Kenya, Rwanda race for middle-income status

The Thika Superhighway. One of the major drivers of economic growth for Kenya is the ongoing investment in infrastructure. FILE 

By GEOFFREY IRUNGU

In Summary

• Ernst & Young projects Kenya and Rwanda could reach middle-income status by 2025.
• The projection is based on Kenya’s high foreign direct investment (FDI) inflows, infrastructure development and a diversified economy which has set a basis for rapid growth.

Kenya and Rwanda are the only East African countries expected to reach middle-income status by 2025, financial consulting firm Ernst & Young has predicted.

The E&Y projection is based on Kenya’s high foreign direct investment (FDI) inflows, infrastructure development and a diversified economy which has set a basis for rapid growth.

The report titled Africa Attractiveness Survey predicts that the economy is likely to grow by at least four per cent on average in the years to 2017, lifting most Kenyans out of poverty.

“As of today, 22 sub-Saharan Africa countries (45 per cent of the total), as well as five North African countries, have attained middle income status as defined by The World Bank and, if current growth rates are sustained, 13 more (Kenya included) more could reach middle income status by 2025,” says the report.

By World Bank definition, a middle-income country had a per capita income of at least $1,026 per person per year (an equivalent of Sh87,200) in 2011, but while this rises every year Kenya’s average rises more slowly because of population growth of about 2.5 per cent annually.

In 2011, Kenya’s income per capita was 77,000 (or $906) and in 2012 it was Sh84,200 (or $991). Last year, the World Bank said Kenya may achieve the middle income status by 2016 if it sustains an average GDP growth rate of 4.5 per cent.

The Ernst & Young report said Kenya would achieve the middle-income status despite its economy being the slowest growing in the eastern African region in the next five years.

Uganda’s economy will grow at 5.8 per cent, Tanzania’s at six per cent and Rwanda’s at 6.5 per cent. Only Burundi is expected to grow its economy at less than four per cent during the five-year period.

One of the major drivers of economic growth for Kenya and attractions for foreign investors is the ongoing investment in infrastructure. It is listed as the fifth in Africa in terms of infrastructure development with the top four countries being South Africa, Nigeria, Egypt and Algeria.

Kenya is listed as having invested $32.9 billion in 60 ongoing infrastructure projects against South Africa’s $129.9 billion in 134 projects and Nigeria’s $95.5 billion in 106 projects. Egypt has put in $60.2 billion in 82 projects while Algeria has $87.2 billion.

(Read: Kenya tops growth of new investments into Africa)

The survey report noted that the majority of the total infrastructure projects are related to power (37 per cent) and transport (41 per cent). In the power sector, Kenya has been investing in geothermal exploration and in exploitation and expects to bring into the national grid some 280MW by April next year.

It said there were over 800 active infrastructure projects across different sectors in Africa than in 2012, with a combined value in excess of $700 billion. Reforms in business facilitation and improved financial access have also contributed to expectations of higher economic growth, the report says.

In a recent interview, Ernst & Young Kenya office CEO Gitahi Gachahi said that access to finance for growth, especially for small and medium enterprises (SMEs) remained one of the most critical factors in maintaining and increasing the pace of economic growth.

“We keep talking about accessing finance. What we need is to facilitate SMEs to get affordable credit and you will see higher GDP growth,” said Mr Gachahi.

 

The report cited Kenya as among the leading in receiving foreign direct investments (FDI) in Africa in the past ten years. Kenya ranked eighth in terms of the rate of attracting FDI between 2003 and 2012. It ranks third after Ghana and Republic of Congo when taking the five-year period between 2007 and 2012 in terms of the rate of FDI attraction.

In the next 30 years or so, the report said that Kenya is likely to be among the countries that will follow the developmental path taken by Asian tigers, Mexico and Turkey.

“By the 2040s, we have no doubt that the likes of Nigeria, Ghana, Angola, Egypt, Kenya, Ethiopia and South Africa will be considered among the growth powerhouses of the global economy,” said the Ernst & Young survey report.

As a source of FDI to other parts of Africa, Kenya came eleventh globally. Five of the top ahead of Kenya were European countries, namely, the UK, Germany, Spain, Portugal and France. Other countries were the US, India, UAE and China.

The only other African country that was listed ahead of Kenya in terms of investing on the continent was South Africa.