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Kenya: Elections in an Hourglass Economy
By Thuo TK
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I have lived in the same Nairobi neighborhood for a decade and have noticed changes. Unofficial bus stops have appeared as some private passenger service vehicles no longer go all the way to the CBD. A few years ago, commuter bus hawkers were unheard of. Now they do. There has been a little increase in bus fares thought.
In Summary
According to data from the Kenya National Bureau of Statistics (KNBS), prices of basic goods such as maize flour, sugar, and cooking gas have grown by more than 46% since 2013. The number of Kenyans living in poverty has increased by 15% from 2013.
In once affluent areas, more makeshift eateries have sprouted up. Some have developed into significant but transient niche markets. Despite paying county taxes, they operate in places that are not permitted to host markets.
I thought about a few potential reasons for this shift: a) a situation where vendors have relocated closer to their customers. b) agriculture is a major factor in rural-to-urban migration. Farming yields are dismal, and farmland has diminished. c) a consistent loss of jobs, which has led many people to start their own small businesses. Or to put it another way, all these don’t represent signs of economic growth.
An hourglass economy
When the upper and lower classes are growing but the middle class is contracting, an hourglass economy is said to exist. While the lower class has poor skills and makes little money, the upper class has exceptional skills and makes a lot of money. That narrowing middle denotes a diminishing middle class that eventually sinks into poverty as a result of continued financial pressure.
According to a 2021 report by the Kenya National Bureau of Statistics (KNBS), the percentage of Kenyans living in poverty has increased by 15% since 2013 when the Jubilee Party came to power.
Applying the hourglass to Kenya's economy
Let’s begin with the fundamentals. How is Kenya’s economy doing right now? According to the KNBS, a middle-class Kenyan spends each month between $210 and $1170.
Over the past six years, Kenya has maintained an average GDP growth rate of 5.7%, and all macroeconomic indicators are positive. On the ground, however, there is no evidence of this, and consumption is not rising.
In 2019, 51% of Kenyans thought their financial condition had gotten worse, according to a poll conducted by the Central Bank of Kenya (CBK), Financial Sector Deepening (FSD) Kenya, and KNBS.
Economic Growth vs Economic Development
While economic growth implies an increase in GDP, economic development necessitates the distribution of GDP and an improvement in people’s wellbeing.
The CBK Governor asserted that growing infrastructure spending has not distributed wealth among working Kenyans and criticized Kenya’s economic framework for failing to generate economic growth without jobs and a rise in income.
“It is true you have GDP numbers but you can’t eat GDP. At the end of the day, what is needed is specific income. That is what anybody else wants plus jobs,” said Dr Patrick Njoroge.
How did Kenya get here?
Public debt was 42% of GDP in 2013 when former President Uhuru Kenyatta took office. Currently, it is 72%. The significant infrastructure borrowing was justified as long-term transformational because it would boost the economy and create jobs.
Instead, borrowing has made Kenya vulnerable to the negative effects of high debt, such as higher taxes, a decline in the value of the local currency, more borrowing, expensive debt servicing, and the stifling of the private sector. That has become a reality.
Out of every dollar of taxpayers’ money, 57 cents go towards servicing the country’s burgeoning debt, according to data from the Central Bank of Kenya. Kenya’s public debt has seen a 13-fold increase since 2000.
The shilling has declined, taxes have been put on formerly tax-exempt goods, several state agencies have borrowed to pay their personnel, and development investment has decreased.
In October 2021, the government was forced to further subsidize the price of fuel in response to a widespread protest about an uncharacteristic surge in prices. Subsidies have continued to stabilize fuel prices, but their long-term viability was already under question. The new government of President William Ruto has undertaken the removal of oil subsidies terming them unsustainable.
In other words, Kenyans are now reaping fruits of national profligacy and the country is at a high risk of debt distress as determined by the International Monetary Fund.
Managing the debt
Zambia has completed a $1.3 billion rescue agreement with the IMF as it works to negotiate a debt restructuring with its creditors. Zambia owes $17 billion in foreign currency debt, a large portion of which was borrowed by the administration of the former President Edgar Lungu.
Fears arising from the nation’s economic prospects have complicated the preparations for negotiations with both public and private creditors.
In this way, I find parallels between Kenya and Zambia. Both nations owe enormous sums of money to creditors that range from Chinese state-owned banks to holders of eurobonds.
Sadly, there isn’t much to show for the debts that previous administrations racked up in both cases to pay for infrastructure. Again, the debts in both cases will make current administrations’ attempts to revive the economy challenging and slow.
Debt reduction and restructuring may be something the incoming Kenyan administration looks into. Three factors have made it difficult for Zambia to negotiate with creditors: a conservative economic outlook, large debt levels (85.5% of GDP in 2021), and a history of missed eurobond repayments.
Kenya however has not of these encumbrances. The economy is predicted to grow, the public debt is expected to decrease to 64.9% of GDP in 2023 from 67.5% in 2022, and the incoming administration has pledged to cut back on borrowing and ruled out the possibility of defaulting on its obligations.
Therefore, Kenya’s new government may profit from efforts at restructuring and so provide space for reduced prices on essentials like fuel and food. In addition to lowering living expenses, this will enable the government to achieve its medium- to long-term economic goals in order to change the economy’s current hourglass outlook.
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