Kenya’s success in becoming a middle-income country hangs on the nation’s ability to grow its exports and decrease poverty, the World Bank economists said Monday.
Exporting more would help the country to effectively deal with the fiscal and monetary challenges it has faced in the past 10 years as it reduces the current reliance on domestic consumption as a major driver of growth, the economists said even as they forecast a 5.7 per cent growth this year.
“For Kenya to grow beyond five per cent, it needs to enhance the contribution of exports as an engine of growth which is now dominated by consumption. Today, net exports are a drag on growth, having reduced overall growth by 4.1 per cent in 2012 — and as reflected in a large and widening current account deficit,” the bank said in its eighth edition of the Kenya economic update report.
The bank estimates that if Kenya was to balance its external position (that is, matching imports with exports while maintaining current levels of consumption and investments) its overall growth would stand at eight per cent — only two percentage points shy of the 10 per cent target.
Speaking four days after Treasury secretary Henry Rotich presented his Budget to Parliament, the World Bank economists said Kenya needs a heavy dose of structural and tax reforms to unleash the potential that is required for accelerated growth.
“The economy needs structural reforms to improve the business environment and for more Foreign Direct Investment flow to Kenya,” said John Randa, the bank’s country economist for Kenya, and one of the lead authors of the economic outlook report.
“Such reforms will include tax and expenditure measures that will increase savings and investment to expand manufacturing exports, taking advantage of Kenya’s low labour costs and its coastal location.”
The statement was partly seen as signalling the World Bank’s backing for the proposed and controversial VAT reforms that many have opposed citing their possible impact on the cost of living for poor households.
READ: Mixed reactions to Rotich’s tax and spend plan
A robust exports sector is also seen critical to helping Kenya deal with its most pressing socio-economic challenge — unemployment — and restoring macro-economic stability through a reduction in exchange rate volatility.
The World Bank economists also placed reducing inequality at the centre of Kenya’s progression to a middle-income country status saying an increase in targeted cash transfers and other public funds to poor households would increase the speed of poverty reduction and speed up growth.
The bank estimates that the rate of poverty dropped from 47 per cent in 2005 to about 38 per cent currently. That estimate is hinged on the assumption that economic growth improved but the country’s high level of inequality stayed the same since the last household survey was done in 2005.
The World Bank said the speed of poverty reduction could improve from the one percentage point per year to two percentage points with the roll-out of policies that reduce inequality as has happened in Uganda and Rwanda. Cutting poverty levels at the rate of two percentage points per year would enable Kenya to reduce the number of poor people to almost zero by 2030, the report says.
“Indeed, Kenya can only eliminate extreme poverty by 2030, the World Bank’s global poverty target, if it reduces poverty by two percentage points each year. Such a high rate of poverty reduction is only possible if growth is accompanied by a reduction in inequality,” said the report which was released in Nairobi Monday.
For Kenya, the urgency in reducing the inequality gap lies in recent findings showing that a child is 30 per cent more likely to survive to age five in Rwanda, Ghana and Nepal than in Kenya — which has higher per capita income but poor distribution of the same among citizens.
If there is no change in inequality, economic growth will only yield a one-percentage point reduction in poverty annually as has happened in the past 20 years, the World Bank said.
“Though poverty has come down to 38 per cent, we need to tackle inequality. If you reduce inequality, then we will bring down poverty much faster,” said World Bank’s Kenya country director Diarietou Gaye.
Ms Gaye said accelerated economic growth was critical to poverty reduction that must be monitored through regular household surveys.
Such economic growth, she said, would call for reforms in the business climate to increase investment and create more jobs.
The report said public spending should work to remove the role that geography, gender, ethnicity and wealth play in influencing access to key services, “so that everyone is in a good position to seize the opportunities being generated in a growing economy.”
Economic secretary Geoffrey Mwau said the government was in the process of expanding the cash transfer process and public resources for the social sector, including education and health.