International Monetary Fund (Washington, DC)

Kenya at the Economic Frontier - Challenges and Opportunities

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Kenya today is already a “frontier” economy. The impressive turnaround in its performance is the outcome of important changes in the economic, political, and social landscape over the past few years.

At the economic level, prudent policies have helped anchor the conditions for strong and stable growth. Fiscal discipline has improved both the external and domestic debt positions. A more modern framework for monetary policy has helped keep inflation expectations in check, despite adverse shocks. And stronger supervisory powers have maintained financial stability, even as the financial system is expanding rapidly and capital markets opening up.

The result? Kenya has built a strong external position and is now in a favorable condition to tap international financial markets with the planned Eurobond issue.

Going forward, as Kenya becomes more integrated in the global economy, it is bound to be exposed to external shocks—through spillovers from trading partners’ economies or volatility in international financial markets. Further bolstering its foreign reserve position and lowering its debt burden will ensure that the country is resilient to these shocks.

At the political level, Kenya has not only overhauled its form of government by implementing the 2010 Constitution, but also gone through a delicate political transition—a transition that culminated with the March 2013 peaceful elections. Kenya’s new system of checks and balances means that management of public resources is now more transparent and subject to more accountability. These changes should support overall economic stability.

In addition, Kenya has fully embraced the opportunities afforded by technology in enhancing financial inclusion. This country now boasts the highest share of population with access to financial services in Sub-Saharan Africa (more than 70 percent).

What does this mean practically speaking? It means that millions of Kenyans who were previously outside the financial system now have a stake in the economy. The younger generation, in particular, has been increasingly empowered to take advantage of new opportunities.

Kenya has indeed come a long way over the past few years. The key is now to build on this momentum, with emphasis in the following areas. We might call them the “Three C’s”: completing fiscal devolution; closing infrastructure gaps; and continuing regional integration.

The first “C”: Completing fiscal devolution

We can all agree that devolution and fiscal decentralization are important steps. And yes; the process will be complex and the risks are significant. But I recognize that expectations are high. It is crucial that devolution is implemented successfully: crucial to secure access to resources to all parts of the country; and crucial to ensure that every region gets to benefit from improved economic conditions.

If done properly, this kind of devolution can bolster social cohesion, by increasing accountability in the management of public resources, and improving the quality of services delivery. It can also create new private sector opportunities in the new counties.

But coming back to the risks, it is imperative that devolution is done right. That means spending needs to remain within the available envelope of public resources—and be transparent. It also means avoiding duplication of functions between the central and local government.

The second “C”: Closing infrastructure gaps

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