Analysis Of The Kenyan Economy Essay

Question:

Discuss about the Analysis of the Kenyan Economy.

Answer:

Introduction

Over the past years, the Kenyan economy has been experiencing constant growth. Today, the country has the largest economy in East Africa. By and large, this growth is attributed to the nation’s well-educated labor force and its access a vital port that serves as an export and import terminal for the East and Central African community. In addition, the nation has a vibrant tourism industry characterized by an abundance of wildlife and an attractive coastline. What is more, the Kenyan government is enthusiastic and committed to implementing reforms to encourage trade and economic growth. For this reason, the Kenyan economy is expected to continue experiencing economic growth in the future.

Stage of Development

Kenya is a developing economy. Particularly, this is because the nation is in its infancy and almost all its sectors are below the global average. At the moment, the country is characterized by poor legal systems, infrastructure, and poor political processes. In addition, it has a poor health sector and a struggling education sector. With respect to Rostow’s stages of the growth model, the country is between the preconditions for takeoff and take off stage. As of now, Kenya is moving towards the development of more productive commercial agriculture. As such, growers are continuously moving from subsistence farming to commercial production. Thus, the level of exports has increased substantially over the past years.

In addition, the nation is experiencing an increased investment and changes to the physical environment to expand the level of production. Furthermore, there is an increase in the spread of technology within the country. Advances are also being made in the existing technologies to enhance the level of production in the country. Consequently, this has increased external and internal demand for raw materials for production purposes, thereby bringing about significant economic changes to the economy. Notably, the social structure is also changing, and individual social mobility has taken root. Urbanization has also increased, and industrialization has become a major component of the economy. Even so, the country is lagging behind in most of the crucial economic indicators. For this reason, the economy is characterized among the developing nations of the world.

Historical Economic trends and Future Growth Forecasts

Kenya has exhibited constant growth, and the economy stands among the fastest-growing economies in Africa. The economy is fairly diversified, with the biggest contributors to the GDP being agriculture sector (25 percent), transport and communication sector (11 percent) and the manufacturing industry (10 percent). The country is set to experience rapid urbanization in the near future (“Kenya GDP,” 2017). In 2014, a robust GDP growth of 5.3 percent was recorded. Mainly, this growth was linked to the expansion of the manufacturing, communications, and technology, construction sectors. Although growth levels slowed down in the first half of the preceding year, it picked up in the second half, thereby registering a growth of 5.5 percent by the end of 2015 (World Bank, 2016).

In 2016, the GDP increased by approximately 0.10 percent. It is worth noting that the highest recorded value of GDP growth in the country was 3.8 percent recorded in 2010 (“Kenya GDP.” 2017). In contrast, the lowest level of growth was experienced in the first quarter of 2008 at negative 2.4 percent. Between 2005 and 2016, the average level of GDP is estimated as 1.29 percent (World Bank, 2016). Typically, Kenya is a net importer. Specifically, the value of the country’s imports significantly exceeds the value of the exports. By and large, this condition exists due to the nature of the imports and exports from the country. While the country’s chief exports are mainly products of low value such as horticulture and tea, the imports are of high value such as technology, machinery, and oil. The big differences in value force the nation to use its foreign currency reserves as well as accumulate a lot of debt. For this reason, the nation has a substantial trade deficit (Ajayi & Khan, 2000).

The levels of inflation in the country have been fluctuating since 2011. In that year, the level of consumer price inflation was relatively high at 14 percent. However, this estimate significantly dropped in the following year to around 9.4 percent (KNBS, 2016). In 2013, the inflation levels further dropped to 5.7 percent, but later increased to 6.9 percent in 2014. In the preceding year, the inflation rate dropped slightly to 6.6 percent. As of last year, the level of inflation in the country was estimated at 6.35 percent (KNBS, 2016). Unemployment is also a significant problem for the Kenyan government. Today, the levels of unemployment in the economy is significantly high. As of last year, 40 percent of the country’s population was reported to be jobless. This figure is dangerously high. Mainly, this condition is brought about by the relatively high population growth in the country. The population increased from approximately 39.5 million people in 2011 to 44.1 million in 2015. Regardless, the economy stands as one of the most attractive foreign direct investment destinations in the continent. Given that the economy is among the fastest-growing economies in the world, the economy boasts great prospects for success and development.

Government Influence

GDP growth

It is worth noting that the Kenyan economy has been experiencing substantial increases in the level of GDP growth in the last few years. Last year, for instance, the level of growth rose by 0.1 percent (“Kenya GDP,” 2017). Given that the nation has potential to increase its level of productivity, the government has implemented measures to spearhead the economy towards an era of robust growth and development. The inauguration of the country’s vision 2030 has been a major incentive towards increasing its GDP growth. One of the pillars of the vision is the economic pillar which aims at increasing the average growth rate of GDP by 10 percent every year. To achieve this goal, the government must work towards increasing the level of employment in the country. In addition, the level of national productivity should be enhanced to allow for increases in household income, firms profits, and government revenues. The government may also use expansionary fiscal and monetary policies to stimulate the aggregate economy, thereby achieve greater GDP growth.

Interest rates

The Kenyan government has the power to regulate the level of interest rates in the country. Mainly, this is done through the Central Bank of Kenya (CBK). Basically, the CBK uses monetary policy instruments to control the level of interest rates in the economy. At the end of last year, the government imposed a legislation to cap interest rates in the country at only 4 percent above the CBK’s benchmark rate (Aglionby, 2016). Typically, this legislation will lead to a reduction in the cost of lending as the bank lending rates and deposit rates will be significantly lower. In turn, this will encourage households and firms within the economy to borrow more. An increase in the supply of money in circulation will bring about an increase in aggregate activities within the Kenyan economy. Subsequently, this will lead to an increase in aggregate demand for goods and services. An increase in aggregate demand will translate to a substantial increase in the level of GDP growth.

Value of the currency

Sometimes, the government may influence the value of its currency against other foreign currencies. Mostly, this is done to encourage trade between the country and the rest of the world. In order to encourage the level of exports, the government may devalue its currency. This way, the country’s products will be relatively cheaper for other countries, thereby enhancing the demand for exports. However, devaluation of the currency would mean that imports into the country will be relatively expensive for Kenyan households and firms. In turn, the level of imports will decline. An increase in the level of exports and a decline in imports will result in an increase in the country’s net exports. Moreover, the level of debt will also drop.

Foreign Debt

The current levels of foreign debt in the country are alarmingly high (“Kenya BOT,” 2017). For this reason, the government of Kenya must take stringent measures to reduce the levels of foreign date and achieve a balance of payments (Anyanzwa, 2017). Mainly, this can be achieved through the implementation of structural changes in the economy. First, the government should cut down its expenditures. By instituting radical budget cuts, public debt will reduce significantly. In addition, the government may increase the tax charges. By so doing, it will be able to raise more revenue that may be utilized in offsetting debts.

Environment and personal wellbeing of citizens

Currently, the nation is ranked among the top nations with many individuals living below the poverty line (Karanja, 2015). In this regard, the government should implement programs that will increase employment opportunities for its people (Corral, 2009). By so doing, many individuals will be able to attain a decent living, thereby improving the standards of living in the country. It should also institute structural changes in the country’s health and education sector. This way, the country will be able to reduce mortality rates in the country. With regards to the environment, strict anti-pollution policies should be implemented to ensure that industries operate under environmentally-friendly conditions (UNESCO, n.d.).

Tourism Development

The tourism industry is of key importance to the Kenyan economy. For this reason, the government of Kenya should create a positive environment for the development of the tourism and hospitality industry.

Economic Incentives

The Kenyan government should implement policies that aim at extending facilitation measures in favor of private sector investments in the tourism and hotel industry. Such economic incentives could be in the form of tax rebates and grants to investors. At the moment, the government offers a 100 percent investment allowance to individuals and firms investing in the sector (Embassy of Kenya, 2013). In addition to this, it provides investors with Industrial building allowances to encourage the establishment of buildings and structures for the growth of the sector. On top of these incentives, the government may offer greater tax allowances to companies that promote eco-tourism, thereby encouraging investment in the region. The government may also offer grants and loans to local companies that may want to venture into the tourism industry in Kenya (Sanga, 2015).

Infrastructure Development

The development of the tourism sector is highly dependent on the availability of appropriate infrastructure. As such, proper infrastructure will serve the needs of the tourists and encourage major investments in the industry (Khadaroo & Seetanah, 2007). In this regard, the Kenyan government should take a keen interest in developing and supporting the development of infrastructures such as restaurants, accommodation facilities, built-up attractions, and transport. Private investors will be enticed to invest in the sector if the nation possesses a good air transport network as well as suitable road transport facilities. Most importantly, the government must ensure that investors have ample access to basic services such as electricity, telecommunication, sewerage, water and health facilities.

Education and Training

Kenya suffers from a shortage of qualified workers in the tourism industry. Mainly, this is because the current provision of personnel from colleges and universities is inadequate to meet the industry’s demand for the well-trained professional workforce (Mayaka & Akama, 2007). Thus, the government should address this issue by instituting a curriculum that ensures that graduates and diplomats attain hands–on skills that match the requirements of the labor market. It should also develop a national tourism education strategy that will help satisfy human resource needs for the sector (Okech, 2009).

Marketing

Kenya should focus on marketing its diverse tourism products both locally and internationally. Therefore, the government should initiate programs such as lobbying for direct flights from the US and other major economies to Kenya. It may also seek direct landing rights for its national carrier, Kenya Airways in Asian countries that have the potential of bringing large numbers of tourist in the country. By so doing, the country will be reducing the travel costs for tourists thereby enticing them to travel to the country. The government may also advertise its tourism destination sites through brochures, television advertisements and broadcasts. In addition, social media platforms such as Instagram, twitter, blogs, and Facebook have a great potential of reaching out to tourists across the world (Mengo, 2014). This way, the country will entice individuals from all over the world to visit the country, thereby boosting tourism

Local Impacts and Business Development

Lamu Island, a small town in the coastal region of the country is a perfect location for developing a tourist hotel. The destination is situated off the country’s coastline, in the Indian Ocean. Today, the region boasts as one of the best destinations for tourists to relax even during times of security threats in the country. Besides, the town is in close proximity to the country’s main coastal attraction town, Mombasa. For this reason, setting up a luxury hotel in the region for local and foreign tourists will be highly profitable.

Attracting local finance

The investor may seek for finance locally by approaching with the local government with a proposal indicating the usefulness of the project in enhancing the level of employment opportunities in the community. This way, the local government in liaison with the central government may offer the investor a grant and other tax deductions and incentives that will significantly reduce the cost of starting up the project. The investor may also seek loans from local banks to invest in the hotel industry.

Legislation and planning

Investors must consider the regulations pertaining to the establishment and development of a hotel facility in the country. Thus, they must obtain all the relevant permits and licenses before commencing operations of the proposed business. In addition, they should consider all the possible restrictions imposed by the government with regards to the types of structures to develop. Most importantly, the investor must plan for the payment of all the applicable taxes and land rates associated with such developments in the region.

Staffing, Skills of local residents

Lamu town and its environs are endowed with a large population of local residents who can provide both skilled and semi-skilled labor for the hotel. Thus, the investor will not struggle to find the right personnel to work in the establishment. Besides, the management may dedicate itself to offering training to its potential employees before employing them in their workforce. Employing local residents will significantly improve the welfare of the people in the region.

Economic flow effects

The establishment of the hotel in the Lamu region will increase the level economic activities in the region both directly and indirectly. First, the clients to the hotel will also visit the many tourist attraction sites within the island and its surroundings, thereby promoting tourism. In addition, it will promote the fishing industry in the region since most tourists prefer to eat seafood. The curio industry will also be promoted as tourist tend to buy souvenirs. What is more, the hotel will offer many employment opportunities for the local people, thereby enhancing their quality of life (Kuto & Graves, 2004).

Conclusion

Although Kenya is a developing economy, it is one of the best investment destinations in Africa. The country’s tourism and hospitality industry provide great prospects for profitability and prosperity. The government plays an active role in establishing a suitable environment for local and foreign investors. Occasionally, it regulates and controls the level of interest rate to enhance economic growth and stability. It also provides numerous incentives for investors in the tourism industry. Therefore, investing in the country may lead to great benefits for both the investor and the local community.

References

Aglionby, J. (2016). Kenya to cap interest rates on bank loans. Financial Times. Retrieved 21 January 2017, from

Ajayi, I., & Khan, MS. (2016). External Debt and Capital Flight in Sub-Saharan Africa. International Monetary Fund. Retrieved 21 January 2017, from

Anyanzwa, J. (2016). Kenya: IMF, World Bank Cautious About Kenya's Economic Growth. All Africa. Retrieved 21 January 2017, from

Corral, M. (2009). To What Extent Should Government Ensure Citizen Well-Being? (1st ed., pp. 1-5). Vanderbilt University. Retrieved from

Investment Incentives. Embassy of the Republic of Kenya. Retrieved 20 January 2017, from

Karanja, S. (2015). Kenya ranked sixth on extreme poverty index. Daily Nation. Retrieved 21 January 2017, from

Kenya (2016). The Economist. Retrieved 21 January 2017, from

Kenya (2016). World Bank. Retrieved 20 January 2017, from

Kenya Balance of Trade (2017). Trading Economics. Retrieved 21 January 2017, from

Kenya GDP Annual Growth Rate (2017). Trading Economics. Retrieved 21 January 2017, from

Kenya GDP Growth Rate (2017). Trading Economics. Retrieved 21 January 2017, from

Kenya Overview (2016). World Bank. Retrieved 20 January 2017, from

Kenya: Economic Growth and Trade. USAID. Retrieved 20 January 2017, from

Kuto, B., & Groves, JL. (2000). The Effect of Terrorism: Evaluating Kenya's Tourism Crisis. e-Review of Tourism Research 2(4), 4-7.

Leading Economic Indicators (2016). Kenya National Bureau of Statistics. Retrieved 20 January 2017, from

Mayaka, M., & Akama, S. (2007). Systems approach to tourism training and education: The Kenyan case study. Tourism Management, 28(1), 271-275.

Mengo, B. (2014). Feature: Kenya turns to social media to promote tourism. African News. Retrieved 21 January 2017, from

Okech, R. (2009). Promoting Rural Tourism In Kenya And Romania (1st ed., pp. 2-6). Maseno. Retrieved from

Quarterly Gross Domestic Product Report: Third Quarter 2016 (2016). Kenya National Bureau of Statistics. Retrieved 20 January 2017, from

Sanga, B. (2015). State allocates Sh5.2 billion to the Kenyan tourism industry. Standard Digital. Retrieved 21 January 2017, from

Sustainable Tourism. UNESCO. Retrieved 20 January 2017, from

Wunder, S. (2000). Ecotourism and economic incentives- an empirical approach. Ecological Economics, 32(3), 471-475.

How to cite this essay: