The Kenyan Economy is on a rebound in2018. Reflecting improved rains, better business sentimentand easing of political uncertainty, economic activity isrebounding after the slowdown in activity in 2017. Accordingto official statistics, the economy expanded from 4.7percent in H1 of 2017 to 6.0 percent in H1 of 2018 supportedby improved harvest in agriculture, steady recovery inindustrial activity, and still robust performance in theservices sector. As a result, real GDP growth is projectedto reach 5.7 percent in 2018, an upward revision of 0.2percentage points from the April 2018 Economic Update.Growth in private consumption and investment are driving therebound. Private consumption picked up in 2018 fueled byrising household incomes from improved agriculturalharvests, lower food prices, and strong remittance inflows.A recovery in private sector investment activity is alsounderway, partly reflected in increased imports of rawmaterials and chemicals and more positive investor sentimentwith the Purchasing Managers’ Index remaining inexpansionary territory (above the 50- mark) for H1 2018 at55.1 points compared to 49.7 points over the same period in2017. The recovery in private sector activity (consumptionand investment) is expected to off-set potential drag ingrowth due to unwinding of fiscal stimulusat a time whenfiscal consolidation is gathering momentum. Net exportscontinued to weigh on growth owing to faster expansion inimports relative to Kenya’s exports. There are three keypolicy recommendations from this analysis. First, thegovernment could consider expanding direct cash transferprograms. Cash transfer programs are well-targeted so that alarge fraction of the benefits are captured by the poor.These programs could further be expanded in order toincrease their poverty-reducing effect. However, this willrequire enhancing revenue mobilization for the coverage toincrease significantly. Second, exemptions granted withinKenya’s VAT regime appear to benefit the poor onlymarginally. The variation in consumption shares of exemptand zero-rated items across the welfare distribution issmall. A review of the VAT law might help remove exemptionsand increase revenue that could then be spent inwell-targeted and progressive cash transfer programs.However, a more detailed follow-up analysis of exemptionsand zero-rates would be necessary to determine item-levelincidence. Third and finally, shifting public resources fromhigher-level health facilities to lower-level facilities islikely to benefit the poor. Conditional on uptake, publichealth spending on outpatient care is pro-poor while theassociated user fees and over the counter purchases areregressive. The results suggest that redirecting spendingfrom higher-level public health facilities to primary carefacilities has the potential to benefit the poor and mightincrease access.
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