Beyond Resilience: Increasing Productivity of Public Investments in Kenya

Earlier this week we released the 14th edition of the Kenya Economic Update, our bi-annually published report which assesses the state of Kenya’s economy. Kenya remains one of the bright spots in the region. With economic growth rates sustained at above 5%, Kenya has outperformed the Sub-Sahara Africa regional average for eight consecutive years. Our macroeconomic team projects that gross domestic product (GDP) growth in Kenya will increase to 5.9% in 2016 and could accelerate to 6.1% by 2018. Both Kenya’s current performance and the positive medium-term outlook are in sharp contrast to the regional growth deceleration—average per capita incomes in the Sub-Saharan Africa will decline —and the global economic slowdown.

Private consumption and government investment are the key drivers of Kenya’s recent growth performance, underpinned by a stable macroeconomic environment, lower oil prices, diversification, improved security perceptions, and ongoing structural reforms. Growth in private consumption is fueled by a surge in remittances, an emerging middle class and the demographic divided, while ongoing public infrastructure investments are easing supply side constraints. The road network has improved quite significantly over the past decade. The port of Mombasa, which still has its own challenges, has improved vessel turn-around times and reduced container transit time in the port. Electricity generation has increased and become greener, and more people are now connected to the national grid.
 

But in addition to physical infrastructure, the recent efforts to improve so called “soft infrastructure”—the policies, institutions, practices and regulations that shape how economic activity is conducted—are also growth enablers. Some of these achievements are reflected in Kenya’s recent surge in the World Bank Doing Business global ranking. Currently ranked 92, compared to 136 two years ago, Kenya is now among the top 5 economies in Sub-Saharan Africa where it is easiest to do business and over the past year Kenya has emerged as the third top reformer globally.

Medium term economic prospects for Kenya remain robust. Ongoing public infrastructure investments will continue to play a ‘crowding-in’ role, easing transport and energy costs, and supporting economic expansion in construction and industry. Private consumption will drive service sector growth and Kenya’s external sector account will remain healthy on account of a steady increase in remittances, a rebound in tourism and a rise in Foreign Direct Investment (FDI).

Risks to Kenya’s future growth prospects that are not included in our baseline outlook emanate from both domestic and external sources. On the domestic front, these include delays to fiscal consolidation, adverse climatic shocks affecting the largely rain-fed agricultural sector, unintended effects of the interest rate cap, and potential uncertainties in the run-up to the 2017 general elections which could lead to a wait-and-see attitude by investors and dampen short-term growth prospects. On the external front, these include weaker than expected growth in the global economy, volatility in global financial markets and a hike in oil prices.

While Kenya’s macroeconomic stewardship and almost a decade of resilient economic growth are commendable achievements, more is needed, and on multiple fronts, to attain the higher growth rates required to achieve the goals envisioned under Vision 2030. To increase the pace of growth, productivity in Kenya must improve. Not only in the private sectors, especially in agriculture, but also in the public sector. In this fourteenth edition of the Kenya Economic Update, we focus on how higher levels of growth can be achieved by enhancing the productivity of public investments which has declined in the recent years as reflected in the weak execution of infrastructure projects.

The KEU report proposes that reforms are warranted in two broad areas. The first is to institute a system of Public Investment Management (PIM) to improve the way projects are evaluated, selected and prioritized for inclusion in the budget, and as well as the way they are monitored during execution. This in turn can accelerate the catalytic impact of public investment on economic growth. The second reform is to streamline the process of land acquisition, particularly when determining compensation and preparing Resettlement Action Plans (RAPs), to prevent significant delays and cost escalation in the execution of public infrastructure projects. While the reforms in both these areas will take commitment and time to complete, the report proposes a number of quick wins which can be implemented to commence the process and build momentum.

Kenya has performed well in recent years. The World Bank remains committed to supporting the Government of Kenya’s efforts to implement its ambitious economic development agenda, including improving the productivity of ongoing public infrastructure investments.