Kenya’s economic future

June 25, 2015

Kenyans have good reason to be upbeat about their economic future. Despite terror threats that have crippled tourism sector and volatile commodity prices,the country’s gross domestic product has been expanding in the 4 percent to 6 percent range on average for the past decade. The number of middle-income and affluent Kenyan households is projected to double from 2013 numbers to reach 20 million over the next decade. 25Optimism is being buoyed by a new reformist government of President Uhuru Kenyatta that vows to boost spending on infrastructure, education, and health and seeks to boost annual economic growth to 7 percent.Kenya also has the advantage of being the largest economy in one of Africa’s most dynamic regions – East Africa.What’s more, Kenya’s vast market of 40 million people is steadily integrating as the central’s governments push forward to achieve the Vision 2030 goals of being an upper middle income country.Kenya has been taking many of the steps needed to translate its economic gains into better living standards. According to an American research firm, sustainable economic development assessment, Kenya stands out as a country that has done well in converting wealth, as measured in GDP per capita, into well being of its citizens, as measured by improvements in areas such as health, education, and income equality in the past three years.I would like to share what I believe could be a roadmap to accomplish the Kenya’s economic goals and to seize the rich opportunities of East Africa regional integration.

It is critical that Kenya improve its capacity for innovation as has already been witnessed with iHub and Strathmore Business School initiatives.Making the leap from an economy that now relies heavily on commodities and low wage manufacturing to one driven by innovation will require improvement on many fronts. Just like a recent event that I attended and shared my views on how East African future will look like, I would like to focus here on two areas where improvement would have a particularly powerful impact on Kenya’s innovation capacity which is basically talent and small and medium-sized enterprises.Talent is an increasingly scarce commodity in most developing economies and Kenya is not an exception. If current trends continue, Kenya will soon have enormous skills gaps at all levels. An insufficient supply of college graduates is a major reason. Kenya has made dramatic gains in education in recent years, with 90 percent of all citizens now receiving a primary education. But just 20 percent of students make it all the way to the tertiary level. This is partly due to the fact that many Kenyans cannot afford tuition or must drop out of school to support their families.Kenya’s skills gap is particularly acute when it comes to experienced management. For example, it is projected that by 2018 Kenya will have only 35 percent of the middle managers that companies will need to run their businesses.

To have a skills base required for an innovation-driven economy, Kenya must make higher education more financially accessible to economically disadvantaged students.Kenya could also make it more attractive for the some 700,000 to 2 million university-educated nationals living abroad to bring their skills back home and by making it easier for companies to recruit and employ foreign talent especially from East African countries of Uganda and Tanzania.Kenya could also consider a dual-education program, in which private companies pick up the cost of vocational studies of students in their apprenticeship programs.Research has shown that in Germany where such arrangements exists, more than half of students that participate in the program end up staying with their employers for more than two years after completing their apprenticeships. Other countries that has successfully implemented diaspora programs such are Taiwan, China,South Korea,Singapore, and Malaysia have managed to bring talent back home by offering everything from generous financial incentives to fast-track permanent residency for foreign-born spouses and children.Kenya can do the same and benefits will be enormous.It was a step in the right direction to see Finance Cabinet Secretary Henry Rotich offering tax incentives to Kenyans living abroad importing cars in his 2015-2016 national budget.A more vibrant SME sector, a key driver of innovation in Kenyan economy is also critical for Kenya to thrive in an integrated East African region.

Impressively,President Uhuru Kenyatta government has begun to tackle the bureaucratic roadblocks that hinder SMEs. It has simplified local licensing requirements, issuance of permits and business registration processes.However, such measures have yet to be fully implemented. Better access to capital is also essential and at the moment only around 10 percent of investments by Kenyan SMEs currently are funded by such external sources as banks.There are many successful models for aiding SMEs. To address one critical problem that hinders small-business financing in Kenya, the lack of a robust infrastructure to supply reliable credit information to lenders, Kenya recently introduced the Small and Medium-Sized Rating Agency.Since their inception, the agencies which charges fees based on the size of the business, have issued ratings on more than 1,000 SMEs that are accepted by 34 banks and credit institutions. The country has also developed entirely new institutions to quickly provide credit and other financial services tailored to the specific needs of SMEs and programs dedicated to providing small-business owners with management training and access to the information they need to compete at a higher level.The Kenyan economy already has powerful fundamentals and a record of steady performance on its side. By boosting its capacity to innovate, Kenya could make the next economic leap and serve as an engine of rapid growth in an integrated East and Central African region.

Contador Harrison