Rebasing made Kenya look richer... but only on paper

Kenya recently rebased its economy. As a result, the estimated gross domestic product (GDP), which is the measure of the country’s economy for 2013, was 25 per cent larger than previously estimated. In a layman’s language, rebasing is recalculating the GDP.

Kenya’s GDP per capita — a measure of the total output of a country (GDP divided by the number of people in the country), is now $1,269, (Sh115,479). This has propelled Kenya to the superior category of ‘lower middle income’. The ‘lower middle income’ status is a World Bank grouping of 53 countries whose average income lies between $1,036 and $4,085 (GDP per capita).

Rebasing saw the country join the league of the top 10 biggest economies in Africa, and has surpassed the recently re-based economies of Ghana and Ethiopia. The country’s GDP is now $55.2 billion, up from $44.1 billion before rebasing - making it the fourth largest economy in sub-Saharan Africa after Nigeria, South Africa and Angola.

In the new GDP series, Kenya’s average annual growth for 2007–13 was five per cent, up from 4.3 per cent in the old series. However, to ordinary Kenyans, this should be translating to increased school enrollment, better housing, healthcare, access to clean water and food security.

But this is not the case. What this has done is that Kenyans have become richer on paper.

Fiscal deficit

The latest Kenya Economic Update released on Thursday by Diariétou Gaye, Country Director for Kenya World Bank warns that there is a catch-22 in these new numbers. The Bretton-Woods institution says the rebasing of Kenya’s GDP affected a number of macroeconomic indicators, with implications for policy makers. “Because most critical indicators are shares of GDP, a larger economy reduces the ratios, with serious macroeconomic consequences,” said the World Bank.

With the rebasing, gross public debt as a share of GDP fell from 58.9 per cent of GDP to 47.2 per cent (from 42.0 per cent to 43.1 per cent in net terms) in 2013/14. For National Treasury, this offered headroom to borrow more. Rebasing makes Kenya’s debt metrics look favourable, but the new figures may not justify additional borrowing.

“This decline might seem to take debt pressure off policy makers and encourage them to borrow more. However, Kenya’s ability to pay (revenue generation) fell from 23.4 per cent of GDP to 19.4 per cent, and its exports to GDP ratio fell significantly,” the report said.

After rebasing, government spending in 2013/14 as a share of GDP declined from 31.2 per cent to 25.9 per cent. Also, the fiscal deficit, which is the difference between the Government’s expenditures and its revenues (excluding the money it’s borrowed), fell from 7.4 to 6.2 per cent, and public debt dropped from 52.0 to 43.1 per cent in net terms. The trouble is that these changes could be interpreted as indicating that additional development spending could be financed through public borrowing. But the rebasing also affected revenues, which fell from 23.4 per cent of GDP to just 19.4 per cent.

This means Kenya’s ability to cover its external debt, which is measured as total debt service as a share of exports) was eroded, as exports’ share of GDP also declined. The World Bank advises that the appropriate metric for determining whether Kenya should take on more debt to finance viable projects is the ability to pay, as measured by the ratio of revenue to GDP and total debt service, but only the scope to borrow.

“Efforts to find new ways to fund the Government — such as reintroducing the capital gains tax in the 2014/15 budget and adopting tax administration measures aimed at increasing taxation from rental income — increase this ratio and are therefore welcome,” the World Bank said. The report shows that Kenya’s economy is larger and growing faster than previously estimated.