East Africa’s GDP to rise by 13 percent- If Weather allows.

Ethiopia's GDP projected
 to remain robust 

 East Africa’s GDP is expected to grow by 13.3 percent to US$340 billion this year, says IMF Database for April 2019. The five largest economies in the region will raise the total regional GDP by US$28.2 billion to control $302.2 billion in 2019 from the $265 billion they controlled last year.  The regional GDP last year stood at US$300 billion, according to the IMF data.  This year, the GDP is expected to rise to $340 billion. Of the five star performers, Kenya and Ethiopia generated 57 percent or $169.5 billion last year.

 The star performers including Ethiopia, Kenya, Rwanda, Tanzania, and Uganda will grow by an average of 6.32 percent including Tanzania. But if Tanzania is excluded. The top four will rise by 7.1 percent.

Kenya, says the IMF data, will be the leader posting absolute GDP growth of $11 billion, leaving her peers to share the rest of the spoils. In generating such large absolute growth, Kenya’s GDP will cross the US$100 billion Mark this year, up from US$90 billion last year. This will be the largest absolute expansion in recent years.

 The same data show that in 2018, in absolute terms, Kenya’s GDP grew by US$10 billion, ahead of $4.7 generated by both Ethiopia and Tanzania. This year, the Database shows, Ethiopia is hot on the heels of Kenya, projected to generate an impressive $10.7 billion in absolute growth. Kenya and Ethiopia will therefore contribute $22 billion or 78 percent of the US$28.2 billion absolute growth in the region this year.

However, bad weather is likely to taint this rosy picture. The long rains have failed this year and the Short rains in October- December is uncertain.  The resulting drought will affect agricultural output which contributes more than 15 percent of the GDP.

Consequently, IMF projections for the region are likely to be missed by a significant margin. A slowdown in agricultural production is likely to be a drag on other sectors, mainly food processing. It will lead to higher food prices thus leading to a decline in absolute consumption- the number of goods and services consumed in the region. Private consumption contributes between 64 and 84 percent of the demand-driven growth in East Africa, Kenya included.  Given that the rains have failed in the region generally, growth in the entire region will soften.

But Services and industry, including the construction of infrastructure, could stagger the impact of drought and drive economic growth this year. Generally, these are the largest contributors to growth from the supply side, beating agriculture to the second position. In Kenya, the services sector contributes 71 percent of the GDP growth, the highest share in the region. In Ethiopia, the  industrial sector grew by 18.7 percent in 2016/17, and services grew by 10.3 percent, says AfDB’s Regional Economic Outlook 2019. The sector is also a significant growth driver in Tanzania and Rwanda.

Despite the wet towel, the IMF projections clarify some grey areas in the regional economy. Among these: Is borrowing to invest in critical infrastructure good or bad?  The estimates are positive that it is good. In fact, other reports such as The World Bank’s African Pulse and the Africa Development Bank’s Regional Economic Outlook concur that investing in infrastructure contributed to the fast growth in East Africa.

Consequently, the projected growth trajectory tacitly acknowledges that the massive investment in infrastructure over the last few years is bearing fruit.

 Kenya, like several of her neighbors, boasts of large increases in infrastructure output and, going by the available data, is probably the leader in the region: Paved roads, according to 2018 Economic Survey reached 20,400 Kilometers in 2017.  In a country where the market for goods and services is within a 450 Kilometer radius, this amount of paved roads implies a wide reach, opening up previously difficult areas to reach.

Kenya's GDP projected to
 remain robust by IMF

The country has increased its electricity generation capacity to 2.9 GW, much of it from renewable sources such as Wind 338 MW, Geothermal 700MW, Solar 55 MW in addition to hydro 885 MW. Peak demand for electricity stands at 1.9 GW leaving a comfortable surplus. For this reason, the country is looking at decommissioning thermal power. In addition, the country has in place a Standard Gauge Railway from Mombasa to Nairobi whose 120 KM extension to Naivasha will be completed by the first half of this year. The Railway has cut freight transport from the Port of Mombasa to Nairobi to eight hours.

According to the African Development Bank’s Regional Economic Outlook 2019, industrialization is picking up pace in East African countries that have invested heavily in infrastructure. Kenya and Ethiopia top the club.  These two had the most projects under construction. According to the business consultancy firm, Delloite.In 2017, the two commanded 43 projects. Kenya was leading with 23 projects. Ethiopia followed closely with 20 projects.

Tanzania's  growth to 
decelerate, IMF

The projections also identify the leading economy in east Africa: At US$100 billion, Kenya is the clear leader followed by Ethiopia.  Ethiopia, the second-largest economy will rise to US$90 billion, says the IMF projection.

IMF estimates that Kenya’s GDP will grow by 5.83 percent, a slight decrease from 5.95 percent last year. Other estimates say the GDP growth rate could pass 6 percent. Other fast growers are; Tanzania $61 billion, Uganda $30.3 billion and Rwanda $9 billion. The IMF projected trajectory shows that Kenya’s GDP will reach $157 billion in 2023, four years down the road.   

In tandem with the growth in GDP, income per capita is also rising in the region as the five leading economies hurtle towards middle-income status. Kenya has already entered that club and her GDP per capita is expected to grow to $2,020 in 2019 and $2,962 four years down the road.

This explains why private consumption has become a leading driver of demand-led growth in the region.  Private consumption is an indicator of the income levels in a country. Thus large consumption expenditure is an indicator of a population growing richer.  Consequently, the region is a significant market for its own products and imports.

 Private Consumption contributes 84 percent of demand-driven growth in Kenya, and 64 percent in Tanzania. Both the Outlook and the World Bank’s Africa Pulse, also published this month, agree that growth in domestic demand is driving economic growth in the region.  On the reverse, declines in private consumption contributed to a contraction in growth in Burundi and South Sudan.

In Kenya and Ethiopia, the wide reach of infrastructure, especially roads, is opening up previously difficult areas to reach. This, coupled with the wide reach of electricity connectivity, is improving economic activity in rural areas. Kenya, where demand for electricity expands at 8 percent, has connected 67 percent of households, says the local Power Distributor, KPLC.

The large growth will also have an implication on public debt, said to be 47 percent of the GDP. A larger GDP will lower the ratio of debt to GDP, pulling the region away from the risk of debt distress.  This will, in turn, increase investor confidence and open the taps for FDI flows into the country in addition to increased tax revenue. It also means better prospects for the expansion of jobs, investment opportunities, and delivery of social services by the government.

The four countries –Kenya, Tanzania, Ethiopia, and Rwanda- are ranked among the top economic performers in Africa by the Pulse.  However, Tanzania, according to IMF is slipping, with a growth rate projected at 3.9 percent this year. This is a departure from the previous trend of growing at more than six percent.