Kenya joins middle income club


Kenya’s Vision 2030 aspires to have double digit growth rates and attain middle income country status by 2030. On 30 September 2014, however, Kenya effectively joined the ranks of middle income countries, sixteen years ahead of schedule!

The addition of a country to the middle income club is often viewed as a coveted achievement for many developing countries – but what has changed and what does it mean for Kenya?

What happened?

Kenya’s move to middle income country status follows a ‘rebasing’ of the economy – a periodic statistical exercise that accounts for changes in a country’s economic structure over a specific time period (every 5 years). It reflects the dynamic nature of economies, with sectors and industries expanding or contracting over time, giving a more accurate picture of an economy and its performance.

The result is a 25% upward revision of Kenya’s gross domestic product (GDP) – the total value of goods and services produced within a country over a given time period. The Kenya National Bureau of Statistics announcement on Tuesday put total GDP in 2013 at US$55.2 billion, rather than the previously thought US$42.6 billion. This makes Kenya the 9th largest economy in Africa and the 4th largest in sub-Saharan Africa after Nigeria, South Africa and Angola. The rebasing in Kenya follows similar actions taken by Nigeria and Ghana, who both recently saw their economies revalue by 89% and 60% in 2014 and 2010 respectively [1].

The revisions mean that Kenya’s GDP per capita is up to US$1,246 from US$994. Kenya’s gross national income [2] per capita, the measure used in World Bank income group classifications, is now up to US$1,160, just over the US$1,045 threshold for lower middle income country status.

What changed?

Kenya was previously using the country’s economic structure in 2001 as a basis for calculating its GDP. This has now been brought more up to date, to 2009. The rebasing gives government, the private sector and development partners a more accurate picture of the Kenyan economy, supporting planning and investment purposes. While broad sector shares remain largely unchanged, with agriculture still a major contributor to GDP, at the sector level there have been significant shifts. Horticulture, manufacturing, financial services, real estate, and information and communications technology (ICT) have been major contributors over the past decade. Their full inclusion in the GDP composition has been a major factor in the 25% increase in the overall value of GDP.

What does it mean?

Better data, better revenue generation?

Better information on the country’s income may assist the Kenyan government and its partners to have better-informed policies that reflect the current situation in the country. This is important as the country works towards attaining the Vision 2030 aspiration of an industrialised middle income country by 2030.

The rebasing offers the government revenue-generation options on both domestic and international fronts. At the domestic level, the larger economic sectors offer potential tax revenue-raising opportunities that have hitherto not been exploited. This is important as the country seeks to expand its tax revenue base. At the international level, Kenya now has a lower debt-to-GDP ratio [3], which makes it possible to expand its borrowing portfolio at a time when the government is looking to access international markets to fund infrastructure projects. Any additional borrowing would need to be used wisely and avoid the risk of falling into ‘debt-distress’.

Better data, better resource allocation?

Similarly, the change in income status has domestic and international implication relating to Kenya’s resource allocation.

From the domestic side, the rebasing will give the Kenyan government the most recent and accurate data to inform resource allocation decisions. For example the financial services, ICT and manufacturing sectors could see increased government support given their contribution to GDP is now better recognised. Emerging sectors like extractives and mining could also benefit given their potential GDP contributions.

From an international perspective, despite development progress, aid still plays an important role in Kenya [4]. But middle income country status has the potential to ‘lock-out’ Kenya from receiving aid, as donors focus on lower income countries, as well as trade-related preferences being put ask risk. We, at Development Initiatives, have argued that income groups are not a sensible basis for allocation decisions, and that ‘middle income’ in particular is too broad to be useful. Making decisions based on a classification derived on average income per person alone is too simplistic – poverty levels and access to resources are also vital components [5].

When all is said and done, are we really there yet?

This sudden leap up to middle income country status is an economic and statistical “quirk”, emphasising economic growth.

The reality of Kenya’s situation has not changed. Looking at socio-economic status, Kenya had an estimated 43% of its population living below US$1.25 a day in 2010 [6]; increasing inequality of the benefits of economic growth and resources remain a concern the richest 20 percent of the population receiving an average of US$2,079 while an average of US$134 went to the poorest 20 percent of the population in 2011 [7]. Kenya is also currently ranked 147 out of 187 countries in the UN’s Human Development Index (HDI), and it is unlikely to meet all the Millennium Development Goals at country level by 2015.

While the statistical achievement of middle income country status for Kenya is a major milestone towards Vision 2030, the real work of development has only just started.

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Contact:

Jason R Braganza, Senior Analyst, Development Initiatives – Africa Hub, 4th Floor Shelter Afrique Building, Mamlaka Road, Nairobi, Kenya

T: +254 717 471 062 E: Jason.Braganza@devinit.org W: www.devinit.org


[1] Gross National Income (GNI) is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus income earned in the domestic economy by non-residents (Todaro & Smith, 2011: 44)

[2] http://www.economist.com/blogs/baobab/2014/04/kenya-recalculates-its-gdp-figures

[3] Debt-to-GDP ratio is the proportion of debt held by a country relative to the total value of goods and services produced. It provides a measure of ability to take on additional debt, i.e. a low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

[4] Aid plays an important role in key areas of health, infrastructure and governance.

[5] See Investments to End Poverty chapter 1, pp 22-23

[6] African Economic Outlook Database, 2014

[7] For details see the Kenya inequality profile: http://soea.sidint.net/kenya/