Foreign Aid and the Challenges in Kenya

Development Analysis by Hakeem Ochola Student | KCA Uni.

Globally, foreign aid is one of the largest components of foreign capital flows to low-income countries. Over the past four decades, sub-Saharan African countries, including Kenya, have received foreign aid to alleviate poverty and address underdevelopment. In 2020, global foreign aid amounted to $194.1 billion, of which Kenya received over $3 billion.

However, over the past decade, there has been a radical critique of foreign aid. This has been driven by the perception that it has not produced the expected results. This perception is based on two premises. First, that foreign aid can only increase growth in a good policy environment. As such, foreign aid can be a double-edged sword. If the economic and policy environment is appropriate, it can support economic and social progress (Lancaster, 1999). If not, it may have no positive effect—or worse—delay development due to potential negative economic and political impacts.

Types of Foreign Aid and the Donors

Since independence, Kenya has received aid from various countries and institutions due to its foreign policy of ratifying the United Nations Charter and aligning with globalization and multilateralism.

Kenya receives different forms of aid:

• Development Aid: The largest portion, focused on infrastructure, education, health, and other long-term growth initiatives.
• Emergency Aid: Targeted toward disaster response, health crises (such as the COVID-19 pandemic), and fiscal shortfalls.
• Military Aid: Supports training, equipment, and law-and-order collaborations.

Some donor states are motivated by historical ties, such as the United Kingdom, which granted Kenya independence in 1963. Modernization theory explains that developed countries remain linked to their former colonies, although this theory has limitations.

Younas (2008) argued that donors may also use aid to promote trade. If the recipient uses aid to purchase exports from the donor, it functions as an export promotion strategy—benefiting the donor's economy through improved terms of trade and higher incomes.

Key donor countries include the United States, United Kingdom, Germany, Sweden, Norway, China, Japan, and Brazil. Key institutions include the United Nations, African Development Bank, European Union, World Bank, and IMF.

However, funding remains insufficient for the scale of needs—partly due to Kenya’s high ethnic diversity (Cohen, 2006) and governance concerns in aid-utilizing ministries, which deter some donors.

Challenges to Foreign Aid Effectiveness

Several studies identify major issues affecting the effectiveness of foreign aid in Kenya—especially development aid:

1. Aid Volatility

Foreign aid to Kenya has shown significant volatility. OECD-DAC data reveals Kenya’s aid volatility stood at 24.1% between 1980–2006, compared to 17.2% for Africa and 13.9% for all developing countries. This high volatility discouraged the government from including program aid in national budgets, prompting a shift toward local resource mobilization.

Mwega (2004) found that volatility disrupted four large aid-supported infrastructure projects, leading to deviation from plans and underproduction of services.

2. Aid Fragmentation

Kenya’s aid fragmentation is significant. Measured by the Hirschmann Herfindahl Index, it stood at 0.1 in 2006—much lower than 0.3 for all developing countries and 0.22 for sub-Saharan Africa. This indicates a large number of small donors, increasing complexity in coordination.

The number of bilateral and multilateral donors increased from an average of 17 in the 1980s to 27 by 2006, and likely higher today. According to McCormick et al. (2007), project multiplication—due to more donors and more projects per donor—has led to inefficiencies and administrative burdens.

3. Coordination and Harmonization

Coordination of aid in Kenya involves both the government and donors. The World Bank initiated an Advisory Group in the 1970s for coordination. At the 2005 Consultative Group (CG) meeting, the government identified key challenges to harmonization:

• Disconnect between central and line ministries
• Excessive use of financial management agencies
• Lack of decentralized donor missions
• Over-involvement of donors in certain sectors
• Low disbursement rates for some donor-funded projects

Cohen (2006) conducted a practice-based study linking ethnic diversity to aid effectiveness. He concluded that ethnic dynamics influence project implementation, as leaders often distribute projects to secure ethnic loyalty. This weakens transparency and undermines equitable development.

Photo Credits: US Embassy in Nairobi on X

In summary, poor governance negatively affects Kenya’s development by enabling mismanagement of donated funds. According to Gitaru (2015), for foreign aid to impact Kenya’s economic growth positively, it must be productively invested in development projects. The study found that a 1% increase in foreign aid in the previous year could lead to more than 4% GDP growth in the current year.

To maximize the benefits of foreign aid, Kenya must also invest in export-led growth strategies. This includes:

• Enhancing export competitiveness
• Increasing value addition
• Diversifying exports
• Integrating into regional and global value chains

Such strategies could increase employment, strengthen domestic economic structures, and foster South-to-South cooperation through blocs like the EAC, COMESA, and the African Union.

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Hakeem Ochola is a Journalism and Digital Media student at KCA University. Email:   taylinhakeem@gmail.com

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