Why Growth in Exports Should Be a Cause for Concern for Policy Makers
Category: General
By: Leo Kipkogei Kemboi,
Trade is identified as a key driver of Kenya’s economic growth as espoused in the Vision 2030 blueprint. The development blueprint emphasizes on Kenya’s commitment to be the lead manufacturing point for the regional market. However, the long-term sustainability of Kenya’s competitiveness is currently in question as the country has been registering a significant decline in exports as a share of GDP for the past six years.
Exports play an important role in the economy by influencing employment, economic growth and balance of payments. Balance of payments constitutes payments into and outside the country. Exports are one of the key foreign exchange earners for Kenya. The bigger the percentage, the better for the economy. Most developed economies have 50% of exports as a share of GDP. Kenya’s top exports include; tea, horticulture, articles of apparel and clothing accessories; coffee, titanium ores and concentrates. All these exports collectively accounted for 62% of all the total domestic export earnings (Kenya National Bureau of Statistics, 2019).
However, Kenya’s exports have not grown as fast as the overall economic growth. The chart below shows exports as a share of GDP.
From the chart above,
- The exports as a share of GDP has almost declined by half in the six years we reviewed (based on the latest available data).
- In 2012, the exports of goods as a share of GDP was 22.2%. It declined gradually up to 13.2% in 2018. The exports are not growing faster enough as other areas of the economy.
- This measure is a proxy of the wellbeing of the economy and general economic productivity. If exports This reduction can be explained by the contracting private investment (Source: National Treasury, 2018). The capital contribution to average growth declined from 4% in 2008-2012 to 3.3% in 2013-2017.
- Private investment is necessary for replenishing capital stock, adoption of frontier technology, boosting firm productivity and ultimately private sector-led growth (Source: National Treasury, 2018). This private sector-led growth if it happens can be seen through improved exports or the complexity of the goods that Kenya exports.
Another explanation of the phenomenon is that Kenyan shilling is strengthening despite the widening current account deficit and fiscal deficit. The expectation is that Kenya Shilling would depreciate given those conditions and increase the returns on exports. However, the shilling has continued to be more stronger and as a result, exporters are losing more competitiveness. As a result, manufacturers are losing competitiveness within the region. Regional and global institutions have reclassified Kenya’s exchange rate regime from floating to stabilized (International Monetary Fund 2018) (World Trade Organization 2019) (Africa Development Bank 2019).
In conclusion, a consecutive six-year decline in the share of exports to GDP is an alarming trend. Policymakers should ensure there is a conducive environment to crowd in new private sector investment, improve on total factor productivity and deregulate critical sectors of the economy. In turn, this will ensure more maintainable economic growth and jobs.
References
- National Treasury. 2018. Kenya Comprehensive Public Expenditure Review, From Evidence to Policy. Nairobi: Government of Kenya.
- Kenya National Bureau of Statistics. 2019. Statistical Abstract. Nairobi: Kenya National Bureau of Statistics.
- Africa Development Bank. 2019. East Africa Economic Outlook. Economic Outlook, Africa Development Bank, 9.
- World Trade Organization. 2019. “Trade Policy Review.” 11.
- International Monetary Fund. 2018. 2018 Article Iv Consultation And Establishment Of Performance Criteria For The Second Review Under the Stand-By Arrangement. International Monetary Fund.
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Why Growth in Exports Should Be a Cause for Concern for Policy Makers
| Post date: Wed, Feb 19, 2020 |
| Category: General |
| By: Leo Kipkogei Kemboi, |
Trade is identified as a key driver of Kenya’s economic growth as espoused in the Vision 2030 blueprint. The development blueprint emphasizes on Kenya’s commitment to be the lead manufacturing point for the regional market. However, the long-term sustainability of Kenya’s competitiveness is currently in question as the country has been registering a significant decline in exports as a share of GDP for the past six years.
Exports play an important role in the economy by influencing employment, economic growth and balance of payments. Balance of payments constitutes payments into and outside the country. Exports are one of the key foreign exchange earners for Kenya. The bigger the percentage, the better for the economy. Most developed economies have 50% of exports as a share of GDP. Kenya’s top exports include; tea, horticulture, articles of apparel and clothing accessories; coffee, titanium ores and concentrates. All these exports collectively accounted for 62% of all the total domestic export earnings (Kenya National Bureau of Statistics, 2019).
However, Kenya’s exports have not grown as fast as the overall economic growth. The chart below shows exports as a share of GDP.
From the chart above,
- The exports as a share of GDP has almost declined by half in the six years we reviewed (based on the latest available data).
- In 2012, the exports of goods as a share of GDP was 22.2%. It declined gradually up to 13.2% in 2018. The exports are not growing faster enough as other areas of the economy.
- This measure is a proxy of the wellbeing of the economy and general economic productivity. If exports This reduction can be explained by the contracting private investment (Source: National Treasury, 2018). The capital contribution to average growth declined from 4% in 2008-2012 to 3.3% in 2013-2017.
- Private investment is necessary for replenishing capital stock, adoption of frontier technology, boosting firm productivity and ultimately private sector-led growth (Source: National Treasury, 2018). This private sector-led growth if it happens can be seen through improved exports or the complexity of the goods that Kenya exports.
Another explanation of the phenomenon is that Kenyan shilling is strengthening despite the widening current account deficit and fiscal deficit. The expectation is that Kenya Shilling would depreciate given those conditions and increase the returns on exports. However, the shilling has continued to be more stronger and as a result, exporters are losing more competitiveness. As a result, manufacturers are losing competitiveness within the region. Regional and global institutions have reclassified Kenya’s exchange rate regime from floating to stabilized (International Monetary Fund 2018) (World Trade Organization 2019) (Africa Development Bank 2019).
In conclusion, a consecutive six-year decline in the share of exports to GDP is an alarming trend. Policymakers should ensure there is a conducive environment to crowd in new private sector investment, improve on total factor productivity and deregulate critical sectors of the economy. In turn, this will ensure more maintainable economic growth and jobs.
References
- National Treasury. 2018. Kenya Comprehensive Public Expenditure Review, From Evidence to Policy. Nairobi: Government of Kenya.
- Kenya National Bureau of Statistics. 2019. Statistical Abstract. Nairobi: Kenya National Bureau of Statistics.
- Africa Development Bank. 2019. East Africa Economic Outlook. Economic Outlook, Africa Development Bank, 9.
- World Trade Organization. 2019. “Trade Policy Review.” 11.
- International Monetary Fund. 2018. 2018 Article Iv Consultation And Establishment Of Performance Criteria For The Second Review Under the Stand-By Arrangement. International Monetary Fund.
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Introduction Imagine paying the same fare to travel at 6 a.m. as you would at 6 p.m., even though the matatu is half-empty in the morning and packed in the evening. At 6 a.m., there may be more seats available than passengers willing to pay for them. By 6 p.m., the situation is reversed. Hundreds […]
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Kenya’s proposed post-2030 Vision commits the country to high-income status “within a generation.” One positive issue that should be emulated is that the document seeks to solve the most important policy decision and the foundational problem in economics, which is to expand output and labour. Skeptics ask the most important question, why would this plan […]
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According to the Annual Debt Report 2024/25, as shown in Chart 1 below, Kenya today is such that for every one hundred shillings the Kenyan government raises in tax revenue, approximately ksh71 goes directly into servicing existing debt before a single hospital is staffed, a classroom is built, or a kilometre of road is constructed. […]