Why Kenya's service economy might be built on a shaky foundation

Fertiplant East Africa ltd (FEA) manufactures fertilizers in Nakuru town on June 4, 2021. [Kipsang Joseph, Standard] The Principal Secretary in the State Department for Industry Dr Juma Mukhwana has a common joke he never fails to share when discussing the country's manufacturing status. That the lack of and underutilisation of trade agreements by Kenyan manufacturers is akin to a factory that has closed shop, but its marketing department is still operational. But when data and sentiments from National Treasury Cabinet Secretary John Mbadi are juxtaposed, the underutilisation of these trade pacts portrays a picture of a country that is slowly turning into a supermarket as once mentioned by Bidco Africa board chair Vimal Shah - a country that consumes but does not produce. Latest data from the Kenya National Bureau of Statistics (KNBS) 2025 Economic Survey shows manufacturing grew by 2.8 per cent in 2024, as accommodation and food services grew by 25.7 per cent. Data shows the country's economy is now heavily relying on services, away from the traditionally known sectors such as construction, agriculture and manufacturing to grow. For National Treasury CS John Mbadi, this is a good sign. "What saved our economy is the diversification. Our economy is well diversified, and that is why in the middle of many major shocks, the economy can still demonstrate resilience," he said during the launch of the report. However, this diversification is slowly turning into an imbalanced seesaw which former National Assembly Budget and Appropriation Committee Chair and Kiharu Member of Parliament Ndindi Nyoro cautions. He says the services sector is meant to be facilitative. But for former Principal Secretary State Department for Trade Alfred K'Ombudo, the reliance on the service sector is necessary because that is where the world is heading, and it has the potential to liberalise an economy. As part of a panel discussion on mobilising capital for African trade and infrastructure development held at Strathmore University, the former PS defended this change in economic direction, saying the country's export composition now stands at 45 per cent services. "It may be difficult to see because you cannot touch or feel," he said. "If you look at Kenya's export performance in the services sector, the top 40 countries we are exporting services to are industrialised." He lists the United Kingdom and the United States as some of the developed countries where Kenya is thriving in exports of services. Data from the UK government shows that in the four quarters to the end of the fourth quarter of 2024, Kenya exported services worth Sh106.02 billion to the UK - 58 per cent of exports during that period. "And if you look at the balance, Kenya is actually a net exporter of services, but we are a net importer of goods," he said. The former PS said having a services-driven economy also makes it easier for businesses to start especially for those who are getting into the export space. "I call it democratisation of exports. The barriers to entry are lower. It costs significantly less to put up export infrastructure for services," he said. However, this path Kenya seems to be taking in growing its economy, according to MP Nyoro is unlike how developed countries industrialised themselves. "Most economies move from the agrarian to industrialisation, then service sector. Why does it seem like developing countries leapfrog? They come from nowhere and jump into service?" he posed. "One of the critical issues is that what we call the service industry in developing countries is actually public service." He listed education as one of such. He said a key trait of the services sector in developed economies is that they run on tech. This is whether it is banking, insurance or transport and storage. One of the service sectors that Kenya brags about globally, mobile money, and has informed President William Ruto's mild Finance Bill, 2025, is what the National Treasury CS John Mbadi alluded to, saying it will be the focus on how the economy will look like. "That is why we have proposed in the Finance Bill, 2025, to give importance to financial investment, giving incentives to those who want to invest in the financial sector," said CS Mbadi. " He added: "Many economies that have grown rely on the financial sector, including the world's largest economies." According to MP Nyoro, the financial services sector, however are more facilitative. This is because during such transactions, nothing is being produced. "They facilitate people to do business, but what are you selling? When I send money to my grandmother using M-Pesa, what have I produced?" he posed. "The service industry, and especially what we have here in Kenya, and in developing countries, is more facilitative. And, therefore, we have to build the base on what we are facilitating, and that is why industry is very critical." This base lies in agriculture, which he said 70 per cent of rural population practices but productivity is very low compared to developed economies such as South Korea and China. Accommodation and food services grew by 25.7 per cent in 2024. Financial and insurance services, also a service sector grew by 7.6 per cent, information and communication by 7.0 per cent, transportation and storage by 4.4 per cent, and wholesale and retail by 3.8 per cent. Despite these growths that surpassed core sectors such as agriculture and manufacturing, Kenya's gross domestic product (GDP) is still largely agriculture based in terms of composition at 22.5 per cent for agriculture, forestry and fishery, followed by manufacturing at 7.3 per cent. In terms of nominal growth, a majority of the sectors that contributed Sh1 trillion and above in the country's GDP are service oriented. These are transport and storage Sh2.1 trillion, wholesale and retail Sh1.2 trillion, financial and insurance Sh1.3 trillion and real estate Sh1.4 trillion. Agriculture contributed the highest Sh3.6 trillion, while manufacturing and construction contributed Sh1.2 trillion and Sh1.0 trillion respectively to the country's now Sh16.2 trillion GDP. Kenya's reliance on services sector, while it may be intentional as far as the direction the government seeks to take, also mirrors what is happening globally. "The world trade volume expanded by 3.4 per cent in 2024 compared to a growth of 0.7 per cent registered in 2023. The growth in global trade was buoyed by robust performance in business services and tourism," reads the Economic Survey Report. Germany, notes the report, is one of the developed economies whose growth was also supported by the sector. "In 2024, Germany's real GDP growth stood at 0.0 per cent, rebounding from a contraction of 0.1 per cent in 2023, underpinned by the services sector," the report says. Regionally, the East African Community (EAC) recorded a growth of 5.4 per cent which the report attributes to agriculture, services, and manufacturing sectors, alongside increased foreign direct investment. In Kenya, accommodation and food service activities sector recorded a growth of 25.7 per cent in 2024 compared to 33.6 per cent growth recorded in 2023. "This growth was mainly driven by high-profile international conferences and meetings held during the period under review. International visitor arrivals at the Jomo Kenyatta International Airport (JKIA) and Moi International Airport (MIA) rose by 12.1 per cent to stand at 1.8 million in 2024, up from 1.6 million 2023," the report says. But perhaps this direction is positive if sentiments by the Chief Executive of Jubilee Holdings Dr Julius Kipngetich and Kenya Private Sector Alliance (Kepsa) Chief Executive Carole Kariuki are taken into account. During this year's Diamond Trust Bank's (DTB) Fifth Economic and Sustainability Forum, tourism was fronted as the country's major economic driver on grounds that its multiplier effect will trickle down to the rest of the industries that seem to struggle, such as manufacturing. "In manufacturing, you cannot compete with the Chinese or the Indians. They have perfected it. To me, competitiveness is in tourism," he said, referencing France, which he said receives 117 million visitors annually and has created millions of permanent jobs. Ms Kariuki argued that concentrating on tourism will spur growth in key sectors such as building and construction due to demand for accommodation. "We are not saying we will not do agriculture, manufacturing or banking. But because we have such an excellent tourism product, every industry will be stimulated," she said. The challenge however is that as the services sector expands, the contribution of manufacturing has been stagnating at around seven per cent. In 2024, this stood at 7.3 per cent a drop from 7.6 per cent in 2020. The plan is to increase manufacturing to 20 per cent of GDP by 2030 does not look promising. Despite several trade pacts the government has signed with other markets, such as the Economic Partnership Agreements with the European Union and the United Arab Emirates, Industry PS has lamented that producers are not manufacturing for these destinations. "The volume of trade between Kenya and the EU has not grown because we signed a new agreement. And that is why I said we behave like a factory that has closed, but the marketing department is still selling products. We are selling what we do not have," he said during the launch of the Route to Market Strategy by the Kenya Association of Manufacturers (KAM).

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