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Kenya’s Young and Jobless

By Parselelo Kantai
Posted on Monday, 24 August 2015 14:39

One weekend in early July, mobs descended on slums, rural townships and village centres in Nairobi and central Kenya to break into liquor shops and breweries legal and illegal. They proceeded to destroy the infrastructure of cheap alcohol that had, over two decades, eaten into a generation of young men. But what if Kenya does not need prohibition but jobs? What if Kenya needs shared growth rather than a new moral crusade? A decade after the end of the Bretton Woods institutions’ imposed austerity regime, however, the dividing lines between those who were shut out of the new order and those who have thrived have never been sharper.

Upscale apartment blocks and snaking supermarket queues feed the idea of a take-off

On paper at least, the Kenyan economy is on the up. Last year, the government revised its economic statistics, unexpectedly catapulting the country to middle-income status. Its gross domestic product is now $61bn. The World Bank predicts 7% growth by 2017, one of the fastest rates in East Africa.

Investor optimism

Transport and energy projects are being rolled out. Investment going into energy projects is set to halve the cost of electricity in the next few years (see page 54). New transport corridors will open up regional markets. East African trade is booming, too, and Kenyan manufacturers are the main beneficiaries of the emerging common tariff regimes in the East African Community Common Market and in the wider Common Market for Eastern and Southern Africa.

Thanks to mobile-money platforms, more than 30 million people have entered the banking system over the past decade, initially just as consumers and now increasingly as savers. Safaricom and Equity Bank are among the banks and phone companies seeing their profits surge.

A resource bonanza is looming too. Oil, mineral sands and rare earth minerals, when exploited, will open up a new dimension of an economy long-dependent on a stuttering agrarian sector. And then there is the land itself: with global food demand set to skyrocket by 2050, East Africa’s rural areas should become a globally competitive asset.

“It would take a catastrophic political event to turn the tide,” says the head of a western financial advisory group.

“Yes, I am aware that this is possible, [given] the post-election violence of a few years ago. But there is real optimism about this country and the region in general.”

The investor crowd feeds on the idea of Kenya’s economic take-off. The evidence appears readily available: the up- scale apartment blocks, the unending traffic crisis in cities and the snaking queues in the supermarkets.

Few in the investor class remarked, however, on a study last year that suggested that all the talk of a burgeoning middle class had been grossly exaggerated. That study by South Africa’s Standard Bank suggested that there were no more than 400,000 households that could be defined as middle class – having annual consumption levels of between $7,500 and $37,000.

A more recent study to be published by the Institute of Economic Affairs (IEA), a Nairobi think tank, speaks of far lower figures. Using a monthly expenditure of $500 as its base, the IEA estimates that there are between 144,000 and 300,000 people who can be categorised as middle class. This is hardly a ‘middle class’. It is a tiny elite on whom the ‘Kenya rising’ narrative rests. These figures offer a glimpse into an economy whose fundamental structures of inequity have remained unchanged since the colonial era.

A growth rate averaging 5% over the past few years may be attractive to investors fleeing the eurozone and elsewhere, but given demographic growth and historical lag, it is insufficient to lift the population out of poverty. And because the accent of growth over the past decade has been consumer-driven rather than via export production, the economy has been unable to absorb the estimated one million people entering the job market annually.

Sector weaknesses

To some extent this is offset by Kenya’s traditional strength in agriculture and tourism, both strong employers. But tourism, once the leading hard-currency earner, has been hard hit thanks to the Al-Shabaab Islamist insurgency in Somalia that has precipitated a raft of travel advice from governments in Kenya’s main tourist markets. The Nairobi government’s response has been to increase spending on the security sector, which has done little to improve confidence. A recent economic survey indicates that tourist numbers have been falling for the past three years.

This, however, is only a dim indication of the pains the sector is experiencing: scores of hotels have closed, tourism resorts on the coast have turned into ghost towns and at least 30,000 employees have been rendered jobless. “Even if some kind of attempt was made to rescue the sector now, we wouldn’t likely see a recovery until 2017. As it stands now, there are many hotels along this coast that have closed and will probably never reopen,” observes a hotel owner.

And as official priorities turned away from agriculture, the rural economy has fallen into a dangerous state of neglect. Kwame Owino, executive director of the IEA, explains: “In terms of structural change, agriculture still dominated the economy in terms of jobs and dependence. We haven’t yet diversified the economy sufficiently, but the returns on investment in agriculture are falling. Farmers are getting poorer. Growth may have happened, but most farmers will tell you they can’t see it.” The government’s bailouts this year for leading sugar millers in western Kenya attest to the problems in the sector.

Of the 2.3 million
people with Personal Identification Numbers at Kenya’s Revenue Authority, less than 300,000 qualify as middle class
Source: Institute of Economic Affairs

Coffee production is a third of what it was three decades even as producer prices hit unprecedented highs. Kenya’s coffee export earnings dipped by almost 3% in 2013/2014, having already collapsed 13% in 2012/2013. Tea and horticulture exports, which enjoyed more than a decade of favourable prices, now suffer as European markets remain in the doldrums. Hence the spectre of growth that creates few jobs, with its handmaidens – alcohol and Al-Shabaab.

Is the growth, per se, in danger? External debt was not a problem during the austerity years, but domestic debt was. Today, the Jubilee Alliance government has renewed its appetite for debt, both foreign and domestic. Over the past two years, the government has accumulated debts worth 10% of gross domestic product. With President Uhuru Kenyatta determined to make the modernisation of the country’s infrastructure his enduring legacy, the hope of a pay-off from all the capital expenditure in the near future has dampened fears that Kenya could hit the rails.

Growing deficit

Even so, the government’s spending spree remains a source of worry. Recurrent expenditure, mostly on salaries, has significantly expanded the national budget, now at more than $20bn. But revenue collection targets are rarely ever met even as the deficit grows ever wider. In this year’s budget, treasury secretary Henry Rotich announced that the $5.8bn deficit would be met by a combination of donors, domestic banks and international bond flotations.

The first sign of inflationary pressure has been the fall of the shilling – down 10% and continuing to fall during the past two months. The government has attributed this to capital expenditures, but it is notable that attempts by the central bank to intervene in the markets to stabilise the shilling have had little effect.
A weakening shilling may be a boon for exports – except that production levels of some of the country’s traditional export commodities are low. Two bright spots could help balance things out: oil and gas production in a few years’ time will add a new revenue stream to the economy and Kenya’s new infrastructure hub at Lamu could help to capitalise on rising Asian wages to capture a new slice of the global manufacturing market.

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