growth recovery in kenya: what caused it and how can it be sustained praveen kumar aftp1 september...
TRANSCRIPT
Growth Recovery in Kenya: What Caused it and How Can
it be Sustained
Praveen Kumar
AFTP1
September 29th, 2008
2
Presentation Outline
I. Kenya’s Growth experience
II. Analysis of drivers of recent trends
III. Constraints to accelerating and sustaining growth
IV. Outline of a growth strategy
3
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
4
Growth bypassed Kenya even as it accelerated in neighboring countries…
Trends in annual GDP growth (Real LCU)
Mozambique
Kenya
Mauritius
TanzaniaUganda
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1991 1993 1995 1997 1999 2001 2003 2005
5
…but recovered strongly after 2003
012345678
2002 2003 2004 2005 2006 2007 2008(est)
Year
%
6
Recovery was broad-based
0
5
10
15
20
Agr
icul
ture
and
For
estr
y
Man
ufac
turin
g
Con
stru
ctio
n
Who
lesa
le a
ndT
rade
Hot
els
and
rest
aura
nt
Tra
nspo
rt a
ndC
omm
unic
atio
n
Fin
anci
alIn
term
edia
tion
GD
P g
row
th (
perc
ent)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Con
trib
utio
n (p
erce
nt)
% Change(annualized)
Contribution toChange in totalGDP (annualized)
7
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
8
for example, Imports of Machinery and Transport Equipment Increased (% of Gross Domestic Expenditure)
0.0
4.0
8.0
12.0
16.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
year
% o
f g
ross
do
mes
tic
exp
end
itu
re machinery and industrial transport machinery
industrial transport equipment
9
TFP also improved
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 1.2Source : 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.
Average Annual Change in GDP per unit of labor (%)
Contribution to GDP per unit of labor change (%)Period
10
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 mid-1990s; & critically;
Declining political risk after the successful 2002 elections fueling an improvement in sovereign creditworthiness & the private investment climate;
11
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.
12
Driver 2: Sustainable trajectory of public debt
0
10
20
30
40
50
60
70
80
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Domestic debt
External debt
Debt to GDP ratio
13
What lowered the debt ratio?Debt decomposition
1996/97 - 2002/3 2003/04 - 2006/7 1996/97 - 2006/7
Change in public sector debt -1.8 -5.8 -3.2
Contribution from
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
Factors Explaining Falling Indebtedness 1996/97-2006/07(% points of GDP, annual average)
14
Solid foundation for solvency – Revenue mobilization Significant reforms in tax policy Improved tax administration
0.5
5.5
10.5
15.5
20.5
25.5
30.5
19
95
/96
19
96
/97
19
97
/98
19
98
/99
19
99
/00
20
00
/01
20
01
/02
20
02
/03
20
03
/04
20
04
/05
20
05
/06
20
06
/07
Revenue, excluding grants Income Tax VAT Import Duty Excise Duty
15
Driver 3: Decline in country risk
Cost of domestic borrowing declined Sovereign risk ratings improved Reduced perception of risk by firms
16
Driver 3: Decline in country risk:Cost of domestic borrowing
1999 2000 2001 2002 2003 2004 2005 2006 2007
91-day Treasury Bill 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
-Nigeria 1,338 2,037 1,426 2,276 732 667 523 481 ..
-South Africa .. .. .. 238 141 95 85 85 164
EMBI + Spread (In basis points) 824 756 731 765 418 356 245 169 239
Source : Central Bank of Kenya; International Financial Statistics; JP Morgan; and, Staff Estimates
Interest Rate Decomposition(In percent)
17
Decline in country riskSovereign risk ratings
40
60
80
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Month-year
ICR
G R
ati
ng
10
15
20
25
30
35
month-yearII
ratin
g Kenya Mozambique Tanzania
Uganda Zambia
ICRG* Institutional Investor**
*Scale 0 to 100, with 100 as lowest risk.
**Scale of zero to 100, with 100 representing the least chance of default
18
Reduced perception of risk by firms
Issue 2003 2007
Crime, Theft and Disorder 69 59
Tax Rates 69 56
Electricity 47 55Corruption 73 54
Transportation 36 53
Practices of Competitors in Informal Sector 64 50Tax Administration 52 50
Customs and Trade Regulations 40 42
Telecommunications 45 28Business licensing and Permits 13 28
Macroeconomic Instability 50 28
Access to Finance 71 26
Political Instability 47 18
Access to Land 23 16
Labor Regulations 22 16Inadequately Educated Labor Force 31 11Source : Kenya ICA, 2003 and 2007.
Percent of Manufacturing Firms Perceiving Issue as Being a Major or Severe Constraint to Business
19
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
20
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
21
Evidence of high business costs from ICA 2007
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
Cost of crime, security, bribes, and lost production are several times higher in kenya than in other countries
22
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
resource-rich, not post-conflict 12 Sustained Growth economies
23
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)
Kenya (year)
Constraint on the executive (1–7)a More constraint 3.9 (2004) 2.2 (T)e 6 (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 49 39.5 (T) 43
Source: Johnson, Ostry, and Subramanian (2007).a. Polity IV database.b. ICRG database.c Normalized Kaufmann-Kraay index.d. WDI database.
24
Benchmarking Institutions:Kenya has high social fractionalization
Indicator Fast-growing SSA countries average
Sustained growth countries average
Kenya
Ethnica0.72 0.3 0.83
Ethnicb0.75 0.33 0.85
Religionb 0.53 0.3 0.7
Ethnicc 0.68 0.32 0.86Linguisticc
0.76 0.29 0.89
Religionc0.54 0.42 0.78
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).
Indicators of Social Fractionalization, Fast-Growing SSA Countries, Sustained Growth Countries, and Kenya
25
Benchmarking macro and trade policy and outcomes: Kenya looks not bad
Measure Fast-growing SSA countries average
Sustained growth countries– average
Kenya
Total exports to GDP 25.1 19.1c24.7
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)b0.9 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.
Macroeconomic and Trade - Policies and Outcomes, Fast-Growing SSA Countries, Sustained Growth
Countries, and Kenyaa
26
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
Ireland
Kenya
Korea
Mauritius
Thailand
Taiwan
Vietnam
China
Chile
0
10
20
30
40
50
60
70
80
90
1001
96
0
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
% o
f c
ou
ntr
y's
re
al G
DP
27
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
Kenya goods (left axis)
Kenya services (left axis)
HPE goods (right axis)
HPE services (right axis)
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
year
per
cen
t o
f W
orl
d e
xpo
rts
0
2
4
6
8
10
12
14
16
18
20
per
cen
t o
f W
orl
d e
xpo
rts
Source: Staff calculations, based on COMTRADE data. Averaged using SITC2 3-digit classification.
28
Benchmarking sophistication of exports: Low sophistication
EXPY (Proxy for Degree Sophistication), Sustained Growth Economies and Kenya, 1992-2003
Korea, Rep.
China
Chile
Kenya
Ireland
Mauritius
Singapore
Botswana
Thailand
Japan
2000
4000
6000
8000
10000
12000
14000
16000
180001
99
2
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
year
$ p
er c
apit
a
29
A stylized (real) macro-model (MAMS)
Real Macro Indicators by Simulation (% annual growth from 2006-2030)
base base+gns
base+fdi
base+aid
v30-gradual
v30-fast
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
Consumption-private per capita 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
30
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
31
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