Lessons from a tough 2018

Last year was an economically dynamic year for Kenya with both positive and negative elements that provided key lessons. The first lesson is that strong gross domestic product (GDP) growth does not necessarily translate to robust business activity. It is true GDP growth in 2018 was stronger than in 2017; first quarter (Q1) was at 5.7 percent compared to 4.8 percent in 2017, 6.3 percent in Q2 compared to 4.7 percent in 2017.

This was, however, juxtaposed with poor business performance felt by both large companies and small and medium sized enterprises (SMEs). Several large companies have already issued profit warnings, and non-performing loans rose to Sh326 billion from Sh260 billion in 2017 driven by significant defaults from small businesses. Thus 2018 was a year of mixed fortune—some sectors were able to thrive, but fundamental structural issues continued to dampen business growth and development.

A second lesson was the effect of fiscal policy, particularly public debt accrual, on the lived reality of Kenyans. Kenya’s public debt stands at over Sh5 trillion with no reduction in debt appetite on the horizon. The Treasury introduced new taxes targeting Kenyan’s across the board to raise revenue undoubtedly informed by the need to service debt obligations.

Thus a new tax on fuel was implemented and later in the year the government announced that it seeks to implement presumptive tax on informal businesses. Thus the link between growing debt and taxation became a lived reality and painful lesson for Kenyans.

Third, on a positive note, and ironically, 2018 signaled a new recognition of the importance of small business or Micro, Small and Medium Enterprise (MSMEs). The government held an inaugural SME conference attended by both the President and Deputy President and other senior officials. Further, senior government officials attended MSMEs fairs and exhibitions in Kenya and in the region.

The irony, however, is that while one arm of the government has become more alive to the importance of and the need to support MSMEs, it was met by insensitivity in others in the form of presumptive tax on the very same sector. It is hoped that the government will better coordinate itself going forward and focus on the development and strengthening of the MSMEs rather than extracting revenue from a neglected sector surviving through subsistence business activity.

Finally, the year revealed renewed global interest in Africa, particularly private sector development. China unveiled a $60 billion plan for economic engagement with Africa including a Special Loan facility for the development of African SMEs. The US created the $60 billion International Development Finance Corporation mandated to spearhead private sector investment through both debt and equity; and the European Union (EU) proposed the €40 billion Africa-Europe Alliance for Sustainable Investment and Jobs.

This is not to say African governments were ignored, but there is fresh interest in partnering on the development of private sector in Africa.

In short 2018 was a mixed bag. On one hand there were painful lessons that will hopefully inform economic strategy going forward, but there were important positive elements that Kenya and Africa can leverage to build a more prosperous 2019.