Letters

How Kenya ought to sustain position as a key FDI hub

hub

Summary

  • The country has over the years remained to a large extent resilient to many global economic and financial shocks.
  • The local currency has largely remained strong against major global currencies compared to comparable African economies.
  • Kenya has been in the frontline in wooing investors having attained position 56 out of 189 countries in the World Bank’s Ease of Doing Business rankings in 2019.

Kenya’s real Gross Domestic Product (GDP) is estimated to have contracted by 0.3 percent in 2020 compared to a growth of 5.0 percent in 2019 based on the Economic Survey, 2021. This was to a large extent attributable to the Covid-19 pandemic which swept across the world from March 2020.

The contraction was spread across all sectors of the economy, but certain sectors received a heavy blow due to changes in ways of working and various containment measures taken by the Government. Among the most affected sectors were hospitality, education and tourism.

Notably, however, the country has over the years remained to a large extent resilient to many global economic and financial shocks. The local currency has also largely remained strong against major global currencies compared to comparable African economies.

This is attributable to the fact that the country prides itself as one of the few countries with a highly diversified economy in Africa. It is also not dependent on the extractive industry which characterises many African economies such as Angola, DRC and Nigeria.

Based on the Economic Survey, 2021 the contribution of various critical sectors to the GDP was largely balanced other than the agricultural sector which was an outlier and contributed 23% to the GDP. This is, however, in tandem with the fact that the sector employs the largest proportion of Kenyans either directly or indirectly.

The other key sectors that made major contributions to the GDP are manufacturing which contributed 7.6% to the GDP, wholesale & retail trade contributed 8.1%, transportation & storage contributed 10.8%, while financial and insurance activities contributed 6.5% to the GDP.

Foreign Direct Investment (FDI) has emerged as a key driver of sustainable growth in Africa with Governments putting in place economic policies and tax incentives to encourage foreign investors to set up bases in their country.

Kenya has been in the frontline in wooing investors having attained position 56 out of 189 countries in the World Bank’s Ease of Doing Business rankings in 2019. This is a culmination of concerted efforts by the Government to improve the general business operating environment. The Covid-19 pandemic reduced the flow of FDI with the net foreign direct investment inflows declining by 11.9% from a surplus of KSh 87.5 b in 2019 to a surplus of Ksh 77.1b in 2020.

Nevertheless, the country still received substantial FDI due to the diversified nature of the economy with FDI flowing into a wide array of sectors such as manufacturing, business services, ICT and retail. These sectors have historically proven that they create sustainable jobs.

Based on EY’s Africa Attractiveness Report, 2021, across Africa, the share of FDI in services increased to 72% of total FDI while industry accounted for 24% of the total FDI with only a small proportion going to the extractive sector. Service-based sectors remain the major focus for investors.

This encompasses business services, telecoms, media and technology, financial services, and consumer and retail.

There is immense investor interest in services and industry with certain sectors taking the lead in attracting FDI. This includes telecoms, manufacturing, renewables, IT services, business equipment, retail, health care and medical devices.

It is evident that FDI can and should enable Kenya and Africa at large to achieve sustainable economic recovery following the negative effects of the Covid-19 pandemic. This will be a shot in the arm and to some extent take the burden off the government which is grappling with a high debt level.

Other countries which attracted significant FDI in Africa include South Africa, Morocco, Nigeria, Egypt and Ghana. It is noteworthy that in 2020, East Africa faced challenges such as political tensions in Ethiopia and Tanzania which led to a decline in the FDI.

It is therefore paramount that the country forges forward with an economic agenda that promotes economic diversification which has proved to be crucial for Africa’s transformative journey. The government must therefore continuously engage the private sector to ensure the country maintains its FDI hub status in Africa.