Manufacturing and agriculture are the main sectors that stimulate the economy

Manufacturing, agriculture and digitisation of the informal economy are three sectors highlighted by the state think tank as having the potential to boost the country’s productivity.

The Kenya Institute for Public Policy Research and Analysis (Kippra) in its latest report says the Kenyan economy is vulnerable to macroeconomic shocks that continually cause a reduction in gross domestic product (GDP).

However, investments in the three sectors that Kippra considers critical have the potential to make the economy more resilient to such shocks. The Kenya Economic Report 2024, citing the World Bank, notes that productivity growth has generally weakened in the global economy due to shocks such as financial crises, natural disasters and epidemics.

The think tank says Kenya has made significant progress in recent years but there are still pressing issues that need to be addressed.

“Gaps such as low levels of productivity in some sectors, limited access to finance, insufficient infrastructure and a high level of informality prevent the country from realising its full economic potential to achieve inclusive growth,” the report reads.

The Ukraine-Russia conflict, climate-related incidents and Covid are among the shocks the economy has been hit by. Kippra says improving productivity plays a key role in driving economic growth, reducing poverty and creating opportunities for all segments of society.

As noted, by increasing productivity levels across sectors, the country can unleash its full potential and put the economy on a path of sustainable and inclusive growth.

“However, for a deeper analysis and based on understanding the key sectors where productivity can be increased, KER 2024 emphasizes manufacturing, agriculture, and digitalization of the informal sector,” the report says. The three sectors were highlighted based on the analysis, which examined how the Kenyan economy responded to global and domestic shocks.

For example, between 1979 and 2001, the economy stagnated, leading to an increase in poverty levels that peaked at 57.2%. Kippra attributes this to external economic shocks, policy mistakes and challenges, and internal conflicts.

Another event was the drought of 2008–2011, which – as stated in the report – caused huge losses and damages and slowed down real GDP growth by an average of 2.8% per year.

Similarly, drought in 2022/23 led to crop failure and animal deaths, which affected negative growth in the agricultural sector.

“However, the country experienced abundant rainfall between November 2023 and February 2024, which improved agricultural activities in some parts of the country, given that Kenya’s agricultural production is rain-fed,” the report said.

The analyses were also extended with simulations showing the direct and indirect impact of these sectors on the economy.

“For example, improving total factor productivity in the manufacturing sector has a direct impact on the manufacturing sector and an indirect impact on the agri-food and services sectors,” the report reads.

“Moreover, the simulations reveal that the effects of productivity improvements have the largest impact on the services sector, followed by manufacturing and agri-food, which may be due to the changing economic structure towards a service-based economy (increasing economic captivity) and differences in the forward and backward linkages of the sectors.”

Kippra says Kenya can reap the benefits by implementing measures to increase productivity in the agro-food, manufacturing and services sectors.

“It is necessary to improve productivity in all sectors, as they all complement each other,” the report added.