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Kenya Economic Update Summary - June 2021 Edition

Core Content

The Kenya Economic Update (KEU) June 2021 edition provides an assessment of Kenya's economic developments and outlook in the context of the ongoing recovery from the impacts of the COVID-19 pandemic. It highlights the challenges and opportunities for economic growth, job creation, and structural transformation.

Main Points

Economic Recovery

• Global and Regional Context: The global economy rebounded in the second half of 2020, with less severe impacts than initially projected. The World Bank estimates world GDP growth at 5.6% in 2021.
• Kenya's Recovery: Kenya experienced its first recession in nearly two decades in 2020, with real GDP contracting by 5.5% in Q2 2020. However, a partial recovery began in Q3 2020, with services sector output rising by 11.9% compared to the previous quarter.
• Sectoral Performance: The services sector was hit hardest by the pandemic, while industry and agriculture showed resilience. Private consumption and investment are expected to recover as confidence improves.
• Growth Outlook: Real GDP growth is projected to reach 4.5% in 2021 and average over 5% in 2022–23. This is based on expected recovery in industry, moderate service sector recovery, and improved agricultural performance.

Risks and Uncertainties

• Pandemic Contingency: The economic outlook remains highly uncertain, contingent on the course of the pandemic. A third wave of infections in March 2021 highlighted the risk of prolonged economic disruption.
• Downside Risks: These include a slower-than-expected vaccine rollout, fiscal slippages, adverse weather conditions, and a weaker global economic backdrop. In an adverse scenario, average growth could fall to 3.7% in 2021–22.
• External Factors: Global economic conditions, particularly the recovery in trade and investment, are critical for Kenya's export performance, tourism, and capital inflows.

Fiscal and Monetary Policy

• Fiscal Consolidation: The fiscal deficit is expected to decline from 8.7% of GDP in FY2020/21 to 4.2% in FY2023/24. The proposed FY2021/22 budget targets a reduction of 1.2 percentage points in the fiscal deficit.
• Monetary Policy: The Central Bank of Kenya (CBK) has maintained an accommodative stance with historically low real policy rates to support recovery. Continued monetary accommodation is expected, provided inflationary pressures remain moderate.
• Debt Vulnerabilities: Public debt has increased due to large primary deficits, and fiscal consolidation is essential to ensure debt sustainability and restore fiscal space for social and development spending.

Special Focus: Labor Force and Jobs

Demographic Transition

• Kenya is at a critical stage of demographic transition, with the largest age cohort entering the labor force.
• The working-age population is expected to grow by an average of 1 million per year from 2020 to 2029, creating significant job creation challenges.

Labor Supply and Employment

• Labor Force Participation: Labor force participation (LFP) increased by 10 percentage points from 63% in 2005/06 to 73% in 2015/16, but declined to 69% in 2019.
• Job Creation: Job creation slowed down even before the pandemic, with the majority of new entrants into the labor force being absorbed into low-productivity sectors.
• Unemployment and Underemployment: Unemployment increased from 3% to 5% between 2015/16 and 2019, with employment shifting towards self-employment and informal sectors.

Policy Priorities

• Productive Jobs: Kenya must create more productive jobs to harness the demographic dividend.
• Economic Transformation: The country needs to accelerate economic transformation, particularly moving labor from agriculture to more productive sectors.
• Human Capital Development: Investments in education, health, and social protection are essential to support the growing labor force and improve job quality.
• Skills Alignment: Greater collaboration between education institutions and the private sector is needed to align skills with labor market demands.
• Support for Vulnerable Groups: Tailored programs are required to support current poor and vulnerable workers, especially youth with limited qualifications.

Key Information

• Job Creation Challenges: Despite a large and growing labor force, job creation has not kept pace, leading to underemployment and low productivity.
• Healthcare System: The pandemic has exposed weaknesses in Kenya's healthcare system, emphasizing the need for reforms to achieve universal health coverage (UHC).
• Fiscal and Debt Management: The government must balance pandemic response with fiscal consolidation to ensure long-term economic stability and resilience.

Conclusion

The KEU underscores the importance of a resilient and inclusive recovery, supported by effective policy responses and structural reforms. It highlights the need for continued fiscal and monetary discipline, accelerated job creation, and improved alignment between education and labor market needs to capitalize on the demographic dividend and ensure sustainable growth.