Kenya’s deep rooted economic problems cannot be fixed by taxes alone

According to recently released figures by Kenya National Bureau of Statistics (KNBS), Kenya’s economy in 2023 grew at the fastest rate in 5 years largely driven by rebounding agriculture and tourism whilst real wages shrunk for the 4th consecutive year.

So, did the country deliberately set out to prioritise agriculture and tourism in the short –medium term plans?

in Agriculture for example, you would expect to see a very vibrant supporting ecosystems such as universities conducting agro related research, labs training people who can work in the sector, well-functioning connections between universities and agro industries so that new innovations can get to the market, specialised extension services for agro products, access to agro related funding and other established infrastructure that can quickly get the goods and services to local, regional and international market.

In fact, proponents of industrial policy indicates that once a country achieves such high levels of value chain alignment, it is relatively easy to start the production of products that need related technology e.g. food sub sector, because similar skills, technology and infrastructure are required and therefore industries producing those technologies can draw from a supportive ecosystem, with an equipped skills base, existing supply chains, retail networks, massive scale effects and infrastructure that suits their needs.

Read: Impact of global trends on Kenya’s economic fortunes

However, many investors (current and potential) I have with across East Africa would say there is no longer an incentive to invest in the country’s agricultural sector. Emerging issues such as climate change, sustainability demands, low domestic demand and lack of regional and international competitiveness is making even the task a lot harder.

It is at this juncture that a coherent industrial policy therefore becomes the tool for shaping a sector through incentives and disincentives. The Government of Kenya has in the recent past deployed incentives such as import subsidies, tax incentives through Special Economic Zones, industrial parks, input subsidies (fuel and fertilizer) amongst others in an attempt to address some of the key concerns.

In short, what is our problem? Market actors tend to invest where ecosystems are best developed and where investment risks are lowest, because deviating from it is expensive.

If the Government with a limited fiscal space, is serious about building the agriculture sector, tax reductions, exemptions or even cuts may not necessarily be the solution, it has to combine incentives (carrots) and regulations (sticks) such that certain sectors are prioritized over others based on social performance, since the country’s real wages are shrinking fast.

For example, since the Government is now cutting down on education spending, it makes sense to support agro sectors that have the highest component of mass employing those without formal skills.

Equally, since both agriculture and tourism have emerged strongly as key economic drivers, it is imperative to foster new industrial development policies that are at the intersection of agriculture and tourism or perhaps consider swapping pending tax refunds with a combination of well-defined social and environmental performance factors etc.

Obsession with public debt repayment aside, successfully orchestrating Kenya’s delicate economic situation is key for ensuring a prosperous and resilient economy that meets the basic needs of citizens and future generations and delivers long-term stability.

But again, as a country, do we have the political, cultural and governance discipline and maturity, devoid of corruption, rent seeking tendencies and nuanced state capture practices, to execute on medium- and long-term planning.