14 March 2018

Kenya Can Be U.S.$200 Billion Economy By 2025

opinion

Kenya has seen robust growth in recent years and can grow its gross domestic product (GDP) from $80 billion to $200 billion by 2025.

But it has to grow at an estimated 12 percent compound annual growth rate (CAGR), in line with the 11 per cent of 2012-2017.

The services sector contributes 47 per cent of GDP -- compared to an average of 60-70 per cent in large emerging markets.

For services to make up 65 per cent of GDP by 2025, they would have to grow at a stellar 17 per cent CAGR -- much higher than the 12 per cent GDP growth.

DIGITAL ECONOMY

Apart from the traditional service sectors, areas such as the digital economy would reduce the leakages of a cash-based economy and bring more citizens into its organised economy. It would also ensure delivery of State subsidies to beneficiaries.

Services include ramping up the quality of skill centres to improve employment prospects and expand its addressable consumer-base -- critical amid the high income disparity.

Only 17 per cent of GDP comes from industry, far less than the average 30 per cent in large emerging markets. For the sector to comprise even a 17-20 per cent proportion, it must grow at a 12-14 per cent CAGR.

Kenya's gross investment, at 17 per cent of GDP, has lagged far behind the 35-40 per cent of China, Malaysia and Thailand in their initial years of industrialisation. If it can take this to 25 per cent, its gross investment has to grow at a sheer 18 per cent CAGR -- 1.5 times its estimated GDP growth.

PRODUCTIVE IMPORTS

Investment correlates with productive imports such as machinery. Import comprised 22 per cent of GDP, more than the share of investment in the economy.

Newly industrialising nations saw a 50-60 per cent share of import against investment. This implies that a significant part of Kenya's imports are for non-productive purposes not contributing to gross investment.

If import grows at a 7 per cent CAGR, its share can dip to 15 per cent of GDP by 2025 (or 60 per cent of the share of investment, estimated at 25 per cent of GDP). So, where should investments go?

Hard infrastructure apart, Kenya needs affordable housing and has to ramp up urban infrastructure in its second-cities. New industry clusters have to be away from Mombasa and Nairobi to create growth in the other districts, with infrastructure connecting them to the two.

EASE OF DOING BUSINESS

It also means improving its ease of doing business ranking further, over the jump of 28 places seen in the past two years.

Agriculture rakes in 36 per cent of GDP, far higher than the sub-10 per cent in most large emerging markets. If that was halved to 17 per cent by 2025, it would grow at a 2 per cent CAGR.

However, the focus has to be on improving farm productivity since agriculture employs more than 60 per cent of the country's workforce.

Kenya has to unblock unproductive labour and re-skill it in high-growth sectors such as construction and tourism. That would mean investing more in skill training centres.

It also means investing in irrigation and market linkages to improve yield and ensure that the farmer gets the correct price.

Only 14 per cent of Kenya's GDP is estimated to come from exports.

EXPORT SECTOR

The export sector has to grow at a 13 per cent CAGR to meet the forex demand for imports and keep trade imbalance nil.

The shilling was largely flat against the dollar last year as the Rwandan franc and Ethiopian birr (who export common products, such as horticulture) fell.

This makes it all the more imperative to draw up free trade agreements and export promotion schemes for more opportunities. It should push services-sector export and not rely only on merchandise since that would marry its need to push services too.

Kenya has a high share of private consumption-to-GDP ratio, 77 per cent, versus 60 per cent in most emerging markets. Bangladesh and Tanzania, with a similar per capita income, spend less and save more.

EXTERNAL BORROWING

Over-dependence on external borrowing to fund investment is not healthy since it causes collateral challenges if projects do not yield as planned.

Kenya needs to double its savings rate from 14 per cent to over 30 per cent by expanding its domestic financial sector with more products and regulations. That would incentivise more saving and postpone consumption.

These segmental estimates for a $200 billion GDP by 2025 may sound over-ambitious.

But it is not unachievable, going by recent achievements.

If specific drivers such as investment, services export and savings are given the extent of push derived here, it would re-affirm its place as a key economy in Africa.

The author is financial services professional based in Mumbai, India, is a researcher for South Asia Fast Track. 

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