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How Ruto can transform Kenya’s economy

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How Ruto can transform Kenya’s economy

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Despite William Ruto’s narrow win to become Kenya’s president in August last year, the transition occurred peacefully. Now his challenge is to transform the economy in a country with numerous developmental challenges.

According to Kenya’s medium-term plan III (2018-2022), these problems include low manufacturing and export growth, persistent trade and balance of payments deficits, low investment levels and high unemployment. Steep costs associated with doing business, energy, living and food are also obstacles.

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The World Bank identified high levels of poverty and inequality, weak private sector investment, corruption, climate change and susceptibility to internal and external shocks as Kenya’s key development challenges.

In 2020, when Covid-19 hit, the economy shrank by 0.3% from its 5% growth rate in 2019. With declining revenue and increased government expenditure, total public debt grew from 59.5% of GDP in 2019 and was forecast to reach 72% by the end of 2022. The country is now at risk of debt distress with rising debt servicing costs. The estimated fiscal deficit for 2021 was 8.2%, with the current account deficit widening to 5.5% by the end of 2021.

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The Institute for Security Studies’ African Futures and Innovation team recently concluded an analysis and forecast of Kenya’s growth prospects. Kenya’s GDP per capita using purchasing power parity in 2019 was 52% (US$3 466) of the average of US$6 630 for its lower-middle-income peers in Africa. This is projected to reach US$6 249 on the Current Path (or business as usual forecast) by 2043 when the African Union’s third 10-year implementation plan of Agenda 2063 ends.

By this time, Kenya’s GDP per capita will be 42.5% lower than the projected average of US$8 902 compared to its lower-middle-income peer group. So there’s some prospect of reducing the gap, but only modestly. Using the World Bank benchmark of US$3.20 for extreme poverty for lower-middle-income countries, as of 2019, 32.2-million Kenyans – 61.5% of the population – lived below this threshold. This number jumped by several million in 2020 with Covid-19.

On the Current Path, the number in poverty is expected to drop to 23.5-million, or 29.1% of the population, by 2043. Kenya is thus forecast to reduce extreme poverty, but slowly.

Turning the economy around and reducing poverty faster requires strategic investment in sectors delivering the most development dividends. Kenya Vision 2030 aims to transform the country into an industrialising middle-income state providing a high quality of life to all. To achieve this, the government must focus on three sectors. 

First is governance and stability. While Kenya appears to be doing well on security and inclusion, its governance capacity is low, and it lags in fighting corruption. Kenya ranks 29th in Africa on the Transparency International Corruption Perceptions Index and 16th among the 23 lower-middle-income countries. In 2019/2020, the Ethics and Anti-Corruption Commission received only 2 221 graft-related cases for investigation, and 448 reports were forwarded to other public institutions. So, in reality, accountability is limited, with only the small fish being prosecuted. 

Stability and governance ensure the efficient allocation and distribution of state resources and encourage foreign direct investment inflows. The ISS modelled an improved Governance and Stability scenario that can raise Kenya’s GDP per capita in purchasing power parity from US$3 466 in 2019 to US$7 020 by 2043. This represents a 12% increase over the Current Path forecast for that year. The scenario also reduces the number living below the poverty line by 4.5 million compared to the Current Path.

But achieving this won’t be easy. It will require significantly reducing corruption, improving accountability and adherence to the rule of law, and increasing government effectiveness concerning revenue collection, gender empowerment and stability. 

The second sector needing Ruto’s attention is trade, particularly intra-Africa, through implementing the African Continental Free Trade Area (AfCFTA) agreement. One of Kenya Vision 2030’s goals is to attain an export sector that constitutes 29% of GDP by 2022.

Kenya was one of the first countries to ratify the AfCFTA agreement. It was also one of eight chosen to participate in the trade deal’s pilot phase that saw locally made car batteries and tea exported to Ghana. 

Kenya’s main exports include commodities such as tea, cut flowers, refined petroleum, gold and coffee. Although its economy is open to trade, its business with other African countries is limited compared to Asia, the European Union and United States. While most of Kenya’s exports are destined for other African countries, the lion’s share of its imports come from Asia, accounting for 65.7% of its total 2021 import bill. 

AfCFTA’s full implementation by 2043 – which means increased exports, improved productivity, more trade and reduced tariffs – can significantly reduce poverty and boost economic growth. This will raise Kenya’s GDP per capita from US$3 466 to US$7 070 by 2043, representing an increase of US$753 (or 11.6%) compared with the 2043 Current Path projections. It will also reduce the number of poor people by about four-million compared to the Current Path for that year. 

The third sector requiring Ruto’s leadership and his government’s focus is health and demographics. Kenya Vision 2030 aims for equitable, affordable and quality healthcare for all. But corruption, medical shortages, and health worker strikes detract from healthcare delivery. While Kenya has improved health outcomes, it isn’t enough to meet key Sustainable Development Goal targets on health and achieve a demographic dividend. 

Furthermore, the large youth bulge (people aged 15-29 as a percentage of the adult population) of 48% as of 2019 is higher than Africa’s average, posing challenges to Kenya’s development. Together with sizeable youth unemployment, this could lead to instability.

Improved health and lower fertility rates will accelerate Kenya’s demographic dividend, significantly increase GDP per capita and reduce poverty since it allows more revenue to be spent on human capital. This in turn translates into more rapid economic growth. In the ISS’ Demographic and Health scenario, Kenya’s GDP per capita is projected to increase to US$6 713 by 2043, which is 7.4% above the Current Path forecast for that year.

The number of Kenyans living in extreme poverty is projected to be 4.7 million fewer compared to the Current Path. This requires reducing communicable and non-communicable diseases, the mortality disease burden for under-fives, and the maternal mortality ratio. Better access to modern contraception, safe water and sanitation will also be needed. 

Kenya faces significant development challenges, but these can be overcome with determined leadership. Ruto needs to steer his administration to focus on governance and stability, free trade, better health outcomes, and advancing Kenya’s demographic dividend.  

Written by Enoch Randy Aikins, Researcher and Jakkie Cilliers, Head, African Futures and Innovation, ISS Pretoria

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