43,420 316 41,173 13,147 November 45,374 309 39,128 12,713 December 47,507 285 44,413 13,634 January 40,834 304 48,447 14,964 February 27,939 302 47,357 14,657 March 30,987 284 34,488 10,471 April 44,580 268 33,565 9,830 May 43,356 263 42,533 11,703 June 43,299 257 45,182 12,463 2018 July 35,278 251 45,242 12,226 August 37,433 241 38,023 9,919 September 42,531 243 40,268 10,479 October 49,284 244 43,894 11,327 November 45,649 242 44,108 11,015 December 51,830 236 38,681 9,781 Source: Kenya National Bureau of Statistics April 2019 | Edition No. 19 57 Statistical Tables Table 22: Horticulture Exports Exports value Year Month Exports MT Ksh. Million January 20,160 10,927 February 22,337 10,151 March 24,314 11,140 April 25,931 8,611 May 21,260 7,004 June 20,157 10,293 2016 July 17,981 5,577 August 19,650 7,293 September 20,924 6,659 October 23,327 8,312 November 22,772 7,641 December 22,294 7,906 January 27,045 11,559 February 27,461 10,942 March 27,892 9,094 April 25,658 8,977 May 30,549 10,292 June 26,271 9,395 2017 July 22,179 8,660 August 23,357 9,237 September 23,818 8,962 October 24,337 9,059 November 21,676 8,275 December 23,905 10,871 January 27,131 14,899 February 29,603 16,457 March 32,994 12,617 April 29,654 12,875 May 27,657 14,557 2018 June 21,513 9,639 July 21,237 7,734 August 27,054 15,121 September 28,992 11,857 October 28,396 12,041 Source: Kenya National Bureau of Statistics 58 April 2019 | Edition No. 19 Statistical Tables Table 23: Leading Economic Indicators year to date growth rates (Exports MT, Percent) Year Month Horticulture Coffee Tea January 11.0 -13.9 -10.7 February 9.6 0.0 -2.7 March 11.3 -1.2 -0.3 April 13.9 5.2 7.4 May 13.3 6.3 16.5 June 14.2 8.5 21.5 2016 July 12.8 7.5 23.8 August 13.7 5.6 25.8 September 9.4 4.3 22.9 October 8.9 0.5 17.1 November 9.6 3.3 16.6 December 9.7 3.9 14.1 January 34.1 31.2 27.0 February 28.3 23.7 0.6 March 23.3 26.6 -2.9 April 16.5 13.8 -6.8 May 21.6 13.5 -8.1 June 22.9 8.6 -10.3 2017 July 22.9 6.0 -9.2 August 22.5 2.0 -11.1 September 21.5 1.7 -7.4 October 19.7 -0.5 -4.0 November 17.3 -2.1 -4.1 December 16.5 -4.1 -2.7 January 0.3 -21.9 4.3 February 4.1 -24.5 19.3 March 8.9 -25.9 14.3 April 10.5 -17.3 12.2 May 6.1 -12.4 11.3 June 2.2 -9.6 10.4 2018 July 1.5 -4.8 10.2 August 3.1 -3.5 12.0 September 5.0 -4.9 9.6 October 6.1 -1.5 9.3 November 2.1 9.6 December 2.8 7.4 Source: World Bank, based on data from Kenya National Bureau of Statistics April 2019 | Edition No. 19 59 Statistical Tables Table 24: Local Electricity Generation by Source Hydro KWh Geo-thermal Thermal KWh Wind KWh Total KWh Year Month Million KWh Million million million million January 322 392 93 808 February 297 392 95 784 March 335 383 112 830 April 303 394 102 800 May 334 403 92 830 June 348 342 113 803 2016 July 337 393 110 842 August 364 345 138 850 September 349 335 137 824 October 357 364 135 862 November 315 369 158 848 December 299 371 158 836 January 252 380 197 7.0 837 February 214 354 182 7.5 758 March 234 388 230 6.3 858 April 212 381 223 6.6 822 May 229 394 224 3.5 849 June 180 376 274 3.1 834 2017 July 193 402 271 1.5 867 August 251 415 159 3.3 829 September 239 403 213 3.6 859 October 217 416 224 4.3 861 November 305 411 153 7.1 877 December 250 436 184 7.3 879 January 223 430 242 3 900 February 193 387 249 7 837 March 248 448 202 4 903 April 317 428 139 3 887 May 386 447 83 2 918 June 401 430 82 1 914 2018 July 420 438 87 2 947 August 417 427 117 3 964 September 392 440 85 7 925 October 365 432 87 75 960 November 340 398 80 139 957 December 283 423 92 133 931 Source: Kenya National Bureau of Statistics 60 April 2019 | Edition No. 19 Statistical Tables Table 25: Soft drinks, sugar, galvanized sheets and cement production Soft drinks litres Galvanized sheets Year Month Sugar MT Cement MT (thousands) MT January 50,502 41,348 21,330 533,490 February 45,237 41,440 20,102 531,813 March 58,038 48,865 20,120 541,438 April 44,429 42,148 23,109 568,253 May 43,189 36,874 21,980 585,929 June 39,191 36,202 20,180 547,238 2016 July 42,393 32,158 18,320 575,193 August 39,331 38,508 24,190 591,612 September 48,884 40,291 21,045 528,494 October 46,131 43,203 18,328 573,034 November 41,877 40,141 19,143 584,780 December 52,185 49,966 19,431 545,956 January 50,409 53,071 26,230 565,440 February 43,353 49,094 22,994 491,307 March 50,623 42,238 22,574 570,522 April 46,399 26,230 23,225 535,061 May 40,742 15,246 23,081 482,762 June 45,875 16,113 15,424 513,313 2017 July 41,980 17,882 22,640 553,631 August 41,217 10,892 15,296 451,651 September 40,221 21,649 24,188 498,167 October 45,275 32,296 21,312 498,374 November 45,073 43,175 24,357 483,956 December 66,378 49,240 21,438 518,410 January 52,062 62,819 23,919 494,709 February 49,685 53,833 21,890 490,020 March 49,140 49,148 22,048 476,730 April 45,690 36,682 21,434 474,740 May 40,699 28,933 22,271 452,034 June 43,260 28,320 21,434 454,322 2018 July 43,725 30,105 22,510 465,575 August 48,795 35,646 21,847 473,861 September 43,116 37,652 22,425 460,546 October 42,049 45,324 23,906 470,524 November 38,768 22,877 460,967 December 461,922 Source: Kenya National Bureau of Statistics April 2019 | Edition No. 19 61 Statistical Tables Table 26: Tourism arrivals Year Month JKIA MIA TOTAL January 65,431 9,407 74,838 February 62,856 9,983 72,839 March 49,996 8,551 58,547 April 51,311 3,869 55,180 May 59,294 3,578 62,872 June 64,451 4,182 68,633 2016 July 81,729 7,832 89,561 August 87,141 9,817 96,958 September 67,249 8,381 75,630 October 63,229 9,015 72,244 November 61,224 7,990 69,214 December 67,602 10,267 77,869 January 67,876 11,482 79,358 February 62,659 7,809 70,468 March 65,095 8,406 73,501 April 63,842 4,128 67,970 May 65,711 2,678 68,389 June 75,049 5,072 80,121 2017 July 97,955 7,284 105,239 August 79,053 10,729 89,782 September 78,329 9,111 87,440 October 56,034 7,557 63,591 November 61,617 10,956 72,573 December 90,745 15,117 105,862 January 61,137 15,512 76,649 February 70,169 13,482 83,651 March 61,652 14,321 75,973 April 49,388 6,653 56,041 May 70,981 4,047 75,028 2018 June 71,461 5,147 76,608 July 115,908 10,889 126,797 August 100,698 14,291 114,989 September 81,052 9,588 90,640 October 83,241 12,192 95,433 November 83,097 14,948 98,045 Source: Kenya National Bureau of Statistics 62 April 2019 | Edition No. 19 Statistical Tables Table 27: New Vehicle registration All body types Year Month (numbers) January 14,652 February 12,771 March 10,280 April 13,699 May 11,855 June 22,428 2016 July 23,442 August 18,288 September 18,527 October 13,018 November 27,286 December 27,431 January 23,889 February 20,748 March 27,720 April 23,074 May 24,720 June 24,509 2017 July 29,346 August 22,422 September 21,137 October 18,889 November 22,954 December 23,264 January 23,676 February 24,123 March 23,290 April 21,920 May 23,729 2018 June 21,011 July 24,232 August 28,649 September 23,134 October 28,466 November 27,713 Source: Kenya National Bureau of Statistics April 2019 | Edition No. 19 63 SPECIAL FOCUS: ANNEX Special Focus Table 1: Decomposition of TFP by factor shares between 2000 and 2015 Agricultural Agricultural Livestock Machinery Materials, Materials, Labor land (Capital) (Capital) Crops Livestock (feed, (fertilizer, pharmaceuticals) pesticide, seed) Kenya 0.25 0.32 0.31 0.02 0.06 0.05 Rwanda 0.25 0.32 0.31 0.02 0.06 0.05 Tanzania 0.25 0.32 0.31 0.02 0.06 0.05 Uganda 0.25 0.32 0.31 0.02 0.06 0.05 Ethiopia 0.25 0.32 0.31 0.02 0.06 0.05 Indonesia 0.39 0.33 0.12 0.01 0.05 0.10 Malaysia 0.39 0.33 0.12 0.01 0.05 0.10 Philippines 0.39 0.33 0.12 0.01 0.05 0.10 Thailand 0.39 0.33 0.12 0.01 0.05 0.10 Vietnam 0.39 0.33 0.12 0.01 0.05 0.10 Source: USDA, 2018 66 April 2019 | Edition No. 19 Unbundling the Slack in Private Sector Investment Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction The 19th edition of the Kenya Economic Update comes against a backdrop of a strong rebound in Kenya’s GDP growth supported by favorable harvests in 2018, improved investor sentiment and a stable macroeconomic environment. Nonetheless, delays in the March-May 2019 rainy season and a growing need for emergency interventions to deal with food shortages in several counties is a reminder of the outstanding challenges in managing agricultural risks in Kenya. Against this background, the Special Focus topic makes a timely contribution by highlighting a few of the many factors underlying low agricultural productivity and what can be done to transform the sector and deliver on food and nutritional security. The report has three key messages. First, the Kenyan economy rebounded in 2018-thanks to a recovery in agriculture and a still resilient services sector. Nonetheless, the demand side shows signi cant slack with growth driven purely by private consumption as private sector investment lags and government spending is slowing due to planned scal adjustment. The benign demand pressure is re ected by a lack of adequate credit to the private sector, slow demand for industrial imports, and weak pro tability by corporates. The medium-term growth outlook is stable but recent threats of drought could drag down growth. The Bank’s growth projection for 2019 is for a slight decrease to 5.7 percent, before rising to about 5.9 percent over the medium term. Second, boosting credit growth to the private sector and improving scal management could help strengthen aggregate demand and economic growth. Regarding private sector credit growth (which stands at 3.4 percent in February 2019), policy could intervene by addressing factors that led to imposition of interest rate caps and by building a consensus for its eventual reform. Making these changes will also restore the potency of monetary policy, which is essential in responding to shocks emanating from changes to the business cycle. With regard to the potential for improving scal management, there is scope to enhance revenue mobilization, improve promptness of payments to rms that trade with the government to restore liquidity, and strengthen debt management by putting in place an electronic trading platform for issuance of government securities. Finally, accelerating the implementation of structural reforms aimed at crowding in private sector participation in the Big 4 development agenda remains crucial. Third, and regarding the Special Focus topic, a two-pronged policy suggestion is proposed, including measures to transform agricultural productivity and initiatives to boost farmer’s income with improved farm gate prices. In order to transform the sector’s productivity, there is need to reform the fertilizer subsidy program to ensure it is e cient, transparent and well targeted; invest in irrigation and agricultural water management as well as other enabling infrastructure; and leverage modern agricultural technology to generate a wide range of agricultural support applications, including e-extension services. Secondly, and to boost farm gate prices and farmers’ incomes, policy could seek to end post-harvest losses and marketing challenges by fast-tracking implementation of the national warehouse receipt system and a commodities exchange; and by scaling-up agro-processing and value addition to increase returns on agricultural produce. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @Worldbankkenya Nairobi, Kenya #KenyaEconomicUpdate Telephone: +254 20 2936000 Fax: +254 20 2936382 http://www.worldbank.org/en/country/kenya Produced by Macroeconomics, Trade & Investment; Poverty and Equity Global Practices; and Agriculture Global Practices