The World Bank has told Kenya to recalibrate its economic strategy, cautioning the National Treasury against an overemphasis on the services sector, at the expense of industrialisation.

World Bank’s call comes as part of the its latest Country Economic Memorandum report which highlights both the successes and challenges facing Kenya’s recent economic trajectory, and the way forward.
Services sector

“This report argues that growing the services sector should not be seen as an alternative to industrialisation, but rather as an enabler of economic growth, including in manufacturing, and in agriculture too,” the report launched on October 17, 2023 notes.

“Most economic growth has been located in the services sector, with more limited contributions by agriculture and industry.  Services now contribute to 54 per cent of value added and 45 per cent of jobs,” the bank said in the report.

The growing role of services raises questions about the process of structural transformation in Kenya, which traditionally, for many of the current high-income countries was based on industrial sectors growth.

World bank notes that while Kenya has experienced solid economic growth, there are notable limitations that could hinder inclusiveness and sustainability. Notably, Kenya has witnessed a significant rise in public debt, raising concerns about fiscal space and debt sustainability.

Total public debt rose by a record Sh1.6 trillion ($10.8 billion) in the financial year ended June 30 to Sh10.1 trillion ($70.75 billion), breaching a debt ceiling of Sh10 trillion, according to State data.

“The increase in the public debt is attributed to external loan disbursements, exchange rate fluctuations and the uptake of domestic and external debt,” Treasury notes.

According to World Bank, low and declining openness to trade, coupled with weak foreign direct investment, contributed to macroeconomic vulnerabilities, including external debt risks.

One of the critical concerns highlighted by the lender is the need for Kenya to avoid viewing the growth of the services sector as an alternative to industrialization.

Instead, the bank argues that the services sector should be considered an enabler of economy-wide growth, including in manufacturing and agriculture, facilitating the creation of quality jobs.

Despite Kenya’s commendable growth rates, the report identifies three key challenges that need urgent attention. Firstly, the surge in public debt threatens fiscal stability and sustainability.

Secondly, the country’s declining openness to trade and weak foreign direct investment raise concerns about international competitiveness. Thirdly, the pace of job creation is lagging behind the requirements of a rapidly expanding working-age population, prompting concerns about inclusivity.

Growth drivers

The World Bank emphasises that addressing these constraints is vital for Kenya to match the growth rates seen in some of its peers. The report acknowledges the country’s investments in infrastructure but points out that trade and foreign investment have not performed optimally as growth drivers.

Exports, particularly merchandise, remain concentrated in agricultural products, with tea, horticulture, and coffee dominating the landscape. Services exports, including tourism, travel, transportation, and financial services, are also crucial but have seen a decline as a share of total output.

The report serves as a wake-up call for Kenya to strike a balance between the services sector and industrialization, addressing the identified limitations to ensure a more inclusive and sustainable economic growth path.