KENYA INSIGHT: Nairobi Slows as Urbanization Engine Stutters

NAIROBI (Capital Markets in Africa) – Kenya’s capital city Nairobi is being outperformed by semi-urban areas and smaller cities, such as Kiambu and Nakuru, according to data on regional economic activity. There’s some evidence to suggest this may become an emerging trend across Africa with a different pattern of urbanization providing the engine of growth.

• Nairobi had the weakest GDP per capita growth of all Kenya’s 47 counties. This chimes with World Bank research showing urbanization weakening as a driver of economic growth in Africa because of overcrowding and poor service provisions in larger cities. Mombasa and Kisumu, Kenya’s second and third largest cities, have also been outgrown by smaller urban conurbations.
• The impact of urbanization on economic growth is likely to differ across the continent with data showing larger cities in Tanzania and South Africa still outgrowing other regions.
• The data also gives a better picture of the potential tax base, which should help county government raise 125 billion shillings in revenue as envisaged in the 2019 budget statement.

Generally, capital cities tend to boast higher-productivity and better-paid jobs, luring migration from other parts of the country. This has deepened the economic and political divide between urban and rural areas. In this respect, Kenya is no different. The latest gross county product data show manufacturing output and trade is concentrated in Nairobi. This applies, to a lesser extent, to construction, transport, finance, and real estate.

Nairobi Dominates Manufacturing, Trade
However, secondary cities also show significant economic activity in these six categories and have outgrown the capital in recent years. These include Kiambu and Nakuru in the Rift Valley, according to data on County Gross Product from the Kenya National Bureau of Statistics.

The GDP figures also show the three largest cities being outgrown by a number of rural counties, partly because of strong agricultural growth in 2014-17. For instance, the location of agro-processing and supply-chain management close to the source of coffee and tea plantations is probably helping to support some secondary cities, such as Nakuru.

Nairobi Outpaced by Secondary Cities
These developments are in line with research by the World Bank, which has identified secondary cities as an increasing driver of economic growth in Africa as healthcare, transport, housing and education in capital cities become overwhelmed by migration.

The drag on productivity and income levels from long commutes and increasing competition for public services in capital cities may now outweigh the positive impact of migrants from rural areas taking up higher productivity jobs in the larger cities, according to the World Bank.

Larger Cities Hold Sway in South Africa, Tanzania
But more data is needed to establish if this is now the case in Kenya and other countries. South Africa is the only other country in Sub-Saharan Africa for which we have a regional real GDP series. This data shows the main urban areas of Gauteng and Western Cape still outpacing the economic performance of other regions.

Nominal GDP statistics in Tanzania also indicate the commercial capital Dar-es-Salaam outgrowing other regions in 2007-17. There is a range of factors at work, which mean the impact of urbanization on economic growth is likely to differ across Sub-Saharan Africa. These include the relative gap in productivity between urban and rural jobs, as well as the cost of living and transport in cities.

Potential County Revenue
Kenya’s regional GDP data also give some insight into the prospects for raising revenue at the county government level and what sort of economic activity might yield the most tax income. Construction activity should, for instance, provide a basis for counties to raise funds from building permits, while a strong wholesale and retail trade sector may allow them to generate revenue through business licenses.

So far, county governments have failed to raise their revenue from local taxes, according to the 2019 budget statement released by the National Treasury.

More needs to be done in this area for the government to meet its budgeted reduction in direct allocation to counties to 2.4% of GDP in 2022-23 from 3.6% in 2018-19. Unless progress is made at a local authority level then the government is unlikely to achieve its target to halve the fiscal deficit to 3.1% of GDP by 2022-23.

Mark Bohlund covers Africa for Bloomberg Economics in London. He has previously worked as an economist at IHS Global Insight, BMI Research (now part of Fitch Group) and the Swedish Foreign Office.

Source: Bloomberg Business News