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President Uhuru Kenyatta inherits an economy running on one engine

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By TF News Team

Kenya’s economic growth is expected to exceed five per cent this year but most of this growth will come from domestic consumption and not exports of goods and services.Imports are increasing but exports are on a steady declineImports are increasing but exports are on a steady decline

For almost a decade now, domestic consumption has driven the economy as the ‘export engine’ has stalled due to infrastructural bottlenecks and poor policy coordination.

 

“Running on one engine reflects the structural imbalance of Kenya’s current economy- Kenya’s strong engine is domestic consumption, its weak engine is export,” says the World Bank in a recent report.

“In order to restart the export engine, Kenya will need to address a number of issues, especially the infrastructure deficit.”

The bank says it will be very difficult for the country to achieve high growth over an extended period of time because of this imbalance where domestic consumption accounts for 75 per cent of GDP, and the exports on a steady decline.

Exports

Export quantities of coffee, tea and horticulture declined by 12.9, 6, and 4.7 per cent respectively in 2011

Notable increases were recorded in export quantities of tobacco and tobacco manufactures, soda ash and iron and steel which increased by 27.5, 19.9 and 19 per cent

Kenya’s exports as a share of GDP declined from 40 per cent in the 1960s to 26 per cent in 2009 with traditional exports of coffee and tea stagnating due to weak governance in marketing institutions.

According to the Economy Survey report 2012 international trade indicators shows a widening merchandise trade deficit where the balance widened further 49.7 per cent from Sh537.4 billion in 2010 to Sh804.6 billion in 2011.

The value of exports increased by 24.7 per cent while the value of imports grew relatively faster at 38.9 per cent leading to a fall in the export/import ratio from 43.3 per cent in 2010 to 38.8 per cent in 2011.

The volume of trade expanded by 34.6 per cent in 2011 compared to 19.8 per cent growth in 2010 due to a substantial increase in the value of imports.

“In 2011, the balance of payments position was under pressure on account of the imports bill rising to Sh1.3 trillion. This was attributed to the rise of oil prices in the global market,” says the report.

“This is attributable to high import bill on machinery and transport equipment, manufactured goods, mineral fuels and food. In 2011, earnings from total exports financed 38.8 per cent of the import bill compared to 43.3 per cent in 2010.”

Sources say the manufacturing sector is the sector that has been seriously underperforming over the last decade saying in emerging economies, a high performing manufacturing sector is associated with a strong export performance.

In 2000, the manufacturing sector was Kenya’s second largest economic sector after agriculture but nine years later, the sector had slipped to fourth place.

“The manufacturing sector grew by a disappointing 3.3 per cent in 2011 compared to 4.4 per cent in 2010. This translates to a decline of 25 per cent in industrial growth which mainly attributable to energy costs and other primary input costs,” says Ms Betty Maina, CEO Kenya Association of Manufacturers (KAM).

The World Bank says the newly elected government will have to undertake a range of investments and policy initiatives, including those that would improve the efficiency and expand the capacity of the port of Mombasa.

“Kenya needs to address a range of inter-related issues around improving efficiency of the port’s operations-improved customs and inspection procedures-and expanding the capacity to meet the expected high growth in cargo traffic,” says the bank in an economic update report.

The government will also have to address the high cost of energy and improve the business environment that includes tackling corruption.

“If increases (of power charges) sail through, the country has to brace itself for a massive exodus of manufacturing companies to countries that have cheaper energy costs such as Ethiopia, Egypt, Tanzania and Uganda,” says Ms Maina.

Kenya might be forced to rethink regional integration if it has to increase its trade volume and especially those of manufactured goods, a duty that falls squarely on the newly appointed cabinet secretary for EAC affairs, Commerce and Tourism Ms Phylis Kandie.

Experts say demand for Kenya’s exports will remain flat in high income countries but rapid growth within EAC countries will provide an expanding market for goods and services but non-tariff barriers remains the main challenge.

 

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