Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.
Kenya has a domestic market of over 50 million people and is a leading economy in Sub-Saharan Africa. The top five reasons U.S. companies should consider doing business in Kenya are: 1) it is a market-based economy; 2) Kenya is considered to be the economic, commercial, financial, and logistics hub of East Africa; 3) it has a young, growing and educated English-speaking population with a high fluency in technology; 4) the country continues to improve its ease of doing business environment; and 5) Kenya has a strong bilateral relationship with the United States, including a Commercial Cooperation Memorandum of Understanding (https://blog.trade.gov/2018/07/26/advancing-both-u-s-and-kenyan-economic-interests-in-transportation-healthcare-and-infrastructure/) to promote trade and investment, and it is the first country in Sub-Saharan Africa to enter into Free Trade Agreement (FTA) negotiations with the United States. The following information gives greater detail for an overview of the market.
Bilateral trade between the United States and Kenya was $940 million in 2020, down from $1.1 billion in 2019 according to the Office of Trade and Economic Analysis. Kenya has the strongest industrial base in the East Africa region and has been successful in attracting U.S. exporters and investors, with many companies establishing local and regional operations to take advantage of Kenya’s strategic location, diversified economy, entrepreneurial workforce, comprehensive air routes, and status as a regional financial center.
Kenya has built strong bilateral and multilateral trade relationships, including as a member of the East African Community, COMESA at https://www.comesa.int/, and it was the third country to ratify the Africa Continental Free Trade Area (AfCFTA). Moreover, by negotiating an FTA with the United States, the two countries hope to produce a high-standard agreement that will be beneficial to both economies and complement other regional agreements.
According to the World Bank Kenya Overview, over the period from 2015 to 2019, Kenya’s economic growth averaged 5.7%, making it one of the fastest growing economies in Sub-Saharan Africa. A stable macroeconomic environment, positive investor confidence, and a resilient services sector has boosted the economy’s performance.
In 2020, however, Kenya’s economy was hit hard by the COVID-19 pandemic, primarily through supply and demand shocks on both the external and domestic fronts, which caused economic activity to slow sharply in 2020 (real gross domestic product is estimated to have contracted by 0.3% in 2020). Agricultural output grew robustly, but manufacturing and many service subsectors (e.g., tourism, education) were severely disrupted (World Bank). According to Deloitte EA COVID impact report, Kenya’s debt-to-GDP ratio increased from 62.1% in 2019 to 68.7% in 2020 and is forecasted to reach 71.5% in 2021. Inflation as of July 2021 is 6.32%, which is within the Central Bank of Kenya’s 5±2.5% target band.
Kenya’s GDP is projected to grow by 4.5%–6.3% in fiscal year 2021-2022, which is seen as a partial recovery from the economic impact of COVID-19 and the related mitigation measures. Unemployment remains high in 2020, as more than 604 Kenyan companies laid off employees resulting in more than 1.7 million lost jobs. This led to the unemployment rate increasing from 2.6% in 2019 to 6.2% in 2020.
While market-based, some key drivers for the economy come from government, according to Statista (https://www.statista.com/statistics/451117/ratio-of-government-expenditure-to-gross-domestic-product-gdp-in-kenya/ )
In 2019, government expenditure in Kenya amounted to about 25.41% of the country’s gross domestic product. Following the 2017 election, President Uhuru Kenyatta outlined an agenda centered on four pillars for his second and final term. Dubbed the “Big Four,” the agenda focuses on food security, affordable housing, universal healthcare, and increased manufacturing. Despite this broad plan, reprioritization of public resources to manage the COVID-19 pandemic has slowed down implementation of many of the aspirational “Big Four” projects.
The World Bank’s 2020 Doing Business report ranked Kenya 56 out of 190 countries, an improvement of five places from the previous year’s ranking. The Government of Kenya (GOK) has initiated a broad range of pro-business reforms over the last few years, including regulations on starting businesses, obtaining access to electricity, registering property, protecting minority investors, and streamlining the business insolvency process. Kenya has also been experiencing a strong flow of foreign direct investment (FDI), particularly in the finance and insurance, renewable energy, trade, manufacturing, communication, and education sectors. According to the Economist Intelligence Unit, inflows of FDI plunged by 70% to $398 million in 2020—a 14‑year low—but prospects for 2021 are brighter. There is already rising investment by private-equity entities, including multilateral institutions, such as the International Finance Corporation (IFC), and by bilateral bodies, including the U.S. International Development Finance Corporation (DFC).
Agriculture remains the backbone of Kenya’s economy and central to Kenya’s development strategy. According to the Food and Agriculture Organization of the United Nations, the sector accounts for more than 26% of the gross domestic product (GDP), forms 65% of export earnings, and is a key supporter to many of the other non-agriculture sectors such as manufacturing, tourism, and social services among others. It is the largest employer in the country, with more than 40% of the total population and more than 70% of Kenya’s rural population earning at least part of their income from the sector. Agriculture in Kenya is large and complex, with a multitude of public, parastatal, non-governmental, and private sub-sectors.
Although Kenya is the most industrially developed country in East Africa, the African Development Bank estimated that manufacturing accounted for only 9% of GDP in 2019, and has largely remained static for the past decade with the sector contributing 7.5% in 2019 (World Bank). Key exports, such as tea, coffee, and floriculture require little or no processing. Although Kenya’s mineral resources are limited, the country is an important source of high-value mineral commodities such as titanium, gold, and rare earth minerals. The construction and real estate sector have been one of the fastest growing sectors in Kenya, with an average growth rate of 7.0%, contributing about 6.0% of GDP. Growth, however, shrunk to about 1.3%, due to the adverse effects of COVID-19. Government investment in public infrastructure development projects (road, rail, energy, port, and airport modernization) and the real estate sector is attributed to long term growth. In 2021, the sector is expected to recover to 6.3%. The need for fiscal consolidation, however, given high levels of public debt, is expected to constrain public infrastructure investment in the medium-term and slow down the construction industry’s growth. The government is also prioritizing investor-friendly reforms such as an overhaul of policies and legislation relating to public-private partnerships.
The technology sector is also one of the fastest-growing business sectors in Kenya, and internet access rates are some of the highest in sub-Saharan Africa. The rise of 4G and 4G LTE services in 2020, the GOK-approved universal 4G coverage, and the growth in smartphone usage are influencing growth in e-commerce and other e-based services and innovation.
The tourism sector in Kenya is one of the most diverse in East Africa, with increased investments in conference, eco-tourism, and leisure tourism. For a sector that has historically contributed about 9.0% of the country’s GDP, however, the tourism sector faces an uphill task of recovery post-COVID-19. Tourist arrivals are estimated to have declined by 78.4% in 2020 compared to 2019, translating to a 99.7% decline in earnings from $1.5 billion in 2019 to $4.6 million in 2020. This decline has brought total unemployment to 1.1 million workers in the sector. In a report titled, “Impact of COVID-19 on Tourism in Kenya, the measures taken and the recovery pathways,” (https://www.tourism.go.ke/wp-content/uploads/2020/07/COVID-19-and-Travel-and-Tourism-Final-1.pdf ) conducted by the Ministry of Tourism in June 2020, 81.3% of firms in the sector reported a significant reduction in the number of employees. (Deloitte)
As waves of the pandemic hit countries, including key source tourist markets, and a raft of social distancing measures remain in place, Kenya will likely see 2021 tourism levels remain below historic levels. Despite this, the tourism sector is expected to post modest recovery in 2021, with international arrivals forecasted to rise by 37% to 806,000. In pre-COVID projections, the GOK was projecting 2.5 million visitors by 2024 and over 3 million by 2030.
In summary, while the economy is experiencing a slump, modest recovery is expected in some sectors, with rebounds and modest growth being noted in several key sectors in 2021 such as healthcare, education, information communication technology (ICT), and construction. U.S. companies should be mindful of this current economic volatility and maintain strategic agility.