Kenya’s economic performance remains solid, with the growth rate expected to improve from 5.6% in 2015 to 5.9% in 2016, according to a new World Bank Group economic report released today. It is projected to rise further to 6% in 2017, the report says.

The most recent Kenya Economic Update (KEU), Kazi ni Kazi – Informal Should Not be Normal attributes this positive outlook to low oil prices, good agriculture performance, supportive monetary policy, and ongoing infrastructure investments. Kenya experienced strong economic performance in 2015, and has exceeded the average growth for Sub-Saharan Africa countries consistently since 2009, the report adds.

The report also notes that Kenya’s economy remains vulnerable to domestic risks that could moderate the growth prospects. These include the possibility that investors could defer investment decisions until after the elections, that election-related expenditure could result to a cut back in infrastructure spending, and that security remains a threat, not just in Kenya, but globally. Finally, changes in monetary policy in industrialized countries could trigger volatility in financial markets putting the currency under pressure.

While the growing Kenya economy is creating more jobs now than in the past, the report says these are mainly in the informal services sector and are low productivity jobs. Notably, nine million youth will join the labor market in the next 10 years. Given the scarcity of formal sector jobs, the youth will continue to find jobs in the small household enterprises.

“Kenya is not short of jobs; it is short of high productivity jobs,” said Jane Kiringai, World  Bank senior country economist for Kenya and the lead author of the report. “To increase productivity of jobs in the informal sector, policy interventions could be geared towards increasing access to broad skills beyond formal education, creating linkages between formal and informal firms, and helping small scale firms enter local and global value chains.”

To create more and better jobs, it is also imperative to reduce the cost of doing business which is necessary for a robust private sector, the report adds.

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Trade Performance and Export Growth for Employment Creation

The declining performance of Kenya’s merchandise exports is not new, yet reversing it is key to robust growth and employment creation. Overall exports growth averaged 3 percent for the period 2010-2015, which was below average economic growth of 6 percent during the same period. More importantly, export growth to Kenya’s largest markets, EU, EAC and COMESA, was only 1-2 percent. At the same time, exports to Asia, Australia and the America’s recorded remarkable growth at about 10 percent.

Notably, exports to Asia and Australia account for similar share with EU, accounting for 22 percent of total exports. But by far the most significant growth on exports recorded was to the Americas, at rates above 10 percent.

Exports to EAC region started declining in 2011. This coincided with the entry of the fully-fledged Customs Union. The customs union abolished preference access of Kenya’s manufactured products from Export Promotion Schemes. These products started to attract full Common External Tariff instead of being traded on duty free basis. Box 2.1 shows the export products that have declined in the EAC market. These products are from the manufacturing sector. Notably, Tanzania and Uganda now source these products from other markets outside the region (trade diversion). This market loss, which in real sense means loss of trade related jobs in Kenya, needs to be accompanied by a reallocation of factors to sectors that can compete in a deepened regional trade.

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Box 2.1 | Kenya has lost export market for key manufactured goods

Tanzania, where Kenya has lost export market valued at USD200m, leads in the EAC market decline. This represents a decline of 27% of exports between 2012 and 2015. The products behind this market loss include the following: Products of milling industry (HS11), Animal and vegetable fats and oils (HS15), Processed meat and fish products (HS16), Cocoa and cocoa preparations (HS18), Soaps and washing lubricants (HS34), Plastics (HS39), Apparel and clothing (HS61-63), Electrical machinery and equipment (HS85), Motor vehicles (HS87) and Furniture (HS94).

Kenya exports to Uganda recorded a decline of 12% or USD96 million between 2011 and 2014. The products behind this decline include: Meat (HS02), Animal or vegetable oils (HS15), Sugar and sugar confectionery (HS17), Tobacco (HS24), Pharmaceutical Products (HS30), Soaps (HS34), Aluminum products (HS35), Plastics (HS39), Paper and paper boards (HS48), Apparel (HS 60-63), Footwear (HS64), Iron and Steel products (72), Electrical machinery (HS85), and Glass and glassware (HS70).

A clear strategy will be required to reclaim a competitive edge in these more integrated markets. Impetus for Kenya products to reclaim the market share lies in the revealed export potential targeting Tanzania’s extra regional imports of similar products. A case in point is plastics, where Tanzania’s imports from outside the EAC stood at USD604million in 2013 against Kenya’s exports that had plummeted to USD17.4m by 2014. In Uganda, Kenya exports of Animal or vegetable oils stood at USD11m in 2014, Uganda imports of similar products from Rest of the World stood at USD251m in 2014. This implies a trade potential of USD240m in this one chapter alone!

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Kenya Requires a Clear Export Strategy to Expand Exports in Each of the Trading Blocks EAC and COMESA

Retaining and expanding these regional markets requires a genuine commitment to the partnership by all member countries. The factors that have largely been attributed to the decline in exports include restrictive rules of origin across most of the products of Kenya’s, and indeed other EAC countries’, intra-regional export interest. SPS and Standards are also specific NTBs that may have a role in explaining the decline. Equally restrictive were customs procedures on intra-regionally traded products that ended up making it difficult for exports of certain products into the EAC region. Non-Tariff Barriers, especially SPS and Standards that have been reported by Kenya exporters into the COMESA market and the restrictive Rules of Origin will need to be addressed. Equally important is need for an export strategy targeting growth of exports in strategic markets in COMESA.

The prospect for Kenya, and indeed other EAC Partner States, to increase their intra-regional exports lie in the recently concluded reforms in the EAC. One such reform is the revised EAC Rules of Origin (2014) that have introduced the flexibility that was lacking in the previous rules and as well as ushering in very generous cumulative principle that allows Kenya and other EAC Partner States to cumulate with raw materials from more countries than was the case under the previous rules.

The immediate effect of this is to open up duty free market access for products that were previous denied such privilege on account of origin criteria. Cereals, pasta, bread, pastry, cakes and biscuits, among other processed foods of HS chapter 9, are some the key beneficiary products, where the ‘wholly obtained’ criteria was dropped in favour of the more flexible ‘Change in Tariff Heading.’ The latter allows all products from EAC milling industries to be traded within the EAC on duty free basis, irrespective of where the raw material was sourced.

This transformative change in the Rules of Origin is expected to see a steady substitution of breakfast cereals imported from outside the EAC region with EAC originating products manufactured using raw material obtained from most competitive global source countries. This will no doubt see investments and new jobs being created as Kenya and EAC Partner States exploit this potential. This story is replicated in many other manufactured products that could not access EAC market on duty free basis as a result of the restrictive rules of origin.

The prospect for Kenya, as well as other EAC Partner States, of enhancing their intra-regional trade is further explained by the recent Single Customs Territory reforms, particularly the destination country model of customs clearance. This model has removed red tape in intra-regional trade and introduced efficiency in intra-regional trade facilitation, leading to enhanced predictability of export/import business in terms of customs and other trade facilitation agencies treatment, reduction in time and cost of transaction.

The revised rules of origin, reforms in the SCT and the ongoing reforms of the EAC Customs Management Act to address CET and Stay of Duty/Duty Remission and related restrictions are low hanging fruit which Kenya could capitalize on, in working towards regaining the EAC market.

Expanding The COMESA Market

Kenya’s export growth in COMESA has largely been driven by Ethiopia and Congo DR, where exports grew by 6% and 5% respectively during 2010-15, despite these countries not implementing the full COMESA FTA. Exports to Egypt and Malawi recorded negative growth attributed to a decline that was experienced between 2013 and 2015 for Malawi, and 2013 and 2015 for Egypt.