2015/16 Yearbook Economy and Finance

Economy and Finance

Kenya’s 5.6 per cent expansion in its  Gross Domestic Product (GDP) in 2015 was mainly supported by a stable macroeconomic environment and improvement in outputs of agriculture; construction; finance and insurance and real estate.

The Gross Domestic Product (GDP) is estimated to have expanded by 5.6 per cent in 2015 which was a slight improvement compared to a 5.3 per cent growth in 2014. This growth was mainly supported by a stable macroeconomic environment and improvement in outputs of agriculture; construction; finance and insurance and real estate.

However, growth slowed in a number of sectors including; information and communication, mining and quarrying, and wholesale and retail trade. Similarly, growth in taxes on products slowed during the review period. The growth of accommodation and food services contracted by 1.3 per cent,a less severe performance compared to a revised decline of 16.7 per cent in 2014.

Rebasing

In 2014, Kenya’s gross domestic product (GDP) was revised, catapulting the economy to the top 10 African economies. The GDP size or gross output was enhanced by 25 per cent after the elements initially ignored were factored in calculating national production.

The GDP figure released on September 30, 2014 was re-calculated at Kshs4.76 trillion ($53.4 billion) for 2013 up from Kshs3.8 trillion ($42.6 billion). Kenya moved from 12th in Africa to 9th.

This followed the shift to use of 2009 as the base year of calculation as opposed to 2001. Several other countries in Africa have also rebased in line with best World Bank practices. Nigeria was the more notable case, which the largest economy on the continent ahead of South Africa, after changing the base year from 1990 to 2010,

Subsequent quarterly GDP estimations have been based on the rebased formula. The rebasing and revising of National Accounts Statistics kicked off in 2010 and roped in more data sources. Also revised were annual and quarterly national accounts estimates for the period 2006 to 2013 and balanced 2009 Supply and Use Tables.

The growth in agriculture was mainly supported by improved weather conditions that resulted in significant increases in output of maize, horticultural produce and livestock. However, heavy rains in 2015 were unfavourable to cultivation of some crops like potatoes and tomatoes. Nevertheless the significance of crops that were favoured by the weather far outweighed that of crops negatively impacted upon, resulting in an impressive growth of 5.6 per cent in the agriculture sector.

Construction recorded the fastest growth of 13.6 per cent in 2015 compared to 13.1 per cent in 2014. Growth in construction activities was mainly driven by the ongoing public infrastructure development coupled with the resilient private sector’s expansion in the real estate sector.

The financial and insurance sector maintained a robust expansion to grow at 8.7 per cent in 2015 from 8.3 per cent in 2014. This growth was mirrored by a 19.2 per cent rise in the total domestic credit to Kshs2,830.5 billion in December 2015 compared to a growth of 16.1 per cent in December 2014.

Key macroeconomic indicators remained relatively stable and supportive of the growth during the year under review. Overall inflation eased from 6.9 per cent in 2014 to 6.6 per cent in 2015 mainly due to lower prices of energy and transport. Monthly inflation rates fluctuated between 5.5 per cent and 8.0 per cent but were largely contained within the Central Bank’s target throughout the year.

The Kenya shilling

Generally, the Shilling depreciated against its major trading currencies as reflected by the weighted trade index, which worsened by 5.7 per cent during the review period. The shilling was mainly supported by a significant fall in the international oil prices as the country cut back expenditure on importation of petroleum fuels and increased diaspora remittances. However, lower earnings from the tourism sector impacted negatively on the exchange rate of the shilling.

Inflation

In response to rising inflation at the beginning of the year and instability of the shilling, the monetary authorities adjusted the Central Bank Rate (CBR) from 8.50 per cent to 10.0 per cent in June and later to 11.5 per cent in July 2015. The weighted average interest rates on commercial banks loans and advances rose by 1.40 percentage points to 17.45 per cent in December 2015 compared to 15.99 per cent in December 2014.

The index of stocks traded at the Nairobi Securities Exchange (NSE) declined significantly from a high of 5,346 points in the first quarter of 2015 to 4,040 points in December 2015.

Public debt

Total stock of debt as at end of 2014/15 stood at Kshs2.6 trillion, of which external debt stock accounted for 54.7 per cent. Debt servicing charges net of repayments from on lending are expected to stand at Kshs399.0 billion.

During the period under review, Kshs259.8 billion will be transferred to county governments. The total budgeted expenditure for county Governments is estimated at Kshs361.1 billion against an estimated revenue of Kshs343.7 billion.

Agriculture

The sector’s performance was largely influenced by weather patterns in 2015, with heavy and well spread long rains experienced in most parts of the country. The short rains period was characterized by the El Niño weather phenomenon that started in November 2015. In the end, output of livestock and most crops was boosted by the weather but a few crops were negatively affected, resulting to a decline in their production. Consequently, the sector recorded an accelerated growth of 5.6 per cent in 2015 compared to 3.5 per cent in 2014. The agriculture sub-sector grew by 6.2 per cent in 2015 and considerably influenced the performance of the whole sector.

Production of maize increased from 39.0 million bags to 42.5 million bags in 2015 due to favourable weather and reduced incidences of the maize lethal necrosis disease (MLND). Beans and sorghum also recorded substantial growths of 24.2 per cent and 10.5 per cent, respectively.  However, production of potatoes declined by 14.8 per in 2015 due to severe effects of frost during the season. Similarly, production of tea and coffee contracted by 10.3 per cent and 16.0 per cent, respectively in 2015. The value of horticultural exports rose by 7.5 per cent on account of increased exports of cut flower and fruit. On the other hand, export of vegetables declined marginally in 2015.

In the livestock sub-sector, the volume of marketed milk increased by 10.9 per cent from 541.3 million litres in 2014 to 600.4 million litres in 2015. The number of cattle and calves sold to abattoirs rose by 9.5 per in 2015 to stand at 2,274.5 thousand head.

Similarly, sheep and goats slaughtered in 2015 increased from 6,138.5 thousand head in 2014 to 6,560.8 thousand head in 2015.

Energy

Energy In 2015, the energy sector witnessed a steady rise in global crude oil and other liquid inventories. Murban crude prices decreased to an average of US$52.53 per barrel in 2015, from an average of US$99.45 per barrel in 2014.

The volume of petroleum product imports increased marginally from 4,409.0 thousand tonnes in 2014 to 4,431.7 thousand tonnes in 2015. However, the total import bill for petroleum products declined by 32.6 per cent to Kshs226.1 billion during the same period.

Total installed electricity capacity increased by 6.3 per cent to 2,333.6MW, while total electricity generation expanded by 4.1 per cent to 9,514.6GWh in 2015. Demand for electricity increased from 7,415.4 million KWh to 7,826.4 million KWh during the same period. The number of customers connected under the Rural Electrification Programme (REP) rose by 33.0 per cent to stand at 703,190 customers as at July 2015, up from 528,552 as at July 2014. In 2015, Rural Electrification Authority financed electricity supply to a total of 21,487 public primary schools, 17,809 on grid and 3,678 on solar.

Manufacturing

The sector’s real output grew by 3.5 per cent in 2015 compared to a slower growth of 3.2 per cent in 2014. This was attributed to reduced production costs arising from lower cost of petroleum and electricity inputs.

The manufacturing quantum index recorded a slower growth of 3.9 per cent in 2015 compared to 6.3 per cent registered in 2014.

This increase was mainly driven by increased production of pharmaceutical products; beverages; meat and meat products; and non-metallic minerals and plastic products. Producer Price Index (PPI) increased by 3.91 per cent in 2015 compared to an increase of 3.03 in 2014, mainly due to high cost of imported raw materials arising from depreciation of the Kenya Shilling against major currencies.

Credit to manufacturing sector increased from Kshs237,422 million in 2014 to Kshs290,069 million in 2015. Formal employment in the sector rose by 2.7 per cent from 287.4 thousand persons in 2014 to 295.4 thousand persons in 2015. The Export Processing Zone (EPZ) program recorded improved performance in employment, exports, imports, and expenditure on local goods and services, with total sales increasing by 12.1 per cent to Kshs64.1 billion in 2015.

Export of apparel under the African Growth and Opportunity Act (AGOA) increased by 14.4 per cent to Kshs34.6 billion in 2015.

Building and Construction

The country witnessed a thriving building and construction sector in 2015 registering a growth of 13.6 per cent in value added. Formal employment in the sector grew by 11.4 per cent to stand at 148.0 thousand in 2015 up from 132.9 thousand in 2014.

Total proposed development expenditure on roads increased by 79.2 per cent. Consequently, the index of Government expenditure on roads increased from 263.4 in 2014 to 386.7 in 2015 to support projects being undertaken during the year.

Cement consumption went up by 9.9 per cent in 2015 in tandem with the growth in the building and construction sector. Total construction cost index increased by 4.9 per cent compared to an increase of 10.1 per cent in 2014, mainly attributable to the fall in fuel prices, a key input component of the index.

The index of reported private building works completed in major towns rose from 341.4 in 2014 to 367.1 in 2015.  In addition, the index of reported public building works completed in main towns registered an increase from 106.1 in 2014 to 116.2 in 2015. Loans and advances to the sector increased by 32.3 per cent from Kshs80.4 billion to Kshs106.4 billion in 2015. As at December 2015, 174 kilometres of the Standard Gauge Railway (SGR) from Mombasa to Nairobi had been constructed at a cost of Kshs113.9 billion.

Tourism

Tourism earnings went down to Kshs84.6 billion in 2015 compared to Kshs87.1 billion in 2014. Similarly, international visitor arrivals declined by 12.6 per cent from 1,350.4 thousand in 2014 to 1,180.5 thousand in 2015. The suppressed performance was on account of security concerns, particularly in the coastal region and restrictive travel advisories from some European source markets.

Bed-nights occupancy decreased by 6.4 per cent from 6,281.6 thousand in 2014 to 5,878.6 thousand in 2015.  Number of visitors to museums, snake parks and other historical sites went up by 15.4 per cent to 797.5 thousand in 2015 compared to 690.9 thousand in 2014. The number of visitors to national parks and game reserves declined by 10.8 per cent to 1,953.8 thousand in 2015.

Transport and storage

Sector output expanded by 6.4 per cent from Kshs894.1 billion in 2014 to Kshs951.4 billion in 2015. The road transport sub-sector posted a growth of 4.5 per cent in output to Kshs613.9 billion in 2015.

The performance of the Port of Mombasa improved further during the period under review with the total cargo throughput handled increasing from 24,875 thousand tonnes in 2014 to 26,732 thousand tonnes in 2015. Total container traffic handled rose by 6.3 per cent to 1,076,118 Twenty-foot Equivalent Units (TEUs) in 2015.

Total throughput of white petroleum products transported through the pipeline increased by 2.8 per cent to 5,712.1 thousand cubic metres in 2015. The air transport sub-sector recorded a growth of 1.3 per cent in total commercial passengers handled during the period under review compared to a growth of 7.9 per cent in 2014.

The performance of the freight transport segment of the railway transport sub-sector has been on the upward trend for the third consecutive year. Total cargo traffic grew from 1,509 thousand tonnes recorded in 2014 to 1,575 thousand tonnes in 2015. Similarly, the revenue earned from freight transport increased from Kshs6.1 billion in 2014 to Kshs6.2 billion in 2015. Passenger journeys and revenue from passenger traffic stream however declined further during the reference period.

Newly registered motor vehicles increased by 5.0 per cent to 107,761 units in 2015. On the other hand, motorcycles registered increased by 20.8 per cent to 139,420 over the same period.

Balance of payments (BOP)

In 2015, the balance of trade improved from a deficit of Kshs1.081 trillion recorded in 2014 to a deficit of Kshs997 billion. Total exports rose by 8.2 per cent to Kshs581 billion in 2015 while total imports declined by 2.5 per cent to Kshs1.578 trillion over the same period.

As a result, the volume of trade increased marginally from Kshs2.156 trillion in 2014 to Kshs2.158 billion in 2015. The rise in the total export earnings compared to the decline in the total import bill led to the improvement of export-import ratio from 33.2 per cent in 2014 to 36.8 per cent in 2015. The leading export earners were tea, horticulture, articles of apparel and clothing accessories; and coffee, collectively accounting for 54.6 per cent of the total export merchandise.

The National Treasury

The institution was created by the Kenya Constitution 2010. Despite a number of other institutions being created under Part 6 (titled Control of Public Money) of the constitution, the National Treasury under article 225, Financial Control, retains a lot of powers including that of stopping transfers to an errant recipient subject to an initial cap of 50 per cent.

Budget 2015/16 highlights

Mr Rotich in June unveiled a Kshs2 trillion Budget. He targeted to collect Kshs1.35 trillion, where Kshs1.25 trillion would be ordinary revenue and the rest appropriation in aid or user fees charged for government services.

  • Kshs784.2 billion ministerial recurrent expenditure
  • Kshs784 billion development expenditure
  • Kshs185 billion for interest repayment
  • Kshs259.7 billion allocated to Counties
  • Kshs35.2 billion to Constituency Development Fund

Non-fiscal policy measures

  • Bank capital to be raised from Kshs1 billion to Kshs5 billion by 2018
  • Rotich to present Central Bank Bill 2015 to Parliament to overhaul banking law in line with international best practices
  • Nairobi Financial Centre Authority (seeking to make Nairobi a global financial hub) to be operationalised in 2015
  • One million homes to be connected with electricity; Kshs21.1 billion allocated to power transmission; Kshs14.9 billion rural electrification; Kshs4.5 billion street lighting; Kshs1.5 last mile connection
  • Kshs13.5 billion for irrigation
  • Kshs25 billion for employment and NYS re-engineering

Kenya Revenue Authority (KRA)

The tax authority is mandated with collecting all revenue payable to government and operates under the National Treasury.

iTax: KRA in June 2015 celebrated the collection of Sh1 trillion as a result of reforms implemented over the past decade and widening the tax net. KRA has carried out major administrative reforms, key among them being the iTax electronic tax returns platform. In 2015, the revenue authority registered a record two million filings through the system.

Electronic Single Window: This customs management system was created to seal revenue leakages and improve efficiency. In the year 2014/15, a few select imports and exports including sugar, cigarettes and cement were processed through the system. But from July 1, 2015, all importers and exporters were mandated to use the system.

Kenya National Audit Office (KENAO)

It is a creation of articles 229, 248 and 259 of the Constitution. The Auditor-General holds the independent office for a term of eight years and reports to Parliament. The office is mandated with auditing any entity receiving funding from government and that now includes the counties and reports periodically to the National Assembly.

Office of Controller of Budget

The office was established under the 2010 Constitution article 228(1). The first holder of the office was Agnes Odhiambo, who is the former Constituency Development Fund Board CEO. She was appointed on August 27, 2011. Previously, the function was under the Controller and Auditor-General. The holder of the office reports to Parliament through periodical reports and signs and monitors the release of funds from The National Treasury.

Commission on Revenue Allocation

It was established under article 215 of the Kenya Constitution and is mandated with equitable sharing of revenue between the county governments and the National Government. It has been at the centre of bitter disputes as the National Assembly and Senate fight over allocations to counties. It is chaired by the former Central Bank of Kenya Governor, Mr Micah Cheserem.