Why Kenya's real GDP was larger than the nomial GDP

Source: CBK Data
The Rebase of Kenya’s GDP accounting year to 2016 from 2009 has revealed a strange phenomenon: Kenya's real GDP was for six years, larger than the nominal GDP. Nominal GDP, which is the sum of a nation’s wealth at current market prices, is always larger than real GDP. To get the real GDP, Economists deflate the nominal GDP by the consumer price index.

That the Kenyan case was the reverse, statisticians explain, suggests that the method and system of data collection were inaccurate. They ignored or missed out on the expansion of the economy.  Real GDP overshot the nominal GDP after the sixth rebase from 2001 to 2009. At that point, real GDP was 164 percent higher than nominal GDP. Nominal GDP was estimated at KES3.3 trillion(US$33 billion) while real GDP rose to KES 5.3 trillion($53billion). 

According to the Central Bank of Kenya's historical GDP data, real GDP was consistently higher than nominal GDP between 2009 and 2017 when they coincided at KES7.6 trillion (US$76 billion). Since then, Nominal GDP has sprinted ahead of the real GDP which now stands at KES 8.715 trillion(US$79.1 billion) in current dollars. The nominal GDP on the other hand is estimated at KES 10.8 trillion ($97.7 billion).

Kenya’s real GDP has grown more than 854 percent between 2001 and 2020, says the Central Bank’s historical GDP data, which reflects the recent rebasing of the GDP accounting base year from 2009 to 2016.  

According to the National Statistics Office which two weeks ago rebased the GDP accounting year to 2016 from 2009, Kenya’s nominal GDP at the end of last year was estimated at KES 10.7 trillion, equivalent to US$97 billion. This was KES 500 billion ($4.55 billion) larger than previously estimated.   

This is despite the economy contracting to a negative 0.3 percent last year due to COVID-19 disruptions.

Although real GDP lugged behind nominal GDP for the period 2001-2008, it surged past nominal GDP in 2009 when the accounting period was rebased to 2009.  

So why was real GDP running ahead of nominal GDP between 2009 and 2016? Data Capture! The report on the rebase says that the seventh rebase was based on the 2008 System of National Accounting (SNA) guidance.  The previous Rebases were based on outdated Frameworks, says the report.  

Consequently, they did not capture the whole structure of the Kenyan economy resulting in obvious underestimation.  For instance, between 2001 and 2008 real GDP’s growth rate was sluggish, growing by 33 percent in 8 years from KES1.02 trillion in 2001 to KES1.4 trillion in 2008. After the sixth rebase to 2009, real GDP rose 395 percent to KES 5.3 trillion. Real GDP in 2008 was estimated at 42 percent of nominal GDP suggesting that that year experienced ridiculously high inflation rates.

The old framework placed a larger weight on the Agricultural sector whose contribution to GDP was estimated at 32.5 percent. However, the new data found that agriculture’s contribution had shrunk to 20 percent. It is not that agriculture’s output shrunk. Far from that, the sector’s contribution shrunk because other sectors have increased their contribution to the larger GDP.  The transport sector's contribution has risen to 10.3 percent up from 8 percent, wholesale and trade 8.3 percent from7.3percent real estate 9.3 percent from7.2 percent, among others.

Due to the sudden surge in real GDP after the sixth Rebase in 2009, it is not easy to develop a historical trend in the expansion of real GDP.  Between 2009 and 2020 real GDP has expanded 67 percent while nominal GDP doubled every seven years, between 2001 and 2020. The initial sluggish growth up to 2008 coupled with the sudden surge in 2009 is evidence that the statistical methods used to estimate national accounts were inaccurate.

The new base year coincided with the release of the Economic Survey 2021 revealed the devastation of the COVID-19 pandemic in the dollar value of the GDP in Kenya. Real GDP in US dollar terms is valued at US$79.1 billion. This is explained by the 10 percent depreciation of the shilling against the US dollar to KES 110 to the green buck down from KES100 in 2019. The weak Kenya shilling has shaved off a whole $8.04 billion) in US dollar value of our national wealth.  The trend is the same with the nominal GDP whose shilling value is KES 10.8 trillion (US$97.704 billion).

The economic disruption caused by the pandemic resulted in declines in forex flow as international trade ground to a halt for much of last year, affecting Kenya’s earnings from Tourism and other exports.  However, this global problem is expected to ease once the pandemic is controlled allowing the world economy to fully open and the forex flows resume.


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