Kenya Economy - Summary and Outlook, Domestic economy developments

Summary and Outlook

Kenya is endowed with a rich heritage of plant and animal, which allow for a wide range of economic activities. Kenya is strategically located within easy reach of export markets in the region, Middle East, Europe and Asia. Political stability coupled with modern infrastructure that has been developed over the years has made Kenya a natural base for the administration of relief assistance to troubled neighbouring countries taking part in peacekeeping missions. Political stability and the pragmatic economic approach that the Government has followed to encourage foreign and local investment, has led to a remarkable development in various sectors. Kenya's economy depends largely on Agriculture, which accounts for over one third of the GDP and approximately two thirds of exports. Agriculture is supplemented by manufacturing, commerce and tourism, which collectively account for an additional one-quarter of GDP. The GDP per capita has been on the rise since 1992 to date at an average rate of: -

  • 25.2 in 1993
  • 19.03 in 1994
  • 14.05 in 1995
  • 16.6 in 1996.

On average this rise is approximated at 71.46% having 1992 as base year.

Kenya's industrial sector has grown substantially over the years with its contribution to Gross Domestic Product (GDP) rising from about 8 per cent in 1990 to 14 per cent in 1994. There are more than 700 medium and large-scale enterprises of which 200 are foreign multinationals, mostly from the United Kingdom, the United States of America, Germany and the Far East. The major industrial exports include refined petroleum products and cement. In addition, important industrial raw materials such as soda ash and fluorspar are exported in sizeable quantities. Manufacturing production has been dominated by food, beverages and tobacco, chemical and petroleum products, and metal products. Other products which have increased in importance over the period include textile products, leather and rubber products, and cement, clay and glass Viable investments have been made in the production of food, chemicals, pharmaceuticals, leather, rubber, plastic, sugar, textiles and apparels and motor vehicle assembly.

An important development in the industrial sector has been the growth of the informal manufacturing sub-sector, commonly known as Jua Kali, in response to the scarcity of formal wage employment. These are small manufacturing ventures that use very little capital in their production process and manufacture a wide range of products. The most important of these include simple machines, utensils, steel window and doorframes, boxes, charcoal stoves and furniture. In recognition of the important role this sector continues to play in employment creation, in particular, the Government recently introduced a Rural Development Fund intended to finance the construction of sheds in the rural trading centres for use by the 'informal' artisans.

Another sector that has gained increased importance in the Kenyan economy since 1963 is trade, restaurants and hotels, including tourism. At the time of independence, the contribution of this sector to the national economy was minimal. Today the sector is the third most important, accounting for nearly 12 per cent of the total annual national output. Moreover, with the weak performance in coffee and tea over the last three years, due to the slump in world prices for these crops, the sector has become the country's leading foreign exchange earner. The phenomenal expansion in this sector reflects not only the diverse tourist attractions that Kenya has, but also the impact of an appropriate exchange rate policy that has made the country more competitive compared to other tourist destinations. Even more important has been the enormous investment that the country has undertaken in infrastructural facilities such as hotels of international standard and roads connecting the national parks and the main urban centres. By 1996, the country had earnings from tourism rising from 1,250 (Million Kenya Pounds) in 1995 to 1,280 million (Kenya Pounds).

With the general growth of the economy, other services such as banking, insurance and business have also expanded. Real estate services have also grown substantially over the period, reflecting largely the rapid expansion that the country has experienced in its urban population. Altogether, the contribution of these services to the gross domestic product, which was 16 per cent, had almost quadrupled by the end of 1990.

Domestic economy developments

Kenyan economic growth rate was at its lowest since independence in 1992 by registering a 0.4% increase. Inflation rose to 27.5%. Political reforms that led to the reintroduction of multi-party political system led to economic uncertainty towards the general election. This coupled with ethnic clashes in some parts of the country led to economic disruption and a fall in the output levels of the affected areas. During the same year, bad weather led to less production. Consequently, the gross domestic product declined. Withholding of foreign aid by donor countries caused a foreign exchange crisis. The private sector’s investments also fell.
During the year 1992, a survey conducted by the National Household Welfare Monitoring and Evaluation showed that most households’ expenditure was spent on food. The same survey showed that about 74% of households used mud or wood in the construction of walls, 67% used the same materials in floor construction. 36% used grass-thatched roofs.

By 1994, the Kenyan economy had improved considerably compared to the past four years (i.e. 1990 – 1993). This was largely due to the implementation of appropriate economic reforms like tight monetary control, favorable weather also helped to improve the economy, liberalization of foreign exchange and also a return to political stability. Real Gross Domestic Product expanded by 3.0% compared to 0.2 percent in the previous year. Inflation rate, which had risen to 46% in 1993, declined to 28%. During the year, the agriculture sector registered a growth of 2.8% while the manufacturing sector was hit by competition from imported goods hence registered a growth of only 1.9%.

In 1996, the Kenyan economy growth rate again declined by recording a 4.6% growth. This was mainly attributed to inadequate rainfall, power rationing and high cost of domestic credit. The agriculture sector recorded a growth due to the good performance of coffee, tea, and horticultural crops. Horticultural exports increased by 18.1%, while the trade, restaurants, and hotel sector recorded a growth. During the same year, inflation which had fallen to 1.6% in 1995 rose to 9% in 1996 and to 11.2 in 1997. This was due to reduced availability of basic food items and the drastic decline in the production of maize.

The year 1998 was characterized by a slowdown in economic activities and stagnation in investment real economic growth in agriculture rose marginally from 1.0% in 1997 to 1.5% in 1998 while manufacturing declined from 1.9% to 1.4%. Financial and trade, Restaurants and Hotels sub-sectors growth declined.

Investments stagnated as a result of budgetary cuts, poor infrastructure, high interest rates, reduced donor funding and excess capacity. Per capita income dropped by 1.6%. Inflation declined from 11.2% in 1997 to 6.6% in 1998. This was mainly attributed to a tight monetary control policy aimed at controlling the growth of money supply and the availability of basic foodstuffs. On the external front, the balance of payment surplus fell due to a reduction in tourism earnings and slower growth in exports. The terms of trade marginally deteriorated as a result of higher import prices of equipment.

Last Updated on Tuesday 24th November 2009