The curse of Kenya's fake riches

One fine day in October 2014, Kenyans were just going about their business when unexpected news came in.

Without their having to break a sweat, every Kenyan was declared richer by the Kenya National Bureau of Statistics (KNBS). Each citizen saw their income per year jump by Sh26,200 after the size of the country’s economy was re-assessed to include new sectors.

As a result, gross domestic product (GDP) - the sum of all the goods and services produced in the country - expanded by 25 per cent.

Kenya joined a club of not-so-rich-but-not-so-poor countries known as lower-middle-income countries (LMICs).

Kenya leapfrogged Ethiopia and Ghana to become the fifth-largest economy in sub-Saharan Africa behind Nigeria, South Africa, Angola and Sudan.

Unfortunately, Kenyans’ newfound income, which economists describe as GDP per capita, existed only on paper. They did not get new jobs, better salaries or additional plates of ugali.

But in one fell swoop, that day in October redefined Kenya’s economic landscape.

And five years later, Kenyans on Twitter refer to that re-evaluation of their economy with the phrase, “vitu kwa ground ni different”. What was on paper never quite translated into reality.

The country further found itself missing out on cheap loans from Bretton Woods institutions such as the World Bank and the International Monetary Fund (IMF) because, well, they were rich enough to afford the more expensive loans.

Expensive loans

However, while the expensive loans from banks and international capital markets have led to more roads, bridges, airports and railways, the economic returns from this infrastructure has not come in as fast as repayment dates.

Between 2010 and 2015, the country’s Budget deficit – the difference between the money it spends and the money it raises through taxes – was among the lowest in Africa at 1.9 per cent of GDP. In fact, compared to other sub-Saharan Africa countries, Kenya’s Budget deficit placed it at position 14.

The rebasing also meant the fraction of public debt to GDP dropped, giving the government more room to borrow.

By 2017, the country’s ravenous appetite for debt and its redefined borrowing avenues saw the Budget deficit rise to 7.9 per cent of GDP.

This created a vicious borrowing cycle, as the deficit had to be plugged through loans - expensive loans with prohibitive interest rates, short grace periods and even shorter repayment periods.

Kenyans started working for creditors. In the year to June 2019, for every Sh100 the country earned from taxes, non-tax revenues and grants from donors, Sh57 went into servicing debt.

Six years ago, the Treasury would pay out Sh25 from every Sh100 earned.

IMF, which in 2018 noted that Kenya’s probability of defaulting had increased from low to moderate, said interest payments on the public debt increased to almost one-fifth of the country’s revenue, putting it among the top five frontier economies.

This was due to the accumulation of expensive loans, including over Sh500 billion in Eurobonds, which is debt borrowed from international markets and denominated in dollars.

The result has been that the government is looking to deeply cut its spending. But these austerity measures threaten to reduce the circulation of money in an economy facing a cash crunch that has seen companies, fire workers, due to erratic incomes.

GDP has increasingly featured in headlines, but tends to seem so far removed from reality that it has given rise to a new Kenyan proverb: “You can’t eat GDP.”

President Uhuru Kenyatta himself has commented on the country’s meteoric GDP growth.

In his 2016 State of the Nation address, he acknowledged that ordinary Kenyans cannot relate to such colourful economic indicators.

“Wananchi want to know what these economic indicators mean to their lives. They cannot relate to how GDP impacts on the price of unga. Many of our citizens are wondering why their children are still struggling to find jobs. These concerns are legitimate and they are questions that every citizen is entitled to have answers from their government,” said Mr Kenyatta.

Private investment

The narrative has since been picked up by economists like Central Bank of Kenya (CBK) Governor Patrick Njoroge who took on the pitfalls of infrastructure-driven growth.

“It is true you have GDP numbers, but you can’t eat GDP,” he said.

GDP, as a measure of a country’s well-being, has been heavily criticised for its many gaps, yet its relevance has not diminished since 1937 when American economist, Simon Kuznets, came up with the indicator.

The United Nations came up with the Human Development Index (HDI) in one of the many attempts to cure the problem of GDP.

HDI takes into account indicators like the happiness of a population, how long one lives, standards of living and levels of knowledge.

While on GDP lists Kenya sits below eight African countries, it lags behind 15 when it comes to HDI, an indictment of the government’s policy priorities.

Kenyans are poorer in terms of human development when compared to their LMIC peers.

While it might appear unfair to compare Kenya’s poverty levels with some of the other countries considered lower middle income, a 2018 World Bank report compared Kenya to its peer Ghana, and the results were disheartening.

“The poverty headcount in Ghana at the LMIC line (34.9 per cent) is 28.8 percentage points less than that in Kenya. Kenya’s depth of poverty at the LMIC line is substantially higher than Ghana and the LMIC aggregate,” noted the report.

The question on growth figures is, if the economy churned out more healthcare services, legal services, newspapers, fruit juices, skyscrapers, tables, loaves of bread and beers, who would have produced these? How many people would be involved, and did they earn more for their labour?

The verdict has largely been brutal, with experts pointing out that with jobs and wages failing to grow, GDP figures are not living up to the promise.

As Dr Njoroge puts it, infrastructure-driven growth does not trickle down to the majority.

The private sector, made up of households and businesses, is the proverbial goose that lays the golden eggs. Eight in 10 people are employed in the private sector. It is this sector that pays taxes.

Yet, its contribution to the economy has been declining.

“The contribution from private investment has been negative in recent years, declining from 1.3 percentage points of GDP in the four years leading to 2013 to -0.3 percentage points in the four years leading to 2017,” read a World Bank report on private capital in Kenya.

The Nairobi Securities Exchange (NSE), an arena for commercial activities, continues to experience a listing drought even as several businesses that went public either register losses or sharp profit drops.

The benchmark NSE 20-Share Index, which closed yesterday at 2,669.23 points, has gradually fallen from an all-time high of 6,161.46 in January 2007. Few counters outside of Safaricom and banks experience activity.

Two of the sectors that have taken a plunge include the agriculture and manufacturing sectors.

As agricultural productivity has dwindled, Kenya has increasingly turned overseas to feed itself.

As a share of total imports, food imports have increased from seven per cent in 2008 to 10 per cent in 2017

According to figures from the Food and Agriculture Organisation (FAO), Kenya’s poorer neighbours, like Uganda, Ethiopia, Tanzania, and Rwanda, have a lower cereal imports dependency ratio, meaning most of the maize, wheat, rice, and other cereals that they consume are produced locally.

Except for animal products and potatoes, Kenya has had to import nearly all the other food crops to supplement depressed local production, according to official data.

Agriculture is not only the largest economic sector, but it is also the largest employer, with one in six Kenyans engaged in either crop farming or rearing of livestock.

The second-largest employer is the manufacturing sector. Unfortunately, its contribution to GDP has been shrinking, with firms spooked by a crippling cost of production.

To create more jobs, Uhuru wants the share of manufacturing to GDP to inch up to 15 per cent by 2022.

However, two years after the government outlined its agenda of increasing value addition, manufacturing as a percentage of GDP stands at 7.6 per cent as of June 2019.

Further, even as more goods and services were produced, a typical employee’s wages, adjusted for the increase in the cost of living, remained stagnant.

Minimum wage

Wages, economists say, tend to be sticky. Ideally, if you are running a business and realise that your costs of production have gone up, you need to slash them to remain in the business.

However, due to contracts and distortions such as minimum wage legislation from labour unions, a business cannot simply cut employee salaries as part of its cost-cutting measures.

As a result, says Scholastica Odhiambo, an economics lecturer at Maseno University, wages have remained stuck even as GDP has grown.

To reduce costs, most businesses over the last 10 years have opted to remain informal – no labour unions, no pension, no medical cover for employees, no permanent structure.

Indeed, nine out of 10 employees in Kenya make a living from the informal sector, which is characterised by low wages.

“We have to be concerned with the growth of informal jobs and decline in real wages relative to exponential growth in real GDP,” says Dr Odhiambo.

Gerrishon Ikiara, an economics lecturer at the University of Nairobi, however, says the depressed wages might also be a pointer to employers having more bargaining power.