Kenya Economic Survey 2021: SMEs Implications and Policy Options

Kenya’s economy experienced the full brunt of COVID 19 underpinned on the containment measures both domestically and Internationally.

The containment measures in Kenya manifested as; Ban of local and international travel, cessation of movement in and out of some counties and zones, closure of educational facilities, leisure and eating places.

This led to some business closing especially in tourism and education sectors with others facing losses due to little to no revenue.

Real Gross Domestic Product (GDP) was estimated to have contracted by 0.3 per cent in 2020 compared to a revised growth of 5.0 per cent in 2019.

As a result, economic performance of the following sectors were poor

1. Accommodation and food serving activities,
2. Education,
3. Professional and administrative service activities

On the contrary the following sectors performed above average

1. Agriculture (Favorable weather)
2. Construction (Public Infrastructure Investment)
3. Health services (Government spending on COVID 19 mitigation measures)
4. Financial and Insurance
5. Public Administration
6. Information and communication activities

To make sense of this performance, there is need to compare these sector performances to previous year performance

Sector Growth 2010-2019

Top performing sectors between 2010-2019 were

1. Agriculture
2. Wholesale-Retail Trade
3. Education
4. Construction
5. Real Estate
6. Financial
7. ICT
8. Manufacturing

Analysis

Agriculture remains the top performing sector but faces the risk of weather as well as low value due to no value addition

Wholesale retail is conspicuously missing as a top performer in 2020 as compared to being second between years 2010-2019 which can be attributed to the negative effect of COVID 19 on the sector where a majority of SMEs ply their trade. The full impact of COVID 19 to the sector will come to come into view in the 2021 economic review which should factor the net impact of government intervention through post COVID 19 economic recover strategy as well as the covid 19 stimulus program

Despite manufacturing featuring as a key pillar in vision 2030 and MTP 3 (Big Four Agenda), the sector continues to portrays a downward trend, declining from 18.5 per cent in 2010 to 16.2 per cent in 2019. The decline in the performance of the manufacturing sector is partially attributed to high production costs, competition from imported goods and poor performance of the sugar industry in the recent past. The two factors of ; production cost and competition fall within the policy ambit of government which begs the question of effectiveness of current policy interventions to supporting the sector

Despite Information and Communication featuring as a top performing sector between years 2010-2020, the sector’s growth slowed to 4.8 per cent in 2020 compared to 7.5 per cent growth in 2019.

The growth was mainly supported by increased uptake of digital services as the COVID-19 measures which resulted in increased remote working and learning activities remotely as well as rise in cashless payments for financial transactions.

The current framework of measuring the sub sector is;

1. Number of mobile money and commerce transactions
2. Internet service providers
3. Internet subscriptions
4. Number of utilized bandwidths
5. Office broadband subscription
6. International incoming telephone traffic
7. Number of ICT equipment exported and imported
8. Investment by telecommunication operators

Whilst these parameters are fine; they don’t reflect the full topography of the sector hence full contribution to GDP. Other parameters for consideration are;

1. Opportunity cost (Savings made) due to ICT deployment in public-private sector
2. New jobs created within sector eg BPO, Technology based Startups etc
3. Public Investment in the sector eg Research and Development etc

The Financial and Insurance sector also a critical cog in Kenya’s economic development with the sector expanding by 5.6 per cent in 2020 compared to 6.9 per cent growth in 2019. The financial sub sector grew by 4.2 per cent in 2020 compared to 6.2 per cent growth in 2019 arising from increase in domestic credit and credit advanced to national Government and private sector.

There is need to expand the breadth of financial services in order for the country to reap its full benefit. The following are some policy interventions for consideration;

1. Enabling policy to support growth of independent mobile credit providers as they play a critical role in financial inclusion to informal sector SMEs
2. Enabling policy to support alternative business investors as espoused by Business Angels, Venture capital and Private Equity