Download THE STATE OF THE NATION`S ECONOMY Prof. P.Anyang`Nyong`o

THE STATE OF THE NATION’S ECONOMY
Prof. P.Anyang’Nyong’o M.P.
Minister for Planning and National Development
Lecture given at the Institute of Economic Affairs
Annual Lecture Series
Norfolk Hotel, Nairobi
29th January 2003
1. INTRODUCTION
The Institute of Economic Affairs (IEA) annual lecture serves the
purpose of providing a forum to review economic performance in the
foregone year and focus upon the policy imperatives of the New Year. In
the 2003 lecture the Institute requested me as the Minister for Planning
and National Development to make the key note address focusing on the
Government’s preliminary assessment of the state of the nation and to
give indications on the policy priorities and the direction that the
Government intends to take.
In addressing the above request I intend to focus on the following:
• The current stat of the Kenyan economy:
• The proposed policy direction: and
• The expected road map
2. STATE OF ECONOMY
The Kenyan economy over the recent past has been dominated by two
inconsistent trends. On one hand the country has generated a relatively
sustainable macro economic framework with low inflation (4.3% over
1997-2001 and 2% in 2002), stable exchange rates and acceptable level
of foreign exchange reserves (over 3 months by end 2002), stable
exchange rates and acceptable level of foreign exchange reserves (over
3 months by end 2002). During the period 1990/2000-2001/02 the
budget deficits averaged 1.24 percent of GDP. On the other hand, the
country ha failed to achieve satisfactory performance in the real
economy. In particular the country has registered:
a) Poor economic growth real GDP growth averaging 1.0% over
1997-2001 and growing by 1.2% in 2001. this means the trend
of declining per capita income that begun in the early nineties
ha continued into the new millennium:
b) Low investment and savings. Investment averaged 19 percent
of GDP over 1997-2001 compared to a targeted 25-30 percent
while saving averaged just 8.8% over the same period. Kenya
has thus experienced insufficient investment coupled with
increased reliance on eternal funding to finance investment:
c) Poor investment efficiency as characterized by the high level
of investment per unit of increased output. In the period 19972001, 19% of GDP worth of investment achieved 1.04 percent
of economic growth while during the period 1964-73, 19.7
percent of GDP in investments achieved an average economic
growth of 6.6 percent.
d) Declining export performance as evidenced by export to GDP
ratios declining from 32.1% over 1990-95 to 27.5% over 19962000 and 26.2% of GDP in 2001:
e) Rising unemployment and poverty with the latter rising from
45% of the population in 1992 to an estimated 56% in 2002:
f) Net long-term financial outflows in the balance of payments
where in 2001 net outflows totaled Kshs. 22 billion. The bulk
of these net outflows from the public sector where, for
example, there was a net outflow of Kenya Shillings 9.3 billion
in 2001/02. Foreign borrowing is thus predominantly short
term, making both public and private investment financing
difficult and inherently unstable:
g) Public expenditure skewed in favor of consumption at the
expense of investment. Public savings have declined from 2.8%
of GPD in 1999/2000 to below zero by 2001/02 while the
central Government wage bill, which is more than 8% of GDP is
substantially above the 5.5% -6.5% common to low income
countries. Government investments at 3% of GDP also compares
poorly to the Newly Industrializing Country (NIC) experience of 810% of GDP going to investment. This skewed public expenditure
pattern has led to deterioration social sector indicators implying
that expenditure has not been cost effective.
The coming of the new Government has substantially raised
expectations. Kenya can no longer afford to have declining per
capita income, increasing poverty and unemployment, and poor
service delivery. The economic challenge will be to transform the
productive sectors of our economy into high performers able to
provide the resources to deliver higher quality public services
without compromising the macro economic fundamentals.
3.
REASONS FOR ECONOMIC UNDER PERFORMANCE
Kenya’s first decade after independence was characterized by rapid
growth with GDP growth averaging 6.6%, relatively high
investment efficiency with less that 3 units of investment required
per unit of output, growing experts and improvement in service
delivery. Macro economic variables such as deficits, inflation,
interest rates, exchange rate and balance of payments position were
all good. Most important, per capita income expanded by an average
of over 3% per year. This economic growth was based on what has
been referred to as the ‘easy’ opportunities, i.e.:
• Agricultural growth based on bringing more land under
cultivation: introducing exotic cattle, hybrid maize and export
crops to the smallholder sector and intensification of land use
through the subdivision of settler farms:
• Industrial expansion based on import substitution which allowed
for rapid expansion based on protected domestic demand and
postponed dealing with problems relating to economies of scale,
inadequate technology, managerial deficiencies and worker
productivity that was not internationally competitive:
• Rapid expansion of public services with Government services
expanding by an average 16.9% over 1964-73.
This rapid growth was primarily driven by expansion of
educational and health services: and
• Increasing monetization of the economy as subsistence
production declined and commercialization of agriculture
expanded.
Over 1973-2001, Kenya’s economic performance has been
characterized by secular decline. GDP declined from an average of
6.6% between 1964-73 to 5.2% over 1974-79. It declined further
from 4.1 percent during 1980-89 period to average between 2.5
percent between 1990 and 1995. During the period 1996-2002
economic growth averaged less than 2 percent. Overall, poor
performance has been due to a failure to adjust to changing
economic environment and to find new engines of growth as the
old engines run their course. Several indicators exist:
• Kenya has consistently failed to change the policy direction
once easy options were exhausted, e.g.:
(i)
Agriculture has failed to adjust to a high value added
activity. According to Sessional Paper no 1 of 1986,
by 1984 over 46% of high potential land was still being
used for low intensity milk production while only 3%
was being used for high intensity coffee and tea
production. Evidence from Kenya Rural Development
Strategy of 2002 indicates that by 2000, milk
production still accounted for 47% of total high
potential land use while coffee and tea had risen to
5.2%. This is despite the fact that total land under farms
had expanded from 5.6 million hectares in 1984 to 6.8
million hectares in 2000:
(ii)
Manufacturing has failed to transform from an inward
oriented activity to an export oriented internationally
competitive producer. Instead liberalization has led to
import penetration without a commensurate expansion
in exports:
1) Share of Government expenditure to GDP has
remained high even as social indicators (life
expectancy, enrolment rates) have declined.
• A consistent failure to adhere to adjustment
agreement with development partners which has led
to tougher (and hence more difficult) conditionalities
in
subsequent
negotiations.
Kenya’s
structural
adjustment borrowing is instructive in this respect:
i.) A structural adjustment loan (SAL) as
negotiated
over
the1979-80
period
focusing on export promotion but failed to
achieve
the
targets
due
to
slow
implementation:
ii.) A second SAL was negotiated in 1982 to
focus on trade reform, grain marketing,
interest rates and energy but was delayed
due to strong opposition by vested
interests:
iii.) Adjustment loans for the agricultural
sector (1986 and 1990) in the industrial
sector (1988) the financial sector (1989)
and export development (1990) were
largely
undermined
by
Government
implementation failures.
iv.) It should also be noted that Kenya has yet
to complete any Enhancement Structural
Adjustment Facility (ESAF) or Poverty
Reduction and Growth Facility PRGF
borrowing arrangement with the IMF.
4. GOVERNMENT POLICY AGENDA
Following the election of the NARK Government in December
2002, Kenyan’s showed that they had given us a mandate to carry
out sweeping economic and political reforms to renew rapid
economic growth in a context of democratic governance under the
rule of law. An effective recovery and reform initiative will have to
be informed by the mistakes and successes of the past. We shall need
to build the economic reform framework to ensure that:
• Investors, both domestic and foreign, have confidence in the
economy and can put their investments in Kenya:
• Government
uses
public
resources
transparently
and
accountability so as to stimulate domestic savings and
domestic capital formation:
• People receive a just reward for their labor and contribute to
economic growth through increased individual initiative where
mutual social responsibility is an important component of the
responsibility of the citizen:
• The sustainable macro economic framework that has been
achieved at considerable cost to the Kenyan taxpayer is
maintained:
• The fundamental reasons for economic underperformance
since 1980 are addressed especially the failure of the country
to come up with the follow through on a consistent adjustment
framework:
• A more consistent partnership with our development partners
is pursued to ensure that the external sector does not
undermine the overall growth efforts.
Principles that will guide the development strategy
Several principles will inform the development strategy that we
intend to adopt. Critical principles include:
• The over arching goal for the country is to achieve a broad
based improvement in the standard of living for
current and future generation in the country. This requires
among others a reduction in the incidence of poverty,
reduced maternal and infant mortality, higher levels of
education attainment, more productive jobs for Kenyan’s and
greater domestic control of the country’s assets. In other
words, a realistic and programmatic pursuit of lthe UN
Millennium Development Goals.
• Economic growth will play a crucial though not allencompassing role in achieving the country’s socio economic
objective. Economic growth allows the country to directly
tackle the problems of poverty, unemployment and allows a
greater number of Kenyan families to meet their basic needs
without State assistance. Economic growth also has positive
effects on Government revenues and thus increases the
ability of Government to deliver economic and social
services to the populace in a fiscally sustainable manner:
• A business environment that is conducive to both local and
foreign investors. This will require the core enabling
environment consisting of the incentive structure, the
infrastructure and the legal and institutional framework that
matches international best practice or at least exceeds that
available in the region:
• Enhancing and supporting a responsible private sector as a
leading player in stimulating and sustaining economic
growth. Not all that the private sector does will necessarily be
beneficial to the general population. It will be essential for
the Government to simultaneously promote the private sector
by providing and enabling environment: provide those
essential services such as security, law and order, basic
education and health that are essential for the country’s
overall well being but are often provided by the private
sectors: and ensure that even as it promotes the private sector
, it ensures that it protects the national resource base and
ecosystems
• Putting in place a taxation regime that will be fair, just and
equitable, where the base is wide enough to include all
taxable incomes, profit and service provided, giving the
government sufficient revenue to finance its operations
within the context of a healthy economy.
Key Economic Recovery Objectives of the NARC Government
The key objectives of the NARC Government are contained in
the NARC manifesto and the NARC Post Election Action Plan
(PEAP). NARC’s overall goal is to bring about comprehensive
political and economic change in Kenya. The manifesto sets out
the following objectives:
1. Governance: The aim of the government is to put in
place a system of governance that ensures leaders
remain transparent and that the electorate is able to
make demands and receive adequate accountability
from those the elect. The focus will be controlling
corruption, reforming the system of justice, promoting
devolution and decentralization, strengthening the role
of communities and restoring positive relations with the
development partners among others.
2. Sectorial concerns: Rethinking the industrial strategy
and creating a more conductive environment that will
promote investor confidence, address the high cost of
capital, improve infrastructure, and reduce corruption
and red tape:
•
Restoring the agricultural sector by adopting a strategy
with primary aims of
withdrawal of Government from
production and marketing in the sector, rehabilitation of
producer
investment
organizations,
in
improving
the sector,
incentives
increasing utilization
for
of
technology in the sector and ensuring the sector is protected
from adverse competition:
•
Restoring the financial sector by putting in place legal
administrative and judicial reforms to deal with the non
performing loans (NPL) problem, reducing Government
appetite from credit and strengthening monetary policy by
putting in
place
an
independent
Monetary Policy
Committee (MPC) to set overall monetary policy.
•
Strengthening the role of information technology (IT) in
the development process by preparing a national IT policy
and using appropriate fiscal incentives to promote the
sector:
•
Rehabilitation of the infrastructure sector by promoting the
role of the private sector in infrastructure provision,
allocating increased resources to restoration of the existing
infrastructure stock and carrying out the legal, regulatory
and institutional reforms necessary to enable the sector to
function efficiently.
3. Fully integrating the Arid and Semi Arid Lands
(ASALs) into the mainstream of economic life by
promoting partnerships between the government, the
private sector and Non Governmental Organizations
(NGOs) active in the area: improving infrastructure in
the ASALs and promoting those economic activities,
such
as
beef
production,
where
ASALs
have
comparative advantage.
In the first quota of this year, however, we have decided to
lay deliberate emphasis on primary education and the
rehabilitation of the battered infrastructure.
The NARC manifesto has a substantial social development
agenda as well as clear interventions to ensure the country’s
ecosystems are protected. There are further proposed
interventions in the area of land, housing, public sector
reforms among others. It is essential to appreciate that it is
success in the economic recovery agenda that, by providing
requisite resources, will underpin reform effort in these
other area.
Approach to Economic Recovery Strategy
Our economic recovery strategy is based on the following
principles:
(i)
The basic policy thrust must be implementing the
NARC Manifesto since this was the vehicle used
by us to sell our vision to the electorate and it was
this vision that the electorate endorsed and thus
gave the Government the mandate to lead:
(ii)
Harmonizing the Poverty Reduction Strategy Paper (PRSP), the
Government Action Plan (GAP) and NARC Post Election Action
Plan (PEAP) with our Manifesto. The PRSP document is the
result of a comprehensive consultive process that incorporated
the wishes of the people of all the districts in Kenya while PEAP
is the implementation version of the NARC manifesto:
(iii)
The harmonized document will reflect on adequate focus on
issue and protestation of envisaged activities. For an economic
recovery strategy to be credible it must reflect the appropriate
sense of urgency as well as provide clear direction on the path to
be taken, the measures that will be put in place to achieve desired
goals and the tradeoff that will be necessary to achieve the
overall policy aims:
(iv)
Available expertise within the public, private and civil society
sector must be utilized a well as international advice where
necessary be sought. This will enable the Kenyan recovery plan
to be both a consensus document as well as minimize the errors
and omissions which could have drastic consequences in the
future: and
(v)
To the largest extent possible, already existing commitments and
agreements with development partners will be accommodated in
the strategy to ensure that the recovery plan remains an allencompassing policy framework.
In a few days time, we shall assemble a group of seventy people at
the Leisure Lodge in Mombasa to discuss our proposals for
Economic Recovery, focusing first on the next 2 years, but also
giving provisions for a longer term development plan. We hope,
before Mid March, to submit the Recovery Blue Print to an
Economic Summit here in Nairobi when the discussion ensuring
from the Leisure Lodge Workshop will have been concluded.
We also intend to develop a Sessional Paper which will spell out the
long-term vision of the Government.