United Nations Development Programme Analysis of likely Implications on Rebasing the GDP of Kenya October, 2014 _________________________________________________________________________________________________________________________________________________________ i September, 2014 Analysis on the Likely Implications of Rebasing of Kenya’s GDP _________________________________________________________________________________________________________________ Foreword Rebasing the national account, which includes the GDP, is the process of replacing an old base year with a new and more recent base year. A base year provides the reference point to which future values of the GDP are then compared. GDP rebasing serves as a normal statistical procedure undertaken by national statistical offices of countries. This ensures that national accounts statistics present the most accurate reflection of the economy as possible. The UN Statistical Commission recommends that countries review or rebase their national accounts/GDP every 5 years. GDP rebasing is beneficial to a country in many ways. Such benefits include enabling policy makers and analysts to obtain a more accurate set of economic statistics that are a truer reflection of current realities for evidence-based decision-making. Secondly, it reveals a more accurate estimate of the size and structure of the economy by incorporating new economic activities which were previously not captured in the computational framework. Thirdly, it provides better tools for Governments to tackle the challenges of growing the economy and fighting poverty. It further enables Governments to have a better understanding of the structure of the economy, the sectoral growth drivers and sectors where investment and resources should be channeled in order to grow the economy, create jobs, improve infrastructure and reduce poverty. However, it is important to note that the calculation of GDP is an accounting system, which takes into account the market value of all goods and services produced within a year. GDP per capita on the other hand is simply an indicative average realized within a country by dividing the total worth of an economy by its total population. Unfortunately, in both these calculations, the issue of sustainable human development and how the national wealth is distributed are not taken into account. This is why it is possible to see countries with the same GDP per capita radically having different levels of poverty and inequality. In other words, the calculations of GDP and GDP per capita do not necessarily reflect improvement in the well-being of citizens which would automatically translate into reducing poverty, creating jobs and promoting sustainable human development. It thus requires the right kind of policy-mix, political will and determination to achieve these development objectives. Whilst GDP rebasing is a good economic practice that will provide the GoK with relevant tools for tackling economic challenges such as growing the economy, fighting poverty and creating jobs, it is important to note that there are other implications arising from it. This is especially so when poverty, inequality, youth unemployment, insecurity and gender inequality are still entrenched in the economy. Such realities have forestalled the celebrations that might have come with the elevation of the Nigerian economy to the biggest economy in Africa and the 26th in the world. This is after the recent rebasing exercise that shot its Gross Domestic Products (GDP) to $509 billion ahead of South Africa’s $350 billion. It is against this backdrop that UNDP has supported this study to undertake an in-depth analysis of the likely implications of rebasing the economy of Kenya. Nardos Bekele-Thomas UN Resident Coordinator/ UNDP Resident Representative, Kenya _________________________________________________________________________________________________________________________________________________________ ii September, 2014 Analysis on the Likely Implications of Rebasing of Kenya’s GDP _________________________________________________________________________________________________________________ Executive Summary The overall objective of any Government is to improve the welfare of the citizens while narrowing inequality and reducing poverty. To be able to achieve this, the Government needs to acquire accurate, timely and appropriate data to inform and influence the relevant policy interventions. Lack of which will lead to misallocation of scarce resources resulting to welfare loss. To this end, Kenya has been in the process of revising its National Accounts Statistics (NAS) including rebasing of the GDP with a view of obtaining a more accurate estimate of the size and structure of the economy. This is done by incorporating new activities, which were previously not captured in the computational framework. GDP Rebasing is an exercise undertaken by national statistical offices to ensure that national accounts statistics present the most accurate reflection of the economy. The Kenya National Bureau of Statistics (KNBS) initiated the process of rebasing and revising the NAS in the year 2010 and was expected to complete the exercise by May 2014. However, this was not realized until September 2014 when the results were released. The results have elicited intense debate from policy makers, investors, and international organizations among others. This is because the country will change her global ranking from a low income to a low-middle income country, hence affecting the nature of relationship between Kenya and other countries. These could affect the economy either positively or negatively. The international best practices recommend that national statistics revision should be carried out periodically preferably after 5-year period. The GDP rebasing is beneficial to a country in many ways including enabling policy makers and analysts to obtain more accurate sets of economic statistics that are a comprehensive reflection of current realities.. This contributes by influencing evidence-based decision-making. Secondly, it reveals a more accurate estimate of the size and structure of the economy and sources of growth by incorporating new economic activities, which were previously not captured. Thirdly, it provides the Government with better tools to address the economic challenges of fighting poverty, unemployment, inequality etc. by informing efficient allocation of resources to achieve economic growth. Therefore, the overall objective of this assignment is to carry out an in-depth analysis of the implications of rebasing Kenya’s GDP. The focus is on the implications on trade pacts and access to bilateral, multilateral loans and development assistance and on the social development and key macroeconomic aggregates of the economy. Rebasing of the national accounts, which includes the GDP, is the process of replacing an old base year with a new and more recent base year. A base year provides the reference point upon which future values of the GDP are compared. According to the 2014 Economic Survey, the revision process involves use of a wide range of information obtained from surveys, censuses and administrative records. This is implemented in a coherent and consistent manner to achieve the overall goal of improved National Accounts Statistics. Output from this exercise includes revised national accounts estimates for the period 2006 to 2013; balanced 2009 Supply and Use Tables (SUT); 2009 Input-Output Table (IOT) and 2009 Social Accounting Matrix (SAM). This process is necessitated by the fact that economies are constantly changing due to a number of factors. For instance, economies change in their production structure; structural changes in relative prices of various products, changes in consumption patterns, technological innovations and international dynamics among others. However, it is possible that changes in national statistics do not automatically translate into improving the well- being of the people or in equal distribution of wealth. It is important to note that the rebasing of GDP has changed the ranking of Kenya to middle-income status when in fact it still requires substantial structural changes and development assistance mostly provided to countries categorized as least developed countries. In this case, a country assumes a middle-income status due to rebasing of GDP but in reality, it still has many of the features possessed by least developed countries. Although there is generally no standard way of classifying countries a number of approaches exist that classify countries as either developing or developed or as low-middle or high economies. International organizations including World Bank (WB), International Monetary Fund (IMF), Organization of Economic Cooperation and Development (OECD) and United Nations Development Programme (UNDP) adopt classification criteria of countries. Such criteria continue to be adopted extensively in shaping global economic policy debate and decisions in resources transfers, financing arrangements, and trade relationships, among others. _________________________________________________________________________________________________________________________________________________________ iii September, 2014 Analysis on the Likely Implications of Rebasing of Kenya’s GDP _________________________________________________________________________________________________________________ The review and revision of national statistics is expected to have profound effects on the Kenyan