2009 Index of Economic Freedom

Quick Facts

Population:

• 36.6 million

GDP (PPP):

• $53.6 billion
• 6.1% growth
• 3.9% 5-year compound annual growth
• $1467 per capita

Unemployment:

• 40.0%

Inflation (CPI):

• 9.8%

FDI Inflow:

• $50.7 million

Kenya's economic freedom score is 58.7, making its economy the 90th freest in the 2009 Index. Its score has decreased by 0.6 point since last year, reflecting slight deterioration in trade freedom, government size, and property rights. Kenya is ranked 10th out of 46 countries in the Sub-Saharan Africa region, and its overall score is near the world average.

Kenya is one of Africa's most developed economies and has a tradition of private-sector entrepreneurial activity. Its scores for most of the 10 components of economic freedom are near world averages. The one area where it scores notably well is government size, which is relatively low at about one-fourth of GDP. Domestic debt as a percentage of GDP has been declining incrementally in recent years.

Lax property rights and extensive corruption hold down overall economic freedom. Corruption is perceived as pervasive, giving Kenya one of the world's worst scores in this vital area. Non-transparent trade regulations and customs inefficiency hurt overall trade freedom. As in many other Sub-Saharan African nations, Kenya's judiciary is underdeveloped and subject to the political whims of the executive.

Background Back to the top

Kenya is the transportation, communication, and financial hub of East Africa. Economic growth, hindered for decades by government mismanagement, counterproductive economic policies, and corruption, was improving before the onset of recent instability. Civil service reform has been slow, and the government employs about one-third of the formal labor force. Agriculture accounted for about 24 percent of GDP in 2007 and employs a majority of the population. Kenya was a one-party state until 1992, when multi-party elections were held for the first time. The December 2007 election spurred widespread violence when both Mwai Kibaki (who, supported by a coalition of opposition parties, had won the presidency in 2002) and rival Raila Odinga claimed victory. After months of contentious negotiations, Kibaki and Odinga agreed to a power-sharing arrangement.

Business Freedom 66.9 Back to the top

The overall freedom to conduct business is relatively respected under Kenya's regulatory environment. Starting a business takes an average of 30 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures, but closing a business is a lengthy and costly process.

Trade Freedom 71.8 Back to the top

Kenya's weighted average tariff rate was 6.6 percent in 2006. Import bans and restrictions, import and export taxes, import and export licensing requirements, non-transparent and restrictive regulations, opaque government procurement, export-promotion programs, weak enforcement of intellectual property rights, and customs corruption add to the cost of trade. Fifteen points were deducted from Kenya's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 78.6 Back to the top

Kenya has moderate income and corporate tax rates. The top income and corporate tax rates are 30 percent. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 18.4 percent.

Government Size 81.5 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 24.8 percent of GDP. A privatization law came into effect on January 2, 2008, but post-election violence that began in December 2007 has halted the process, and many oil, transportation, and banking companies remain in state hands.

Monetary Freedom74.0 Back to the top

Inflation is high, averaging 11.0 percent between 2005 and 2007. Price controls were officially dismantled in 1994, but the government reserves the right to set maximum prices in certain cases and influences prices through agricultural marketing boards and state-owned utilities and enterprises. Five points were deducted from Kenya's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and local investors generally receive equal treatment, but there are some exceptions. The government screens each private-sector project to determine its viability and implications for national development. Foreign and domestic investments are constrained in sectors where state corporations have a statutory monopoly. Foreign investment is also limited in other sectors. There is a minimum foreign investment threshold, and foreign investors must sign an agreement with the government defining training arrangements intended to phase out expatriates, although any foreign or domestic enterprise may recruit expatriates if Kenyans are not available. Residents and non-residents may hold foreign exchange accounts. There are no controls or requirements on payments and transfers. Most capital transactions are permitted, but the sale or issue of most capital and money market instruments requires government approval. Real estate purchases by non-residents are subject to government approval.

Financial Freedom50.0 Back to the top

Kenya's financial system, one of Sub-Saharan Africa's most developed, remains vulnerable to considerable government influence and inadequate supervision. The five largest banks, including two majority state-owned banks and two foreign banks, control just over 50 percent of assets. The government also owns or holds shares in several other domestic financial institutions and influences the allocation of credit. Non-performing loans, particularly from state-owned banks to state-owned enterprises, are a problem. Capital markets are relatively small, weak, and inefficiently regulated. Foreign investors may acquire shares in the stock market, subject to specified limits.

Property Rights30.0 Back to the top

Kenya's judicial system is modeled on the British system. Commercial courts deal with commercial cases. Enforcement of property and contractual rights is subject to long delays. The process for acquiring land titles is often non-transparent and cumbersome. Courts generally do not permit sales of land by mortgage lenders to collect debts. Protection of intellectual property rights is weak.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. Kenya ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption has led to disinvestment by foreigners and has drained resources needed for education, health, and infrastructure development. Kenyans view the police as their most corrupt public institution. There have been several scandals involving large public and military procurement programs. The government has taken some halting steps to address judicial corruption.

Labor Freedom63.1 Back to the top

Kenya's relatively flexible labor regulations could be further improved to enhance employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be costly.