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How Kenya State Appetite is Stifling Private Sector


Kenyan government’s interest in business is among factors choking competition and discouraging private sector investment in the country as well as slowing down economic progress as peers grow faster, warns the World Bank.

In its latest Country Economic Memorandum report, the global lender has said the state’s footprint in the services sector, especially, is much bigger than necessary, stifling the industry that has been the primary driver of Kenya’s economic growth over the past decade.

This interference, and other factors, slowed down Kenya’s economic growth between 2010 and 2019. The lender says although the growth rate was higher than Sub-Saharan Africa’s average, it was below potential and trailed aspirational peers such as Tanzania, Ethiopia, Bangladesh and India.

According to the research, Kenya’s growth in the 2010s was strong but was limited by, among other factors, underperformance of trade and private investment as drivers of economic growth, pointing to issues with the country’s business environment.

Added to that, productivity, a key determinant of sustained economic growth, has not been improving over the past two decades, partly due to poor performance of private investments, contributing to the below par economic growth.

Both underperformance of trade and investment and flat growth of productivity, are encouraged by the State’s heavy presence in business, which kills fair completion, a challenge that has been growing in prominence over the past decade.

According to World Bank’s data, the government has at least 10 percent stake in 132 businesses operating in 11 percent of Kenya’s markets, some of which are in “competitive sectors where private sector participation is viable.”

Over two thirds of these businesses are in the services sector, most of which operate in “competitive markets where the economic rationale for State participation is weak, and some of them are dominant market players in their industries,” the report says.

“The footprint of the State has the risk of distorting markets and also can reduce competition. So, reassessing the role of the State and thinking about how to treat these State enterprises is important,” said Elwyn Davies, World Bank’s senior economist and lead author of the report.

The services sector was the leading contributor to both economic growth and job creation over the last decade, currently accounting for about 54 percent of real value added to the economy, toppling agriculture and manufacturing, but the State’s involvement in the industry undermines its potential.

“Reducing the State’s footprint in competitive sectors of the Kenyan economy can reduce the risk of market distortions, enhance efficiency, and stimulate private investment,” the bank said.

Tania Begazo, a senior economist at the World Bank and a co-author of the report, said the challenge with State ownership of businesses is “whether the company is actually managed in an efficient way to be able to produce the goods and services that are needed.”

“In some cases, the rules and the frameworks are not enabling that, and on the contrary, some countries also try to protect these companies and in so doing they also restrict private sector to also participate in the sector,” Ms Begazo said.

Apart from involvement in business, World Bank says Kenya also has more barriers to competition compared to other developing countries across the globe and regional peers.

Source: The East African

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