Why Kenya is primed for economic take-off

Domenico Fanizza, assistant director at the IMF. Illustration/Joseph Barasa  Nation Media Group

By Washington Gikunju 

The government jointly with the International Monetary Fund (IMF) have organised a conference to discuss Kenya’s economic success, prospects and challenges.

The conference, to be held on Tuesday and Wednesday next week, is dubbed “Ready for Take Off” and tracks Kenya’s expected transition from a frontier to an emerging economy.

The Business Daily talked to Domenico Fanizza, an assistant director at the IMF, on a wide range of issues facing Kenya’s economy.

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In its announcement of the forthcoming conference, the IMF describes Kenya as “one of the success stories of Africa’s economic resurgence.” How is this so, in terms of, what criteria does the IMF use to describe Kenya as a success story?

Today, Kenya grows at a good pace, with an increasingly favourable outlook. Inflation has remained close to the authority’s target of five per cent. The country’s external position has improved substantially, despite surging capital imports for oil exploration. Financial inclusion is advancing rapidly, giving millions of people a stake in the economy. Foreign investment flows have risen and boosted the stock market.

This is the result of significant reforms that Kenya has implemented in recent years, supported by strong macroeconomic policies. It has overhauled its institutions by moving to a decentralised form of government in line with the 2010 Constitution.

Key reforms include better and more accountable management of public resources which have allowed Kenya to start upgrade its energy and transportation infrastructure.

Mobile and agent banking have provided financial services to millions who never had such access and can now better deal with unforeseen events that may affect their livelihood.

Sound monetary and fiscal policies have reduced Kenya’s vulnerabilities by taming inflationary pressures, increasing international reserves, lowering the current account deficit, and improving both public and external debt positions.

What are Kenya’s main economic opportunities and challenges, in the medium to long-term?

Kenya’s economic outlook is quite promising. A peaceful political transition has removed uncertainty and economic activity is gaining momentum. Sound macroeconomic policies have boosted private investment, both domestic and foreign, attracted by a low inflation environment, a flexible but generally stable exchange rate, and free capital flows.

Kenya is already among the top five destinations for foreign direct investment in sub-Saharan Africa (SSA), with new players expanding into new areas like mining and oil. Domestic activity is vibrant, with impressive indicators on the use of mobile phones, including for bank transactions, internet penetration and e-commerce.

Kenya leads the way in the process of regional integration, having become the second largest African investor in other SSA countries, with a number of regional banks rapidly expanding operations throughout East Africa. Its service sector already operates regionally, with an expanding business-process-outsourcing sector that has attracted multinational corporations to open regional offices in Nairobi in recent years.

By and large, the foundations for faster and lasting growth have been laid.  This does not mean that the task is over. If anything, now is the time to redouble efforts to build upon the foundations of success.  To this end, let me stress an issue that I believe is key to transforming the country into an emerging market economy that delivers better living conditions to all Kenyans

The quality of public spending needs to improve by providing more resources to both infrastructure investment and social safety nets.  There is a need to control the wage bill that threatens to squeeze out resources for development spending. 

The ongoing fiscal decentralisation provides the opportunity to improve accountability and the quality of service delivery, but needs to guard against risk of boosting spending because of overlapping functions. Also, revenue mobilization needs to improve to provide resources for much needed infrastructure and social spending.

As Kenya becomes more integrated in the global economy, economic policies need to ensure that Kenya remains robust in the face of inevitable external shocks, which can result from volatility in trading partner economies or international capital markets.

Kenya, as is noted in the agenda for the conference, has been turning East in search of economic development partners. What, in the IMF’s view, are the opportunities that come with this policy shift? What are the challenges?

The interest of non-traditional development partners in Kenya has been the result of a natural process as new opportunities for cooperation have emerged in infrastructure, energy provision, telecommunications, and now natural resources.

The experience of these new partners would be very valuable for Kenya’s transition to emerging-market status, including in relation to how to make sure that growth is sufficiently inclusive to incorporate the poor among its beneficiaries, and to manage the rising demands from an emerging middle class.

How can the pertinent issue of youth unemployment and extreme poverty (and economic inequalities) be tackled in Kenya?

Let me be clear on this: Kenya can and must grow faster to address it immense social problems and provide employment opportunities for its young and growing population. 

There can be no complacency about Kenya’s current economic success. Poverty remains unacceptably high and progress toward the Millennium Development Goals remains insufficient. This can happen only in context of sustained economic growth.

We have already discussed some of the policy challenges. One of the purposes of the Conference we are organising together with the Treasury and the Central Bank of Kenya is exactly to bring together the public and private sectors, civil society, and academia to reflect on the successes so far, but also to discuss the outstanding challenges, such as infrastructure bottlenecks and the need to create jobs for the young population. Participation by speakers from emerging markets in Asia and Latin America will enrich the discussion by drawing on successful experiences elsewhere in the world.

The IMF has severally raised the issue of closer regulation for financial institutions with cross-border operations. What are the risks currently posed by banks that already have cross-border operations, and how can these be mitigated?

As already noted Kenyan banks have expanded quickly their cross-border activities. Penetrating new financial markets always entails new credit and operational risks.

The CBK has already started to monitor these risks by establishing colleges of supervisors, which gather the supervisory authorities from both the host and home countries to discuss supervisory issues. Nonetheless, there is need to coordinate problem-resolution frameworks across countries to minimize uncertainty and strengthen consolidated supervision.

The IMF has consistently said that the level of Kenya’s public debt is manageable. What are the facts and figures that the IMF uses to make this assessment?

In the context with the program with Kenya, the World Bank and the Fund have conducted what we call a debt-sustainability assessment that looks into the sustainability of debt, using a standard methodology that has been applied to all members of the Fund.

The analysis shows that Kenya faces low risk of external debt distress thanks to the development of an active domestic financing market, and also low risk of public debt distress thanks to fiscal consolidation and a strong preference for concessional debt.

Debt management has been guided by the government’s medium-term debt management strategy that follows best international practices in this regard. One needs to be cautious in the event of shocks, especially those that have an impact on the exchange rate and on growth.