State of the Economy: Inclusive Finance for Economic Transformation
This report first appeared on the FSD Kenya website on December 19, 2022. Anzetse Were led and co-authored the report.
The theme for FSD Kenya’s second ‘State of the economy report’ for 2022 is ‘Inclusive finance for economic transformation’ in cognisance of the increasingly difficult economic environment globally and locally:
The global economy is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions, Russia’s invasion of Ukraine, and the lingering CovidEconmyu -19 pandemic all weigh heavily on the outlook.
In Africa, economic activity bounced back in 2021, lifting GDP growth to between 6.9–4.7%; growth was highest in North Africa (11.7%) and East Africa (4.8%). Africa’s economic activity is expected to slow to 2.7%- 3.6% in 2022 informed by three major global developments: the slowdown in advanced economies and emerging markets, tightening global financial conditions, and volatile commodity prices. Rising food and energy prices are affecting the region, and public debt and inflation are at levels not seen in decades.
Africa’s public debt is now approaching levels last seen in the early 2000s, and the substitution of low-cost, long-term multilateral debt with higher-cost private funds has resulted in rising debt-service costs. 19 of the region’s 35 low-income countries are in debt distress or at high risk of distress, and African countries’ sovereign debt levels are projected to stabilise at around 70% of GDP in 2021/22.
The effects of the COVID-19 pandemic and the Russia–Ukraine conflict is projected to exacerbate extreme poverty. 29.6 million Africans are projected slide into extreme poverty in 2022- 2023 (relative to pre-COVID) and poverty persistence will likely delay reversion to pre-COVID-19 poverty rates.
In Kenya, the economy grew by 7.5 % in 2021 from a contraction of -0.3% in 2020. In 2022, the economy grew at 5.2% in Q2 compared to 6.8% in Q1. Growth this year has been broader across sectors, however the agriculture sector is in severe decline, recording 3 consecutive quarters of contractions. Poor performance in agriculture is mainly due to dry weather conditions and drought in parts of the country, as well as the pronounced effects of the Russia-Ukraine crisis on the sector.
The juxtaposition of overall recovery and severe strain in key sectors reflects the overall reality of continued divergent recovery that is leaving many Kenyans behind. On one hand, the economy is recovering from the worst of the impact of COVID-19 and there are several bright spots to celebrate. The election process ushered in a peaceful transition, employment has recovered to pre-COVID levels, diaspora remittances remain robust, and financial inclusion has strengthened. The digital economy remains a bright spot with significant growth in mobile money and digital payments. Kenya secured record amounts of VC funding in tech in the first half of 2022, and e-commerce is surging.
On the other hand, agriculture is in severe decline, high inflation and the impacts of the war in Ukraine have increased the cost of living, yet incomes have stagnated. As a result, food insecurity is increasing; one in three adults and almost one in four children have recently gone without food for an entire day. Poverty levels are still well above pre-Covid levels, financial health has deteriorated as has labour force participation (since 2016). Mobile and online betting is growing rapidly, and digital inequality is segregating access to opportunities in the digital economy.
A fundamental source of fiscal stress is that the while the debt to GDP ratio grew from 43% in 2011 to about 70% in 2022, tax revenue to GDP declined from 17% in 2013/14 to 15% 2021/22– well below the EAC target of 25% of GDP.
It will be important to keep an eye on aggregate demand as there are 4 sources that will dampen demand and thus economic recovery. These are: i) increases in commodity prices, ii) weakening Kenya Shilling; iii) high inflation; and iv) high poverty levels.
These macroeconomic pressures will put pressure on private sector activity particularly Micro and Small Enterprise (MSEs) most of whom cite low customer demand as their main challenge followed by rising cost of supplies.
There is a need to balance managing debt stress and fostering fiscal recovery, with supporting economic survival and recovery by addressing the increasingly serious challenges of food insecurity, income strain and poverty. There is opportunity to structure discretionary government expenditure to include expanded cash transfers to households in partnership with development players in order to boost aggregate demand and foster business and economic recovery.