Concerns raised about overall health of Kenya's economy

Catherine Masinde (right), the World Bank Group's practice manager for Eastern and Horn of Africa, gives Adan Mohamed (centre), the Cabinet Secretary Ministry of Industry, Trade and Cooperatives, a copy of the results of the "Doing Business in Kenya 2016" report as Carole Kariuki (left), the chief executive officer of the Kenya Private Sector Alliance, looks on at Safari Park Hotel and Casino in Nairobi on September 13, 2016. PHOTO | SALATON NJAU | NATION MEDIA GROUP

What you need to know:

  • The Gross Domestic Product has grown impressively rising from $55 billion in 2013 to $63 billion now.

  • Last year, Kenya National Bureau of Statistics said the economy grew by 5.6 per cent and the World Bank has predicted it would grow by 5.9 per cent this year. East Africa’s largest economy remains robust.

  • But reports continue to emerge of companies struggling to get by as others resort to job cuts to survive, citing a difficult operating environment.

Kenya’s impressive economic growth amid reports of struggling companies and job losses is raising concerns about the overall health of the economy.

The Gross Domestic Product has grown impressively rising from $55 billion in 2013 to $63 billion now.

Last year, Kenya National Bureau of Statistics said the economy grew by 5.6 per cent and the World Bank has predicted it would grow by 5.9 per cent this year. East Africa’s largest economy remains robust.

But reports continue to emerge of companies struggling to get by as others resort to job cuts to survive, citing a difficult operating environment.

The government, which is supposed to be the single largest employer, froze employment in 2013 to tame the rising wage bill that was reported to have hit Sh568 billion a year with only crucial areas such as the security sector exempted. The fate of recommendations of the Intergovernmental Steering Committee for Capacity Assessment and Rationalisation of the Public Service that were made in 2014 is also not clear. The plan, which had proposed to retrench 40,000 civil servants by the end of this year, is said to be waiting for the “appropriate time” for action as the country enters election cycle.

Prof Margaret Kobia, the head of the Public Service Commission, says this freeze in employment is as a result of devolution.

“The only way government can increase jobs is by facilitating economic growth and it should not be looked at as an employer of the future because the reason devolution is here with us is to decentralise jobs,” she told the Nation.

This now leaves the private and informal sectors with the burden of creating jobs, but a string of recent job losses especially among listed companies and the shutting down of some companies is raising concern.

MASS LAYOFFS

Last week, Royal Media Services (RMS) and Sidian Bank became the latest companies to be caught up in the web of mass layoffs citing difficult operating environments. But while RMS chose to directly retrench part of its staff, Sidian Bank opted to give its employees a softer landing through an early retirement scheme. Family Bank has also asked staff to apply for voluntary early retirement.

“The past two years have witnessed developments within the broadcasting industry that have adversely affected our business environment. As a result the company is left with no choice but to reorganise its operations,” said RMS in a memo to its staff on Tuesday.

The media industry in particular has been worst hit due to disruption caused by technology and shrinking advertising revenue as companies cut down on spending. Earlier this year, the Nation Media Group shut down QTV, QFM and Nation FM rendering dozens of its employees jobless while the Standard Group also sent home staff last year.

ICT Cabinet Secretary Joe Mucheru, however, says media houses and Kenyans have been unable to take advantage of the opportunities created by the disruption by technology saying it might take time.

“I still see more usage and growth of content although not all of it is in mainstream media. Then again there has been some apathy from readers because the quality of the content is not changing,” he says.

“Digital jobs are either formal or people are working from their homes. More than 41,000 people have employed themselves through the President’s Digital Literacy Programme. So jobs are being created even though they are not necessarily being published,” he adds.

DEVELOPMENT PRIORITIES

Economic experts, however, argue that Kenya has over the years gotten it wrong in development priorities and regulations, ignoring potential job creation avenues and leaving the country a net importer of finished products.

“We know very well that agriculture is the backbone of our economy and will remain so for a while. But when we still depend on rain-fed agriculture and export most of our products without any value addition then import the finished products, it tells you we are not serious about it,” says Paul Gachanja, the chairman of the Department of Economic Theory at Kenyatta University.

He adds that Kenya’s economy “is increasingly consumption driven”.

“The opportunities to meet the demand for goods and services for the rising middle class are plenty. But importing those goods and services is more profitable than producing them domestically,” he says.

A recent World Bank report raised the red flag on Kenya’s skewed economic growth noting that between 2006 and 2014, 72 per cent of the increase in GDP was coming from the services, financial sectors and mobile communications. This as agriculture and manufacturing stagnate while tourism declines. Tourism Cabinet Secretary Najib Balala in June said the sector has fired 30,000 employees in the last five years due to declining arrivals.

The performance of the agriculture and manufacturing sectors is interlinked and together account for 80 per cent of the country’s work force. When one performs badly the other follows in tandem.

POOR PERFORMANCE

Signs of the poor performance of these two sectors are visible at the Nairobi Securities Exchange (NSE) where technology and financial services listed companies are the only ones making profits while the rest bleed losses. Eighteen companies issued profit warnings during the last financial year, the highest ever.

This has affected the performance of the entire stock exchange whose bear run is almost clocking two years, which has seen companies shed their value and investors losing a staggering Sh333 billion since the beginning of 2014. During this period market capitalisation, which is the aggregate value of all the listed companies, has shrunk by 14 per cent from Sh2.3 trillion to Sh1.967 trillion by the close of trading on Friday.

“There is often times a divergence between the stock market and the real economy and this can happen for many reasons. It is said that the Stock Exchange is a forward indicator and if it is weak, then it signals a weakness in the economy,” says Mr Aly-Khan Satchu, the chief executive of Rich Management.

He adds, “Clearly six per cent GDP whilst better than its peers by a mile is not doing enough on the job side. The economy is not growing fast enough that is why this common refrain ‘That you cannot eat GDP’.”

Manufacturers point out high cost of credit, operation costs and lack of protection from an influx of cheap foreign goods as leading to shrinking profits.

'BORROW MONEY'

“By and large the money from government is not coming though as expected which is pushing companies to borrow money to finance their operations so there is an overall scale down of economic activity in the several sectors and the ripple effects are worrying,” Ms Phyllis Wakiaga, CEO, Manufacturers Association of Kenya, says.

As a result several manufacturing firms are cutting down staff levels as others especially multinationals have shifted to other countries, especially Egypt and Ethiopia, where the cost of production is cheaper.

Last month, Sameer Africa, the only tyre maker in Kenya, announced it was shutting down and moving operations to China or India after close to half a century in the country, which would leave 600 employees jobless.

The announcement by the Yana Tyres manufacturer came a few weeks after Coca-Cola announced it was reorganising its African business and closing down its East and Central Africa headquarters based in Upper Hill in Nairobi. At least 80 employees lost their jobs.

In July, Airtel said it was shedding 60 of its staff. The same month the multi-billion-shilling railway builder, China Road and Bridge Corporation, shocked many when 109 workers, based at a manufacturing factory in Kathekani, Kibwezi East sub-county, were paid their monthly dues and told to leave.

National carrier Kenya Airways, too, is in the process of downsizing its workforce by 1,800 in order to fly out of turbulence while Kenya Flourspar, Eveready East Africa, Karuturi Flowers, Nestle and Tata Chemicals have all closed down for various reasons in the last three years and between them rendering at least 6,000 employees jobless.

LEFT KENYA

They join Colgate Palmolive, Reckit Benkisser, Cadbury, Bridgestone and Procter & Gamble who have all left Kenya in recent years.

The economy created 128,000 new formal sector jobs in 2015, accounting for only 15.2 per cent of total jobs generated last year (841,600 jobs), according to the recently released Economic Survey 2016. At 128,000, the expansion of the formal employment market lags far behind the number of graduates leaving Kenyan colleges, which stands at more than 450,000 annually.

“These youth will want jobs, but in order for the youth bulge to find better jobs than is currently the case, the current level and composition of economic growth will not be sufficient. In the past decade, Kenya’s increase in value added was largely driven by more employment, rather than more productivity,” the World Bank warned in its February report titled, Kenya, Jobs for the Youth.

According to World Bank figures, Kenya’s age dependency ratio (the ratio of unemployed adults compared to those with a form of income) is 82:41 which means every adult with a form of income supports at least two more people above the age of 15.

A high dependency ratio implies that there is a small proportion of people engaged in income generating activity which increases pressure on the resources generated at household level, leading to reduced savings and resources for investments, hence structural poverty.

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