Transcript Kenya CEM Key Messages

Growth Recovery in Kenya:
What Caused it and How Can
it be Sustained
Praveen Kumar
AFTP1
September 29th, 2008
Presentation Outline
I.
II.
III.
IV.
Kenya’s Growth experience
Analysis of drivers of recent trends
Constraints to accelerating and
sustaining growth
Outline of a growth strategy
2
Overall message



Macro framework reasonably sound, fiscal
well-managed
Micro-reforms are working.
Key growth challenges are:



Keeping political risk low
Using fiscal space wisely to scale-up
infrastructure services
Reducing micro-risks such as corruption, security
3
Growth bypassed Kenya even as it
accelerated in neighboring countries…
Trends in annual GDP growth (Real LCU)
10%
9%
8%
7%
Mozambique
Uganda
Tanzania
6%
5%
Kenya
4%
Mauritius
3%
2%
1%
0%
1991
1993
1995
1997
1999
2001
2003
2005
4
%
…but recovered strongly after
2003
8
7
6
5
4
3
2
1
0
2002
2003
2004
2005
2006
2007
2008
(est)
Year
5
0
Financial
Intermediation
Transport and
Communication
Hotels and
restaurant
Wholesale and
Trade
Construction
Manufacturing
Agriculture and
Forestry
GDP growth (percent)
20
15
1.4
1.2
10
1
0.8
0.6
5
0.4
0.2
Contribution (percent)
Recovery was broad-based
1.8
1.6
% Change
(annualized)
0
Contribution to
Change in total
GDP (annualized)
6
Investment grew in an
impressive manner…
Annual Percentage Change in Expenditure on GDP (constant 2001 prices)
2003
2004
2005
2006
2007*
Government Consumption
6.0
0.6
-0.6
1.5
7.2
Private Consumption
2.2
2.4
6.4
7.6
7.3
Gross fixed Capital Formation
-8.0
7.3
27.8
18.5
13.3
Exports of Goods and Services
7.2
12.8
9.7
3.4
6.0
Imports of Goods and Services
-0.1
12.3
15.0
18.2
12.7
Source: Economic Survey 2008, KNBS.
(*) Provisional
7
for example, Imports of Machinery and
Transport Equipment Increased
(% of Gross Domestic Expenditure)
% of gross domestic
expenditure
16.0
12.0
machinery and
industrial transport
machinery
8.0
industrial
transport
equipment
4.0
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
year
8
TFP also improved
Contribution to GDP per unit of labor change (%)
Period
Average Annual Change in
GDP per unit of labor (%)
Physical capital
Human Capital
TFP
1960-1980
3.0
0.4
0.8
1.8
1981-1990
0.7
-2.0
0.1
2.6
1991-2000
-1.2
-1.1
1.0
-1.1
2001-2007
1.6
0.9
0.1
0.5
2003-2007
2.4
1.0
0.1
1.3
1960-2007
1.4
-0.4
0.6
1.2
Source : Staff calculations. GDP, investment, and Labor Force data are from World Development
Indicators database, World Bank. Capital stock data are from Nehru and Dhareswar (1995). Factor
shares in GDP are based on Economic Surveys. KNBS.
9
Three drivers of positive
trends after 2003:



Lagged benefits of liberalization of price, trade,
exchange rate & interest rate forced by reduced aid
after the Goldenberg scandal uncovered in 1992;
Solid foundation for solvency based on significant
revenue collection as a payoff to the reform of tax
policy & administration which started in the mid1990s; & critically;
Declining political risk after the successful 2002
elections fueling an improvement in sovereign
creditworthiness & the private investment climate;
10
Driver 1: Economic
liberalization in the mid 1990s





Era of price controls ended;
Import licenses abolished, tariff structure simplified –
average tariff reduced;
Unified, market-based exchange rate adopted and
exchange controls lifted;
KRA established, tax reforms introduced;
Agricultural marketing liberalized;

Major spur for reform was: the need to establish macro
credibility in the wake of the Goldenberg scandal, and the
reduction of aid.
11
Driver 2: Sustainable trajectory
of public debt
80
70
Debt to GDP ratio
Domestic debt
External debt
60
50
40
30
20
10
0
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
12
What lowered the debt ratio?
Debt decomposition
Factors Explaining Falling Indebtedness 1996/97-2006/07
(% points of GDP, annual average)
1996/97 - 2002/3
2003/04 - 2006/7
1996/97 - 2006/7
-1.8
-5.8
-3.2
1. Primary Deficit (- surplus)
-1.7
-0.1
-1.1
2. Real GDP growth
-1.4
-2.8
-1.9
3. Real interest rate
2.1
0.3
1.5
4. Real exchange rate (- appreciation)
0.6
-2.5
-0.5
5. Other Factors
-1.4
-0.7
-1.1
Change in public sector debt
Contribution from
13
Solid foundation for solvency –
Revenue mobilization


Significant reforms in tax policy
Improved tax administration
30.5
25.5
20.5
15.5
10.5
Revenue, excluding grants
Import Duty
Income Tax
Excise Duty
VAT
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
0.5
1995/96
5.5
14
Driver 3: Decline in country risk



Cost of domestic borrowing declined
Sovereign risk ratings improved
Reduced perception of risk by firms
15
Driver 3: Decline in country risk:
Cost of domestic borrowing
Interest Rate Decomposition
(In percent)
1999
2000
2001
2002
2003
2004
2005
2006
2007
13.3
12.1
12.7
8.9
3.7
3.0
8.4
6.8
6.8
U.S. Treasury Bill
4.7
5.8
3.5
1.6
1.0
1.4
3.2
4.7
4.4
Difference
8.6
6.2
9.3
7.3
2.7
1.6
5.3
2.1
2.4
Actual KSh./US$ depreciation
17.8
7.0
0.7
-1.9
-1.2
1.6
-6.4
-4.1
-9.7
EMBI Africa (In Basis Points)
..
..
..
529
232
177
145
74
166
1,338
2,037
1,426
2,276
732
667
523
481
..
..
..
..
238
141
95
85
85
164
824
756
731
765
418
356
245
169
239
91-day Treasury Bill
-Nigeria
-South Africa
EMBI + Spread (In basis points)
Source : Central Bank of Kenya; International Financial Statistics; JP Morgan; and, Staff Estimates
16
Decline in country risk
Sovereign risk ratings
ICRG*
Institutional
Investor**
80
II rating
30
60
25
20
15
Month-year
10
Se
p97
Se
p98
Se
p99
Se
p00
Se
p01
Se
p02
Se
p03
Se
p04
Se
p05
Se
p06
Se
p07
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
40
Jan-95
ICRG Rating
35
Kenya
Uganda
month-year
Mozambique
Tanzania
Zambia
*Scale 0 to 100, with 100 as lowest risk.
**Scale of zero to 100, with 100 representing the least chance of default
17
Reduced perception of risk by
firms
Percent of Manufacturing Firms Perceiving Issue as Being a
Major or Severe Constraint to Business
Issue
2003
2007
Crime, Theft and Disorder
69
59
Tax Rates
Electricity
Corruption
Transportation
69
47
73
36
56
55
54
53
Practices of Competitors in Informal Sector
Tax Administration
Customs and Trade Regulations
64
52
40
50
50
42
Telecommunications
Business licensing and Permits
45
13
28
28
Macroeconomic Instability
Access to Finance
Political Instability
Access to Land
Labor Regulations
Inadequately Educated Labor Force
Source : Kenya ICA, 2003 and 2007.
50
71
47
23
22
31
28
26
18
16
16
11
18
What can be done to accelerate and
sustain growth: Multi-pronged analysis





Growth diagnostics
Cross – country benchmarking
A stylized (real) macro-model (MAMS)
Use of ICA
Sectoral analysis: Tourism, ICT, agriculture
19
Key results from Growth
Diagnostics




Cost of finance is not a binding constraint in
Kenya currently
Scarcity of human capital is not a binding
constraint currently
High cost of infrastructure services - energy,
ports etc hurting returns
Macro risk receded, but micro-risks
(corruption, security situation) deterring
investment
20
Evidence of high business
costs from ICA 2007
Cost of crime, security, bribes, and lost production are several times higher in kenya than
in other countries
Cost as % of sales
Kenya
(2007)
China
(2002)
India
(2006)
S. Africa
(2003)
Senegal
(2003)
Tanzania
(2006)
Uganda
(2006)
Production lost due
to crime
3.9
0.3
0.2
0.6
1
1.1
1
Payment for
security
2.9
0.8
1.3
0.9
1.5
2.3
1.4
Bribes
3.6
1.9
2.1
0.3
0.4
3.4
3.7
Production lost in
transit
2.6
1.2
0.8
0.8
n.a.
1.6
1.2
Production lost due
to power outages
7.1
2
7.8
0.9
5.1
10.7
10.2
Total costs
20.1
6.2
12.2
3.5
n.a.
19.1
17.5
Source : ICA, 2007
21
Cross-country benchmarking on
deeper determinants of growth

Indicators used by Johnson, Ostry and
Subramanian (2007)



Institutions – broad political and economic
Extent of integration into global economy
Two sets of countries


Fast-growing SSA countries that are not resourcerich, not post-conflict
12 Sustained Growth economies
22
Benchmarking Institutions:
Kenya does OK on indicators of broad political and
economic institutions
Indicator (range)
A higher value
indicates…
Fast growing SSA
countries –
average
(year)
Sustained
growth
countries–
average (year)
Constraint on the executive (1–7)a
More constraint
3.9 (2004)
Economic risk (1–50)b
Lower risk
31 (2002)
31.7 (1984)
33 (2002)
Investment risk (1–12)
Lower risk
8.1 (2006)
7.1 (1996)
9.5 (2006)
Control of corruption (1–6)c
Higher control
2.4 (2005)
3.4 (1996)
1 (2005)
Income inequality–Ginid
Higher inequality
Source: Johnson, Ostry, and Subramanian (2007).
a. Polity IV database.
b. ICRG database.
c Normalized Kaufmann-Kraay index.
d. WDI database.
49
2.2 (T)e
Kenya
(year)
39.5 (T)
6 (2004)
43
23
Benchmarking Institutions:
Kenya has high social fractionalization
Indicators of Social Fractionalization, Fast-Growing SSA Countries,
Sustained Growth Countries, and Kenya
Indicator
Fast-growing SSA
countries average
Sustained growth
countries average
Kenya
0.72
0.3
0.83
0.75
0.33
0.85
0.53
0.68
0.76
0.3
0.32
0.29
0.7
0.86
0.89
0.54
0.42
0.78
Ethnica
Ethnic
b
b
Religion
Ethnicc
Linguisticc
Religion
c
Source : Johnson, Ostry, and Subramanian (2007).
Note : A higher value represents higher fractionalization.
a. Easterly and Levine (1997).
b. Fearon (2003).
c. Alesina and others (2003).
24
Benchmarking macro and trade policy
and outcomes: Kenya looks not bad
Macroeconomic and Trade - Policies and Outcomes, Fast-Growing SSA Countries, Sustained Growth
Countries, and Kenyaa
Measure
Fast-growing SSA
countries average
Sustained growth
countries– average
Kenya
Total exports to GDP
25.1
19.1c
24.7
Manufacturing exports to GDP
4.8
2.2
3.2
Apparel, footwear, textiles exports to GDP
3.9
1.1
0.5
Fuel and ore exports to GDP
3.1
4.2
3.1
Agriculture and food exports to GDP
7.3
7.8
7.7
Trade restrictiveness (0– 1)b
0.9
0.4
1
Balassa-Samuelson average currency overvaluation
10.8
-17.7
9.4
Largest consecutive spell of overvaluation in years since 1970
15.4
6.4
21
Average overvaluation during largest spell
43.8
11.4
16.9
Inflation
7.3
14.6
10.3
Aid to GDP
13.3
4.7 (T -4 to T +5)
4
Source : Johnson, Ostry, and Subramanian (2007).
a. Average for years after 2000 unless otherwise indicated.
b. Sachs-Warner measure updated by Wacziarg and Welch (2003). It is a dummy variable, with 1 indicating fully open trade.
c. All export outcomes for sustained growth countries are averages for T to T+4.
25
Benchmarking extent of integration
into global economy: Kenya’s low
integration
Trends in Shares of Exports in Total GDP, Sustained Growth
Countries and Kenya, 1960-2005
100
Vietnam
90
Ireland
Thailand
Mauritius
Taiwan
Korea
70
60
50
China
Kenya
40
Chile
30
20
10
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
0
1960
% of country's real GDP
80
26
Benchmarking extent of integration
into global economy: Kenya’s
declining competitiveness
Shares in World Exports of Goods and Services, High Performing Economies (HPEs) and Kenya,
1975–2005
0.18
20
HPE goods
(right axis)
16
14
0.12
0.10
HPE services
(right axis)
0.08
12
10
8
0.06
Kenya services
(left axis)
0.04
4
2
2005
2003
0
2001
1999
year
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
0.00
1997
Kenya goods
(left axis)
0.02
6
percent of World exports
18
0.14
1995
percent of World exports
0.16
Source: Staff calculations, based on COMTRADE data. Averaged using SITC2 3-digit
classification.
27
Benchmarking sophistication
of exports: Low sophistication
EXPY (Proxy for Degree Sophistication), Sustained Growth
Economies and Kenya, 1992-2003
18000
Ireland
16000
Japan
Singapore
Korea, Rep.
12000
China
Thailand
10000
8000
Botswana
Chile
6000
Mauritius
4000
Kenya
2003
2002
2001
2000
year
1999
1998
1997
1996
1995
1994
1993
2000
1992
$ per capita
14000
28
A stylized (real) macro-model (MAMS)
Real Macro Indicators by Simulation (% annual growth from 2006-2030)
base
base+g
ns
base
+fdi
base
+aid
v30gradual
v30fast
Absorption
5.0
6.5
5.4
5.7
8.8
9.2
Consumption-private
4.8
6.0
5.0
5.5
8.1
8.5
2.5
3.6
2.6
3.1
5.6
6.0
Consumption-government
5.4
6.4
5.9
5.8
7.6
7.8
Fixed investment-private
4.6
8.3
5.9
5.9
11.8
12.3
Fixed investment-government
6.5
8.0
7.2
7.2
10.5
10.8
Exports
5.0
7.5
6.5
5.5
10.6
11.1
Imports
5.0
7.0
5.6
5.8
9.7
10.2
GDP at market prices
5.0
6.6
5.6
5.6
9.0
9.4
GDP at factor cost
5.0
6.6
5.6
5.6
8.9
9.4
Total factor employment
3.9
5.3
4.5
4.4
6.4
6.6
Total factor productivity (TFP)
1.1
1.3
1.2
1.1
2.6
2.7
ICORa
3.8
4.0
3.8
3.8
3.3
3.3
Real exchange rate
-0.1
0.0
0.2
-0.2
-0.4
-0.4
Consumption-private per capita
29
Outline of growth strategy


Keep political risk low – address issues of social and
political cohesion
Sustain macro-stability



Preserve favorable government debt dynamics and use
available fiscal space to finance only high-return projects
Strengthen institutional framework for project selection and
subject capital projects to systematic economic analysis
Reduce high costs of backbone services:



Logistics costs, particularly of trading across borders
Transportation costs
Telecommunications and energy costs
30
Outline of growth strategy


Improve global integration of Kenyan economy.
Towards that:
 Deepen regional integration, BUT
 Focus on global competitiveness beyond the region:
 Use membership of trade groups – EAC and
COMESA – to further improve openness
 Liberalize unilaterally where possible
 Use multilateral route for securing access to
protected Asian markets
 Maintain a competitive real exchange rate
Proactively provide solutions to government/market
failures in key export sectors
 Example ICT
 Example Tourism
31