Kenya Economic Update: Transforming agricultural productivity to achieve food security for all
Kenya’s economic outlook remains stable amid threats of drought in 2019
Kenya’s real gross domestic product is projected to grow by 5.7% in 2019, a slight decrease from the estimated 5.8% growth experienced in 2018, according to the new World Bank Kenya Economic Update. While the medium-term growth outlook is stable, the report notes that recent threats of drought and continued subdued private sector investment could drag down growth in the near-term. The growth forecast for 2020 stands at 5.9%.
Growth in 2018 was driven by favorable harvests, a resilient services sector, positive investor confidence and a stable macroeconomic environment. Nonetheless, the demand side shows significant slack with growth driven primarily by private consumption while private sector investment remains subdued. So far in 2019, a strong pick-up in economic activity was underway for Q1 of 2019 as reflected by real growth in consumer spending and stronger investor sentiment. However, a delayed start to the long rain season (March – May 2019) could affect the planting season-resulting in poor harvests. In addition, the below average short rains (October – December 2018) and the ensuing food shortages across several counties in the northern part of the country that has prompted emergency interventions, could impose unanticipated fiscal pressure constraining development spending. These developments have slowed the growth forecast for 2019.
“Delays in the long rain season and a growing need for emergency interventions to deal with food shortages is a reminder of the outstanding challenges in managing agricultural risks in Kenya,” said Felipe Jaramillo, World Bank Kenya Country Director. “Policy measures would be required to transform the agriculture sector through increasing productivity and enhancing resilience to agricultural risks to boost smallholder farmers’ income by improving access to competitive markets.”
The 19th Kenya Economic Update (KEU), Unbundling the Slack in Private Investment, attributes the slack on the demand side of the economy to two factors: Insufficient credit growth to the private sector (which stands at 3.4% in February 2019), and inherent room for improvement in fiscal management. On private sector credit, the report recommends fast-tracking solutions to factors that led to the imposition of the interest rate cap and building consensus for its eventual reform. On the latter, ensuring prompt payments to firms that trade with the government could restore liquidity and stimulate private sector activities. Other crucial reforms outlined in the report are improved revenue mobilization and accelerated structural reforms that crowd in private sector participation in the Big 4 agenda.
“Several macroeconomic policy reforms, if pursued, could help rebuild resilience and speed-up the pace of poverty reduction,” said Peter Chacha, World Bank Senior Economist and Lead Author of the KEU. “These include enhancing tax revenue mobilization to support government spending, reviving the potency of monetary policy, and recovery in growth of credit to the private sector”.
Transforming agriculture sector productivity and linkages to poverty reduction
Agriculture remains a key driver of growth in Kenya and a major contributor to poverty reduction. The Special Focus section of the KEU notes that Kenyan households that are exclusively engaged in agriculture contributed 31.4% to the reduction of rural poverty, and agriculture remains the largest income source for both poor and non-poor households in rural areas.
“We found that productivity increases in the agriculture sector not only benefits poor households, it can potentially lift them out of poverty,” said Ladisy Chengula, World Bank Lead Agriculture Economist and author of the report’s special section on Transforming Agriculture Sector Productivity and Linkages to Poverty Reduction.
From 2013-2017, the report notes the agriculture sector contributed on average 21.9% of gross domestic product (GDP), with at least 56% of the total labor force employed in agriculture in 2017. Agriculture is also responsible for most of the country’s exports, accounting for up to 65% of merchandise exports in 2017. As such, the sector is central to the government’s Big 4 development agenda, where agriculture aims to attain 100% food and nutritional security for all Kenyans by 2022.
Despite progress towards achieving food security for all Kenyans, the analysis finds that real agricultural value-added has declined relative to levels attained in 2006. This was due to weather related shocks, prevalence of pests/disease and dwindling knowledge delivery systems such as the lack of extension services on adoption of modern technology.
The analysis highlights a few of the many factors underlying low agriculture sector productivity and high vulnerability to climate shocks; and proposes policies that could help transform the sector to boost farmers’ income-thereby contributing to the overall poverty reduction in Kenya.
“There is a need to reform the current fertilizer subsidy program to ensure that it is efficient, transparent and well targeted; invest in irrigation and water management infrastructure to build resilience in the sector; and leverage disruptive technologies to deliver agricultural services, including agro-weather and market information and advisory services,” said Chengula.
Finally, to boost farmers’ incomes policy could seek to address post-harvest losses and marketing challenges by fast-tracking implementation of the national warehousing receipt system and commodities exchange, while scaling up agro-processing and value addition to increase returns on agricultural produce.
Boosting agricultural productivity
The report recommends policy reforms that could help transform the sector and deliver on food and nutritional security, including:
Enhance access to agricultural financing: While Kenya represents a vibrant and enabling market for FinTech, the report notes the more traditional banking that is needed to service commercial agriculture is lacking. About 4% of commercial bank lending is for agribusiness, despite most Kenyans being employed in agriculture or agribusiness.
Increase the use of fertilizer: The report found that fertilizer use remains inadequate in Kenya. The report also found the targeting mechanisms for the government’s fertilizer subsidy program is inefficient, often benefiting medium/large scale famers relative to small-scale farmers. Reforming fertilizer subsidies to ensure that they are efficient and transparent, and target smallholder farmers remains key in restoring productivity.
Establish structured commodities trading: Like most countries in Africa, the government still retains a big role in marketing agricultural outputs, especially maize, leaving little room for private sector participation. Further, National Cereal and Produce Board (NCPB) buys maize at a premium above the price determined by market forces. These interventions result in undue fiscal pressures, mis-allocation of resources from other potentially high productivity expenditures (extension services) and disincentivize private sector participation. Structured commodities trading could minimize inefficiencies and transform small holder farmers from subsistence into successful agribusinesses.
Invest in irrigation: While 83% of Kenya’s land area is arid and semi-arid, 2% of arable land is under irrigation compared to an average of 6% in Sub-Saharan Africa and 37% in Asia. The low usage of irrigation means Kenya’s agriculture is fully rain dependent and susceptible to drought shocks. The analysis shows that investing in irrigation and agricultural water management for smallholders can reduce productivity shocks and raise the sector’s total factor productivity, potentially climate proofing the sector.
Support stronger farmer organizations: Kenya has many geographically dispersed smallholders that are not integrated into key agriculture value chains. Dispersion increases production costs and reduces small farmers’ competitiveness. The analysis shows that stronger farmer organizations (FOs) could foster economic inclusion of smallholders and increase their market power-thereby raising their incomes and productivity. Further, while value addition to agricultural commodities remains low, increasing the agribusiness to agriculture ratio could create more jobs and reduce poverty.