How Kenya can recover in 2018

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This article first appeared in my weekly column with the Business Daily on December 3, 2017

After what has been widely noted as a difficult year for Kenya, the conversation must now turn to how Kenya can recover. The first step to doing so is acknowledging the factors that held economic growth back and those that sustained and propelled growth.

The first sector that was hit was obviously agriculture, due to the drought which made many Kenyans food insecure, hit forex earnings from the export of agricultural commodities and of course led to aggressive inflation. The financial sector was negatively affected by the continued unfolding effects of the interest rate cap and linked to that, credit growth, particularly to SMEs shrunk considerably. Finally, a great deal of investment was held back over the course of the year. Indeed, a few weeks ago, the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.

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It is important to unpack the impact of deferred investment because there are negative ripple effects linked to this, particularly in the African context. When investors choose to hold off on investing, several entities are hit. These include market research companies, product developers, manufacturers, advertising companies, suppliers, and distributors. The entire ecosystem around investors suffers as investors make the decision to postpone or defer investment. As a result, the multiplier effect of suspended investment has left many Kenyan feeling particularly financially strapped this year.

On the bright side, Micro, Small and Medium Enterprises (MSMEs), most of whom actually sit in the informal economy, proved to be hardy. The Central Bank of Kenya (CBK) stated that MSMEs showed ‘extraordinary resilience’ and helped cushion the economy. The factors behind this resilience has not been formally unpacked but studies on the informal economy reveal an nimbleness, flexibility and litheness that larger, more formal businesses may find difficult particularly within short time frames. Challenges aside, informal businesses have an ability to change their business models and adapt to a changing environment much faster than formal businesses with more rigid structures and processes.

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Going forward, it is important to take remedial action on what emerged as weak spots. This will begin by ensuring better coordination between national and county government on the management of agriculture in the country as well as serious consideration of the repeal or adaptation of the interest rate cap. In terms of positive aspects, MSMEs ought to be prioritised going forward and given the necessary support by government, financiers and business development agencies to scale formal MSMEs with promise, and support informal MSMEs on the journey of sustained profitability and formalisation.

Finally, both government and domestic private sector have to give candid and honest signals on the state of the political economy in Kenya. Investors need to be given a clear indication of when and where to invest such that the investment ecosystem is sustainably revived.

Anzetse Were is a development economist;



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