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Country Profile 2003

KenyaThis Country Profile is a reference work, analysing thecountry’s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit’s Country Reports analyse current trends and provide atwo-year forecast.

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Kenya 1

© The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

Contents

3 Regional overview3 Membership of organisations

11 Basic data

12 Politics12 Political background13 Recent political developments16 Constitution, institutions and administration18 Political forces23 International relations and defence

27 Resources and infrastructure27 Population29 Education30 Health32 Natural resources and the environment33 Transport, communications and the Internet35 Energy provision

37 The economy37 Economic structure38 Economic policy44 Economic performance

46 Economic sectors46 Agriculture49 Mining and semi-processing50 Manufacturing52 Construction52 Financial services54 Other services

55 The external sector55 Trade in goods57 Invisibles and the current account57 Capital flows and foreign debt60 Foreign reserves and the exchange rate

61 Appendices61 Sources of information63 Reference tables63 Population63 Labour force63 Transport and communications64 National energy statistics64 Government finances65 Government revenue and expenditure65 Money supply and credit65 Interest rates66 Gross domestic product at factor cost

2 Kenya


66 Gross domestic product by expenditure66 Gross domestic product by sector67 Consumer prices67 Average wage earnings per employee67 Agricultural production68 Forestry and fishing68 Minerals production68 Industrial production69 Construction statistics69 Banking statistics69 Tourism statistics70 Import and export prices70 Exports by value70 Main exports by volume71 Imports by value71 Main trading partners72 Balance of payments72 External debt, World Bank series73 Net official development assistance73 Foreign reserves73 Exchange rates

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Regional overview

Membership of organisations

The African Union (AU) is the successor to the Organisation of African Unity(OAU) and is based in the Ethiopian capital, Addis Ababa. The AU was formallylaunched in July 2002 at a meeting of African heads of state in the SouthAfrican city of Durban. This came two years after the AU’s formation was firstagreed in Togo in July 2000 and followed a one-year transitional period thatbegan after the ratification of the constitutive act of the AU by two-thirds ofmember states in May 2001. The AU is modelled on the EU and has ambitiousplans for a parliament, a central bank, a single currency, a court of justice andan investment bank. Apart from the parliament, none of these is likely to beestablished in the foreseeable future. The AU also aims to have commondefence, foreign and communications policies, based loosely on those of theEU. The success of the AU, like that of its predecessor, will depend on theindividual performance of its 52 member states, many of which suffer fromvery weak governance.

The OAU was criticised for ineffectiveness—little real action resulted from itspolicy decisions—and it is not clear how the AU will differ. However, theorganisation fills the need for a forum for discussing the continent’s problems,and the idea of pan-African unity exerts a strong hold over member countries.Many of the proposed new institutions and policy co-ordination mechanismsare costly initiatives and cannot be funded within the AU’s current resourceallocations. The OAU was hindered by a shortage of funds; many membersfailed to pay their membership dues and several states are currently bannedfrom voting in the AU because of this. In addition, most African states areunlikely to give up the sovereignty required to make several of the proposedinitiatives, such as a single currency or a court of justice, operate effectively. Lesscostly initiatives that could more effectively promote African unity includetrade integration, particularly the rationalisation of the many overlappingregional trade blocs, regulatory harmonisation, and the promotion of the ruleof law and macroeconomic stability.

The principle of non-interference, which has been a major hindrance to theresolution of conflicts on the continent, is a contentious issues among membergovernments. Although non-interference was enshrined in the old OAU, the AUis attempting to tackle this issue, one potentially useful initiative being theproposed Peace and Security Council (PSC), which is to replace the OAU’sMechanism for Conflict Prevention, Management and Resolution. Modelled onthe UN Security Council, the PSC could sanction military intervention inmember states in cases of genocide, unconstitutional changes of governmentand gross human rights abuse. The AU heads of state conference in Maputo,Mozambique, in July 2003 discussed the PSC, but failed to reach agreement, asmember governments are wary of condoning intervention in their own affairs.Only 14 of the continent’s 52 members backed a protocol establishing the PSC,short of the 26 needed. A meeting of African defence ministers is to be called inthe coming months as a matter of urgency, to discuss the security and legal

The African Union (AU)The African Union (AU)

4 Kenya


ramifications of the PSC. If established, the PSC would have a standing armedforce at its disposal by 2010, comprising five battalions. Western countries havepromised to help fund the force if it is established. Other AU initiatives such asthe establishment of a pan-African parliament have also failed to gain supportas not enough national parliaments have ratified the proposal. The AU hasurged its members to do so before the end of 2003.

The OAU was founded in Addis Ababa in May 1963 by 32 African nations topromote solidarity and higher living standards, defend the sovereignty ofmember states, and eliminate colonialism. Another 21 signatories joinedsubsequently, the last being South Africa in 1994. Morocco left in 1985, after thedisputed state of Western Sahara was admitted as a member in 1984. TheOAU’s general secretariat had an annual budget of roughly US$31m, which theAU inherits. As in the OAU, the foreign ministers of member states meet twicea year to discuss the implementation of the organisation’s accords. The issuesraised will be dealt with at the annual assembly of heads of state, which meetsin June or July. The annual conference is hosted by the member state that is dueto hold the chairmanship of the organisation for the next year. The currentchairman of the AU is the Mozambican president, Joaquim Chissano, who tookover from South Africa’s Thabo Mbeki in July 2003. The day-to-day affairs ofthe AU are managed by the AU commission, which is modelled on theEuropean Commission and was endorsed by the AU heads of state summit inJuly 2003. The commission is headed by the former Malian president, AlphaKonaré, aided by a deputy, Patrick Mazimhaka of Rwanda, both of whom wereelected at the summit. There are also seven appointed AU commissioners.

The OAU has held three extraordinary conferences of heads of state: the firstwas in 1970 to discuss the Angolan crisis; the second, in 1980, sought to addressthe continent’s economic problems; and the third, in 1990, attempted to addressthe problem of African external debt. The AU carries forward the aims of theOAU, which included the creation of an African Economic Community (AEC),in accordance with the Lagos Plan of Action drawn up in 1980. Originally thiswas scheduled to be in place by 2000, but at the OAU’s 27th summit of headsof state in Abuja, Nigeria, in June 1991, this target was postponed to 2025. TheAEC treaty, signed at the summit, outlined six stages, including the removal oftariff and non-tariff barriers to trade and the establishment of a continent-widecustoms union by 2004. A commitment was also made to establish an Africancommon market, with a central bank and single currency, by 2031.

The possibility of establishing a military force to observe and monitorceasefires negotiated by the OAU has been considered. Although the OAUnever deployed peacekeeping forces, it did undertake observer missions—something the AU is also doing. Since May 2003 the AU has had an observermission in Burundi, led by South Africa and including troops fromMozambique and Ethiopia, to help enforce a peace agreement in that country’scivil war.

Conflict resolution came to dominate the annual summit of OAU heads ofstate from the mid-1990s, owing to the crises in the Great Lakes, the DemocraticRepublic of Congo (DRC), Somalia, Sierra Leone, and Ethiopia and Eritrea. From1999 the OAU was involved in conflict mediation in Somalia, Ethiopia and

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Eritrea, Comoros, and the DRC, where four member states—seven at the heightof the fighting—are involved in the conflict. Although the OAU did notintervene during the genocide in Rwanda in 1994, it was the only internationalinstitution quickly to recognise the gravity of the crisis and openly condemnevents at an early stage. During 2002 it also became involved in mediation inthe disputed legislative election in Madagascar. However, the AU has refused torecognise the government of the current president, Marc Ravalomanana, thedemocratic challenger who finally displaced the country’s long-serving ruler,Didier Ratsiraka, being one of the only international organisations to do so. Thishas tended to confirm the allegation that the AU is inherently biased towardsincumbent governments rather than a supporter of democratic politics andgood governance. In 2002 the AU also endorsed the disputed re-election of theZimbabwean president, Robert Mugabe, and refused to criticise the breakdownof law and order in Zimbabwe.

The EAC is the regional intergovernmental organisation of its three memberstates, Kenya, Tanzania and Uganda, and is the successor to the defunct EastAfrican Community, which collapsed acrimoniously in 1977. Discussions onhow to revive regional co-operation led to agreement to establish a PermanentTripartite Commission for East Africa in 1993, although full operation of apermanent secretariat in Arusha, Tanzania, did not begin until March 1996.Further work on a framework for regional co-operation led to a treaty for theestablishment of the East African Community in November 1999, which wasformally launched on January 15th 2001.

The EAC focuses on the harmonisation of members’ policies in priority sectors,the creation of a common market, and the promotion of regional trade andinvestment. This includes currency convertibility, the progressive reduction oftariffs, various regional infrastructure projects, and regional co-operation inresearch, human resources and technology. It also envisages the establishmentof a common travel document and easing border controls for the freemovement of people. Other measures to be considered include theharmonisation of fiscal and monetary policies and those on investment, traffic,the environment and security. Progress has been made in some of these areas,and sectoral councils to co-ordinate joint action have been established. Asecond East African Community Development Strategy for the period 2001-05to cover these objectives was approved by heads of state on April 24th 2001.Longer-term goals include a monetary and customs union, a common currencyand ultimately political federation. There are continuing discussions on theEAC’s relationship with rival, overlapping regional trade blocks, including theSouthern African Development Community (SADC) and the moribundCommon Market for Eastern and Southern Africa (Comesa).

The treaty calls for common external tariffs and the elimination of internaltariffs, and the timetable and scale of tariff-barrier reductions is beingnegotiated. The issue is complicated by economic disparities between EACmembers, since Tanzania and Uganda fear that they would be unable tocompete with Kenyan goods following the opening of their own markets. As aresult, it has been agreed that tariff reductions on internal trade will beasymmetrical: Kenya will reduce its tariffs by 90% and Tanzania and Uganda

East African Community (EAC)

6 Kenya


will reduce theirs by 80%. Intra-regional trade, which is currently less thanUS$1bn, is dominated by exports from Kenya. Some tripartite agreements havealready been executed, including the establishment of an independent EastAfrican trade regime, the harmonisation of standards and the specifications ofgoods produced within the region. Already 207 regional standards have beenharmonised, of which 91 have been adopted and registered with the WorldTrade Organisation.

Since the co-operation agreement was signed, Kenya, Uganda and Tanzaniahave tried to harmonise their fiscal and monetary policies, including measuresfor avoiding double taxation and preventing tax evasion. Other harmonisationmeasures include the convertibility of the three currencies, pre- (and post-)budget consultation between finance ministers, the synchronisation of budgetday in the three countries, the establishment of a Monetary Affairs Committeeof the three central banks, and co-operation in capital and securities regulation.To promote trade and investment, the East African Business Council has beenestablished, drawing members from private-sector organisations in the region.Lawyers have formed their own forum, the East African Law Society, and theEast African Securities Regulatory Authority has also been established.

The three countries are considering joint projects in energy and road and railtransport. They includes the extension of the Mombasa oil pipeline to Uganda;a joint secretariat for railways; and a digital telecommunications transmissionsystem costing US$69m, with finance from the telecommunications authoritiesof the three countries, as well as the European Investment Bank and the EastAfrican Development Bank.

The eventual expansion of the EAC has been mooted. Rwanda and Burundihave applied to join, and discussions are continuing, although there isopposition to their joining while their internal conflicts persist. Expansioncould eventually include Ethiopia and even the DRC.

The main organs of the EAC are firmly in place but it has been criticised forbeing too ambitious and lacking in focus. Therefore it was agreed that the firsttask of the EAC should be to establish a customs union. A deadline for drawingup a protocol on the establishment of a customs union has been set for the30th of November 2003. It is likely that the protocol will take longer to finalise,but it will eventually appear. It will establish a common external tariff structurewith three bands. It would also eliminate, or at least harmonise, tariffs withinthe community. Other projects receiving priority are the development andpromotion of the Lake Victoria Basin and its ancillary projects, and a jointroads project (to which donors have pledged US$1bn). These three projects willremain the EAC’s main focus for the next few years.

Based in Lusaka, Zambia, Comesa is the successor organisation to the regionalPreferential Trading Area (PTA), and came into force on December 8th 1994 with12 members. Comesa now has 20 members: Angola, Burundi, Comoros,Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya,Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan,Swaziland, Uganda, Zambia and Zimbabwe. The Comesa region has a totalpopulation of around 385m and an estimated GDP of US$170bn. Lesotho,

Communauté économique etmonétaire de l’Afrique

centrale (CEMAC)

Common Market for Easternand Southern Africa (Comesa)

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Mozambique and Tanzania have all withdrawn from Comesa since 1997 toconcentrate on their membership of the Southern African DevelopmentCommunity (SADC). South Africa’s decision not to join Comesa makes SADCmembership more attractive to its main trading partners.

The original PTA, launched in 1981, aimed to liberalise trade and encourage co-operation in industry, agriculture, transport and communications. Comesa’sprincipal aims build on these ideals; its main goals are to eliminate thestructural and institutional weaknesses of member states and to promote thepolitical security and stability necessary for sustained development, bothindividually and collectively as a regional bloc. These aims are to be achievedthrough monetary union with a single currency and a common central bank.The creation of a free-trade area on October 31st 2000 was to be a major steptowards achieving them. However, by early 2003, only nine of the 20 membershad agreed to participate fully (Djibouti, Egypt, Kenya, Madagascar, Malawi,Mauritius, Sudan, Zambia and Zimbabwe)—Rwanda, Burundi and Comoroshave committed to join by the end of the year. The nine have removed allbarriers to intra-regional trade, though they retain tariffs on imports fromoutside Comesa. To encourage other members to join the free-trade area, a fundwas created in 2002 to compensate those countries facing revenue loss, thoughthe source and extent of this funding is not clear. Although the targets ofachieving a customs union by 2004 and full monetary union by 2025 remain,neither is likely to be attained.

The most recent figures, for 1998, give total intra-Comesa trade as US$4.2bn;intra-Comesa trade as a proportion of total trade ranged from 3.2% for theSeychelles to 17.1% for Kenya. Over the past 30 years the share of intra-regionaltrade in total exports has actually fallen, from 9% in 1970 to 7.7% in 1998(although these figures do not capture the high levels of illegal crossbordertrade), lower than the average of 10.5% for the whole continent. Reasons for thelow level of intra-Comesa trade include a lack of political commitment andweak balance-of-payments and foreign reserve positions. In some cases thereare hardly any official trade links between member states. Kenya, Malawi,Uganda, Zambia and Zimbabwe accounted for 58% of the trade betweenmembers of Comesa in 1998.

As industry and manufacturing are generally poorly developed, manymembers are unprepared to reduce tariffs further for fear of undermining localindustries (Tanzania’s main reason for leaving) or fiscal revenue. A furtherconstraint has been the strict and cumbersome rules of origin, which are opento conflicting interpretations and not due to be harmonised until 2004. Inaddition to these impediments, progress towards free trade is hampered bypolitical tensions between member states.

Regional free-trade areas such as Comesa aim to increase intra-regionalcommerce, leading to higher economic growth rates; but they attract criticismfrom many who feel that this cannot be achieved while supply-sideconstraints—such as poor infrastructure, inefficient transport links, loweducation and skills levels, and cumbersome bureaucracy—remain. Comesa hasconcentrated on trade integration, but the lack of uniformity in investmentcodes and regulatory arrangements has been an impediment to crossborder

8 Kenya


trade and investment. The commitment to Comesa of many of its members isweak—in 2002 most members were not paying their membershipcontributions—and meetings are frequently cancelled. Moreover, attempts atpromoting crossborder investment and monetary harmonisation have beensuperseded by initiatives from the East African Community and the SADC.

Under the old PTA system, a multilateral clearing facility was established and aPTA unit of account (UAPTA), equivalent to the IMF’s SDR, was used to settledebts between members, the balance being payable in US dollars. In 1997 theUAPTA was replaced by the Comesa dollar, which is pegged to the US dollar. AComesa court was officially opened in March 2001, although it had beenestablished three years earlier. In theory, the court, which aims to be anindependent arbitrator in trade-related disputes, has jurisdiction over nationalcourts, but in practice it does not have the powers to enforce its rulings and ithas been hamstrung by a lack of finance. Comesa also set up the African TradeInsurance Agency (ATI), in 2001. Financed by a US$5m start-up loan from theWorld Bank, the ATI aims to provide political risk cover for investors in allmember countries.

The Inter-governmental Authority on Drought and Development (IGADD), thebrainchild of the president of Djibouti, Hassan Gouled Aptidon, wasestablished in January 1986 with six East African members: Djibouti (where thesecretariat is based), Ethiopia, Kenya, Somalia, Sudan and Uganda. Its aim wasto co-ordinate and channel funding into agricultural development and thealleviation of drought and desertification. Progress on development andenvironmental projects was slow, but the organisation made headway as aforum for regional politics and facilitated the successful reconciliation ofSomalia and Ethiopia in 1988. However, regional events in 1991 underminedIGADD: the presidents of Ethiopia and Somalia were overthrown, Eritreagained independence, and the self-proclaimed Somaliland Republic emerged.

Although IGADD gained a seventh member, Eritrea, in September 1993, it hadlittle success in its attempts to help resolve internal conflicts in Sudan andSomalia. Thus in March 1996, at a summit in Nairobi, IGADD renamed itself theInter-governmental Authority on Development (IGAD) and adopted a newcharter proclaiming conflict resolution to be its priority. IGAD also pledged topay more attention to economic integration. However, with the outbreak of warbetween Ethiopia and Eritrea in May 1998, Sudan’s increasingly tense relationswith both Eritrea and Uganda, and Ethiopia and Eritrea supporting differentfactions in the civil conflict in Somalia, the organisation was severelyhandicapped in the late 1990s.

IGAD’s fortunes have improved since the turn of the decade. The uneasy UN-monitored peace between Ethiopia and Eritrea has held, and progress has beenmade in the quest for peace in Sudan. The latter culminated in the agreement,signed in Machakos, Kenya in July 2002, that a referendum on self-determination for the south would be held after a six-year interim period. Afterthe resumption of fighting a few months later, IGAD quickly brokered aceasefire, which was swiftly followed by the resumption of talks. However, it isUS pressure on both sides, as well as influence over the debate within IGAD,

Inter-governmental Authorityon Development (IGAD)

Kenya 9


rather than IGAD itself, that has caused the rapprochement. IGAD’s Somalireconciliation process, currently continuing in Eldoret, Kenya, had an earlysuccess in the declaration of a ceasefire in October 2002. This subsequentlycollapsed and the talks have degenerated into bickering between the numerousclans in attendance, as international interest has waned. IGAD holds regulardiscussions on economic integration and infrastructural co-operation, but giventhe tensions between its members they are unlikely to result in concrete action.

The initiative to form the IOR-ARC was launched at an inter-governmentalmeeting in 1995. In 1997 the association’s charter was signed in Port-Louis,Mauritius. The IOR-ARC aims to promote regional economic co-operationthrough trade liberalisation, investment, and the development of infrastructureand tourism. The organisation’s 19 full members are Australia, Bangladesh,India, Indonesia, Iran, Kenya, Madagascar, Malaysia, Mauritius, Mozambique,Oman, Seychelles, Singapore, South Africa, Sri Lanka, Tanzania, Thailand,United Arab Emirates and Yemen. Dialogue members (those who may attendmeetings and have general trading interests in the region) are China, Egypt,Japan, France and the UK. Oman’s minister for foreign affairs, Youssef binAlawi bin Abdullah, completed his appointment to the association’s two-yearrotating presidency in March 2003. Sri Lanka’s foreign minister, TyronneFernando, then took the post for the 2003-05 term. The IOR-ARC is solelyconcerned with opportunities to promote trade and investment, anddeliberately avoids issues with political ramifications.

A new 20-year convention was signed in June 200o in Cotonou, Benin, offeringa group of 77 African, Caribbean and Pacific (ACP) countries preferential tradeand aid links with the EU. The Cotonou Convention replaced Lomé IV, aconvention which was signed in 1989 and had replaced previous agreementssigned in 1975, 1979 and 1984. Although similar to the Lomé conventions, thenew convention has a stronger political dimension. Though respect for humanrights, democratic principles and the rule of law were essential components ofLomé IV, under the Cotonou agreement ACP countries have also agreed topromote good governance, combat corruption and try to prevent illegalimmigration into the EU.

Under previous conventions, ACP products, whether agricultural or industrial,entered the EU duty-free, although four agricultural products—beef, sugar,bananas and rum—were subject to a more restrictive system of tariff quotas.Because the type of trade agreement established by the Cotonou Conventiondoes not comply with the rules of the World Trade Organisation, the newagreement offers a negotiating framework for tailor-made regional free-tradeagreements (RFTAs), under which ACP countries, preferably within existingeconomic groupings will gradually open their domestic markets to Europeanproducts. Given the adjustment costs involved, a preparatory period of eightyears has been agreed, during which the old system of preferences willcontinue to apply. However, under existing global trading rules, the 33 Africancountries classified as least developed countries will still have the option ofentering the EU generalised system of preferences (GSP). Unlike the LoméConvention, the GSP, which benefits all developing countries, complies with

Indian Ocean Rim Associationfor Regional Co-operation

(IOR-ARC)

Cotonou Convention

10 Kenya


the rules of the World Trade Organisation (WTO) because it is based on thetwin principles of non-reciprocity and non-discrimination.

The European Development Fund (EDF) will remain the main source ofmultilateral EU aid to the ACP countries. Under the new convention, EDFinstruments have been regrouped and rationalised into two programmes: oneto provide grants for long-term development schemes being carried out eitherat national or at regional level, with additional support available in the event ofa fall in export earnings; and the other to finance risk capital and loans to theprivate sector. The ninth EDF will total €13.5bn (US$12.9bn). In addition, about€10bn left undisbursed from previous programmes will remain available until2007, and €1.7bn will be provided by the European Investment Bank. However,given that it took until the end of 2002 for a quorum of countries to ratify theagreement, it is highly likely that considerable sums will remain undisbursed.

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Basic data

569,259 sq km

28.7m (1999 national census), 30m (2001 provisional estimate)

Population in ’000, 1999 census

Nairobi (capital) 1,346Mombasa 465Kisumu 185Nakuru 163

African—Kikuyu 21%, Luhya 14%, Luo 13%, Kalenjin 11%, Kamba 11%, Kisii 6%,Meru 5%. Non-African—Asian, European, Arab 1%. Religions: Indigenous beliefs10%, Protestant 40%, Roman Catholic 30%, Muslim 20%.

Tropical

Hottest month, February, 13-28°C; coldest month, July, 11-23°C; driest month,August, 24 mm average rainfall; wettest month, April, 266 mm average rainfall

English, Swahili and more than 40 local ethnic languages

Metric system

Kenya shilling (KSh)=100 cents. KSh20=1 Kenya pound (K£). Average exchangerate in 2002: KSh78.75:US$1. Exchange rate on 27th October 2003: KSh76.3:US$1

July 1st-June 30th

3 hours ahead of GMT

January 1st; Good Friday; Easter Monday; May 1st; June 1st; Eid ul Fitr;Christmas holiday, December 25th-26th

Land area

Population

Main towns

Weather in Nairobi (altitude1,820 metres)

Languages

Measures

Currency

Fiscal year

Time

Public holidays

Climate

Ethnic groups

12 Kenya


Politics

Kenya’s political environment has been transformed by the landslide victory ofMwai Kibaki and his National Rainbow Coalition (NARC) in the presidentialand legislative elections held on December 27th 2002. The Kenya AfricanNational Union (KANU) was pushed into opposition for the first time sinceindependence in 1963, and Daniel arap Moi’s 24-year reign was brought to aclose. Fears that Mr Moi would subvert the result and cling to power provedunfounded, as the scale of KANU’s defeat gave him little room for manoeuvre.The elections were described as largely free and fair, with little of the violenceand intimidation that marked the previous two polls in the 1990s. This bodeswell for Kenya’s future elections. The political and economic challengesconfronting Mr Kibaki and his NARC government are, nevertheless, daunting.The new regime has inherited a run-down infrastructure, weak and corruptinstitutions, a country riven with ethnic divisions, and one of Africa’s worst-performing economies. Kenya’s next presidential and legislative elections arescheduled to take place in December 2007.

Political background

The coastal region of what is now modern Kenya has developed through morethan five centuries of Indian Ocean trade, evolving into a sophisticated Swahiliculture with strong Arabic influences. In the mid-19th century trade to theinterior opened up the tribal lands of the Kikuyu, Luhya, Luo, Kalenjin andKamba, which remain the five largest ethnic groups. Kenya was declared aBritish protectorate in 1895, and white settlement started in the early 1900s.

The first genuine African nationalist movement, the Kenya African Union(KAU), was established in 1944, with Jomo Kenyatta, a Kikuyu, as its president.In 1952 the Mau Mau, a secret society made up largely of Kikuyus, launched aguerrilla campaign against white settlers in the fertile Central Highlands. Of themany thousands who died during the Mau Mau rebellion, which lasted until1956, fewer than 50 were white settlers. A constitutional conference was held inLondon in 1960, leading to a transitional constitution permitting the formationof political parties and giving Africans a comfortable majority on the LegislativeCouncil. KANU was formed, dominated by the Kikuyu and the Luo—althoughMr Kenyatta, who had been imprisoned in 1953, remained in detention. Otherpoliticians, wary of Kikuyu-Luo hegemony, formed the Kenya AfricanDemocratic Union (KADU). Mr Kenyatta was released in August 1961, led KANUto victory in the legislative election of May 1963, and was appointed primeminister. A formal declaration of independence followed in December 1963.

Kenya became a republic in December 1964, with Mr Kenyatta as its firstpresident. The entire KADU membership had earlier defected to KANU, thusturning Kenya into a de facto one-party state. Mr Kenyatta was electedunopposed for a third presidential term in September 1974. He died in August1978 at the age of 82. The presidency passed to the now retired Daniel arap Moi,a former teacher and a member of the Kalenjin group of pastoral tribes from

Before independence

Early years of independence

Kenya 13


the Rift Valley region of central and northern Kenya. In 1982 a constitutionalamendment officially made Kenya a one-party state. A coup attempt led by airforce personnel, apparently with strong Luo backing, was foiled later that year.

Daniel arap Moi

Daniel arap Moi, a Kalenjin from the Tugen sub-tribe, was one of Africa’slongest-serving presidents (having held office since 1978) and had been inactive politics since 1952. A skilled politician, who managed to divide theopposition, he stepped down after 24 years in power at the end of 2002Despite his earlier ambitions to continue to serve Kenya in other capacitiesafter retirement, he is now also expected to step down from his position aschairman of the Kenya African National Union (KANU) at the end of 2003.The Moi years were marked by severe political oppression, virtual statecontrol of the media, human rights abuses, rampant corruption (whichincluded the controversial Goldenberg scandal), high security risk and severeeconomic decline This was also compounded by suspension of donorsupport and poor investor confidence.

During the 1980s Mr Moi’s government became increasingly intolerant ofpolitical dissent, and constitutional amendments substantially increased thepresident’s powers. The Kalenjin increasingly came to dominate topgovernment and public-sector posts. In 1988 Mr Moi was re-elected for a thirdterm, but widespread irregularities in voting for the legislature served todiscredit the one-party system further. However, in an informal grouping ofchurchmen, lawyers and disgruntled politicians called for multipartygovernment. Following strong pressure from donors, including the suspensionof aid, and popular protests in Nairobi, the government relented. In December1991 parliament repealed Section 2a of the constitution, which had made Kenyaa one-party state. Despite widespread initial support for the new oppositionparties, political rivalry and internal division in the run-up to both the 1992 and1997 elections destroyed their chances of defeating KANU. The balance wastipped further in the government’s favour by near-monopoly coverage ofKANU campaigning by the state-run media, and by the electoral commission,appointed by presidential decree. By these means Mr Moi and KANU won bothelections fairly easily. The opposition vote, although large, was hopelessly split.

Recent political developments

Emilio Mwai Kibaki’s landslide victory in Kenya’s December 2002 presidentialelection—accompanied by a similarly convincing win for the NARC in theparliamentary election—signals a major shift in Kenya’s political environment.Not only did it end the stagnant and corrupt presidency of Mr Moi, but it gaveKenya a new ruling party for the first time since independence in 1963.

Moi era

Opposition secures anoverwhelming election victory

14 Kenya


Presidential election, Dec 2002(% of vote)

Emilio Mwai Kibaki (National Rainbow Coalition) 62.2Uhuru Kenyatta (Kenya African National Union) 31.3Simeon Nyachae (Ford-People) 5.9James Orengo (Social Democratic Party) 0.4David Ng’ethe (Chama Cha Uma) 0.1

Sources: www.electionworld.org; Daily Nation.

Mr Kibaki, beaten into second place in the previous two elections, gained 3.65mvotes (62% of the total)—almost exactly double those for KANU’s candidate,Uhuru Kenyatta—and the NARC took 125 of the 210 directly elected seats inparliament, compared with KANU’s 64 seats. Some 60% (over 10m) ofregistered voters cast a ballot. Despite some reports of voting irregularities, thepoll was described as mostly free and fair by local and international observers,and, unlike the previous two elections, was not marred by widespread politicalviolence and intimidation.

Presidential election: voting by province(% of vote)

Mwai KibakiUhuru

KenyattaSimeon

NyachaeJames

OrengoDavid

NgetheRift Valley 45 52 3 <1 <1

Eastern 74 24 1 <1 <1Central 71 28 <1 <1 <1Coast 66 30 3 <1 <1

North Eastern 33 66 2 <1 <1Nairobi 79 19 2 3 <1

Western 75 22 2 1 <1Nyanza 63 8 28 1 <1Kenya 64 29 6 <1 <1


The challenges confronting Mr Kibaki’s government are at least as great as thosefaced by any previous Kenyan government. Apart from fulfilling his party’selection pledges on education, corruption, the constitution and reviving theeconomy, he faces the daunting task of holding the NARC together. The party isan unprecedented (for Kenya) alliance of diverse interests, which cuts across theboundaries of both ethnicity and ideology and whose main spur to unity wasthe desire to bring the Moi era to a close. Although the constitution obliged theformer president to retire, Mr Moi and his associates would have retainedconsiderable influence had KANU won. With the NARC’s main objectiveachieved, however, the forces acting on the party will tend to promotefragmentation rather than unity, especially now that the euphoria of victoryhas faded.

The new president faces manychallenges

Kenya 15


Parliamentary election, Dec 2002(seats)

Directly elected Appointed TotalNARC 125 7 132KANU 64 4 68

Ford-People 14 1 15Safina 2 – 2

Sisi Kwa Sisi 2 – 2Ford-Asili 2 – 2

Shirikisho 1 – 1Ex-officio – – 2Total 210 12 224


Important recent events

2000

At the end of July the IMF announced a resumption of funds, following a three-yearfreeze. The new poverty reduction and growth facility (PRGF) agreed between theIMF and the Kenyan government included some of the most detailed performancetargets ever set under an IMF lending programme. However, by the end of the yearKenya’s aid programme with the Fund came unstuck, after the government failed tomeet several of its commitments on governance and was seen to be backtracking onfundamental performance criteria.

2001

Daniel arap Moi’s decision to appoint Raila Odinga and three other members of theNational Development Party (NDP) to the government on June 11th set the stage forthe first coalition government in Kenya’s post-independence history.

March-July 2002

The ruling Kenya African National Union (KANU) merged with the NDP on March18th. Mr Moi finally picked the man to succeed him: Uhuru Kenyatta, aged 41, apolitically inexperienced nominated member of the National Assembly (parliament)and local government minister, and the son of Kenya’s leader at independence,Jomo Kenyatta.

August-October 2002

A splinter group, the Rainbow Alliance, was formed, comprising former NDPmembers within KANU together with other leading KANU members. The RainbowAlliance formally broke away from KANU, transformed itself into the LiberalDemocratic Party (LDP) and merged with Ford-People to form the National RainbowCoalition (NARC).

September 2002

The Constitution of Kenya Review Commission (CKRC) published a draftconstitution; although flawed and incomplete, the most contentious constitutionalproposal was to create the post of prime minister, with executive powers.

November 2002

Kenya’s vulnerability to Islamist terrorists was clearly illustrated by the suicide bombattack on the Paradise Hotel near Mombasa, which left 13 dead.

16 Kenya


December 2002

Emilio Mwai Kibaki’s landslide victory in Kenya’s December 2002 presidentialelection—accompanied by a similarly convincing win for the NARC in theparliamentary election—signalled a major shift in Kenya’s political environment.

May 2003

Security risks were again highlighted when warnings of further attacks led to a six-week suspension of commercial flights from the UK and the release of negativetravel advisories by several Western countries. The temporary collapse of the vitaltourism industry served as a wake-up call to the government.

June-October 2003

The new government’s fight against corruption gathered momentum, including theinquiry into the Goldenberg affair, in which Kenya lost up to an estimated US$900mfrom the government coffers between 1990 and 1993. The drive against graft alsoresulted in the suspension of 23 long-standing senior judges, in effect bringing thecountry’s judiciary system to a temporary halt.

September 2003

Mr Kibaki names a close ally, Moody Awori, as vice-president, more than a monthafter the death of the previous incumbent, Michael Kijana Wamalwa. The delayreflected the difficulties faced by Mr Kibaki in trying to satisfy all constituent partiesof the NARC, which cuts across many traditional divisions in terms of both ethnicityand ideology.

Constitution, institutions and administration

Under the current constitution a president can serve for two five-year termsonly. The constitution was drawn up at independence and draws heavily onEnglish law, although it has been amended more than 30 times. The constitutiongives the president extensive powers and is not adapted to multiparty politics,despite the repeal in December 1991 of Section 2a, which had formalised theone-party state. Judges are appointed by the president, and although they havesecurity of tenure and should therefore be relatively immune to politicalpressure, there has been evidence that the legal process was hamstrung byheavy-handed political interference. Under Mr Moi and his predecessor, JomoKenyatta, the constitutional powers of the presidency were sharply increased:government policy was directed almost exclusively through the office of thepresident, which had the largest departmental budget and direct control of keyareas of security and defence. However, in the boldest move yet againstcorruption, in mid-October 2003 Mr Kibaki suspended five of the nine AppealCourt judges, 18 of 36 High Court judges and 82 of 254 magistrates for allegedwrongdoing; they will be investigated by special tribunals. The clean-up of thejudiciary is a vital step in the battle against high-level corruption, which hasbedevilled Kenya for years, and donors have praised the initiative.

Following sustained pressure from the opposition and from internationaldonors, limited constitutional reforms which marginally reduced the president’spowers were enacted through the initiative of the Inter-Parties ParliamentaryGroup (IPPG) in the run-up to the 1997 elections. This was followed in 1998 by

The president has wide-ranging powers

Planned reforms are throwninto doubt

Kenya 17


the president’s approval of the Constitutional Review Act. In November 2000the appointment of Yash Pal Ghai to chair the Constitution of Kenya ReviewCommission (CKRC) was welcomed by politicians and business people.

The National Constitutional Conference (NCC) published a draft constitution inSeptember 2002. The most contentious constitutional proposal is to create thepost of prime minister, with executive powers. There is widespread agreementon the need to trim the power of the presidency, but no consensus on whetherhaving an executive prime minister would be the best way to achieve this, orwhat the division of responsibilities should be. Little progress has been madeon constitutional reform in 2003. The most recent session of the NCC (Bomas II)was marked by disputes over contentious issues, and by the murder of thecommittee chairman, Dr Crispin Odhiambo Mbae. It appears that Kibakiloyalists (and other NARC factions as well) have become less committed toconstitutional reform, fearing a loss of the president’s authority so soon after hiselectoral triumph. Furthermore, if the clause requiring presidential candidates tobe under 70 years of age is accepted, Mr Kibaki will be barred from standingagain. The next NCC meeting is scheduled to take place in early 2004.

Highlights of the draft constitution, September 2002

The president

• The presidency, with its monopoly over the appointment of judges, cabinet ministers and many other govern-ment and parastatal heads, will be trimmed and made to share its powers with the National Assembly (parliament).

• The president will be joined by a vice-president; the cabinet will be limited to 15 ministers, each with a deputy.

• Parliament will vet cabinet appointments, and ministers will not be MPs, ambassadors or high commissioners.

• The president will become the symbol of the nation, and the holder of the office will promote national unity,protect Kenya’s sovereignty, uphold the constitution and guarantee human rights.

Prime minister

• Two new posts, of prime minister and two deputy prime ministers, will be filled by a vote in parliament.

• The prime minister will run the day-to-day affairs of government and will oversee the relationship betweenparliament and the civil service.

Parliament

• Kenya will have a two-chamber parliament; it will consist of the current 210-member National Assemblyelected from constituencies, together with a new 100-member upper house—to be called the National Council—whose members will be elected from among district and provincial representatives.

• Parliament will be empowered to impeach the president and sack a poorly performing prime minister.

• Parliament is to be given greater powers to control the budget, approve presidential appointees and monitorgovernment operations.

• Constituents will be empowered to impeach incompetent or corrupt members of parliament.

18 Kenya


Political forces

Following Mr Moi’s unilateral decision to name Mr Kenyatta as his chosensuccessor, a number of senior KANU party officials and ministers—includingthe party’s secretary-general (and minister of energy), Raila Odinga, two partyvice-chairmen, Kalonzo Musyoka (minister of tourism) and Musalia Mudavadi(minister of transport), the vice-president, George Saitoti, and a former KANUsecretary-general, Joseph Kamotho—resigned from government and formed theLiberal Democratic Party (LDP). The LDP then joined more than 12 oppositionparties to form the National Rainbow Coalition (NARC). This was quicklyfollowed by the announcement of Mr Kibaki as the NARC’s presidentialcandidate for the December 2002 election. Mr Odinga, previously the leader ofthe National Development Party (NDP), had joined KANU only in mid-March2002, when the two parties merged in what was seen as a historic union. Suchparty-hopping has characterised Kenyan politics and has increased significantlyin the build-up to elections—and will continue to do so—although mostdefections are for reasons of personal ambition rather than ideology.

The NARC has faced a barrage of criticism since the election over its propensityfor in-fighting, but by most of the measures used to judge the effectiveness ofcoalition government it has not fared badly, and key legislation, such as thenew anti-corruption laws, has not been unduly delayed. NARC leaders havenevertheless been stung by the stream of derisive comments aboutgovernment effectiveness, which have not been stilled by claims that politicalconflict is a sign of real democracy, and they now appear more determined topresent a united front, at least in public. If such unity is maintained (even ifonly on the surface) the next NARC summit will define the party’s structure ata grassroots level, no easy task given ethnic and ideological differences,although no date for the summit has yet been set for what will be a definingevent in Kenyan politics

Formed in 1960, the former ruling party, KANU, has now entered a period ofself-examination. According to the inquiry set up by KANU to analyse thereasons for its historic 2002 election defeat, the merger with Mr Odinga’s NDPin March 2002 marked the start of the party’s decline. In addition, the inquiryhas blamed its flawed and opaque procedure for choosing a presidentialcandidate, the misuse of campaign funds and a failure to communicate theparty’s new vision to voters. Its recommendations include changing the party’sname to New KANU, abolishing the unwieldy hierarchy of four vice-chairmen,and reducing of the powers of the party’s chairman—currently Mr Moi. Theparty’s first grassroots conference for 14 years is scheduled to take place at theend of 2003. Most notably, Mr Moi is expected to stand down as chairman.

The leader of KANU, Mr Kenyatta, lost his bid to chair the Public AccountsCommittee (PAC), a post that traditionally goes to the leader of the opposition.The committee acts a parliamentary watchdog, examining governmentexpenditure. MPs feared that Mr. Kenyatta would not be objective, given thatone of his responsibilities would have been to audit KANU’s past misdeeds.MPs instead voted for James Magara of Ford-People. KANU’s failure to adjust to

KANU defectors join forces toform NARC

KANU retreats to lick itswounds

The NARC coalition aims todisplay greater unity

Kenya 19


its new opposition role is apparent in its inability to date to appoint a shadowcabinet, something on which the government is now insisting.

Despite its defeat, KANU remains a large national organisation and its prospectsfor the future are by no means entirely gloomy. The first challenge forMr Kenyatta will be to turn the party into an effective opposition, which willenable him to exploit the potential divisions within the ruling alliance.

Key political figures

Emilio Mwai Kibaki (aged 71)

Mr Kibaki rose to high office in Daniel arap Moi’s Kenya African National Union(KANU) government of the 1980s but moved into opposition—under the banner ofhis own Democratic Party—after the restoration of multiparty democracy in the early1990s. In terms of sheer numbers and popular exuberance, Mr Kibaki’s publicinauguration ceremony almost matched that of the triumphal celebrations of 1963,when Jomo Kenyatta (Uhuru’s father) led the country to independence. Both menare from the dominant Kikuyu ethnic group, unlike Mr Moi, and many Kenyansviewed Mr Kibaki’s victory as a “second independence”. An economist by training,Mr Kibaki is a former vice-president and minister for finance, and is seen as honest.

Arthur Moody Awori (76)

On September 25th Mr Kibaki named his close ally, Moody Awori, as his deputy,more than a month after the death of the previous incumbent, Michael KijanaWamalwa. Mr Awori is, like his predecessor, a member of the Luhya, the secondlargest of Kenya’s 40-plus ethnic tribes. Mr Awori is respected as an elder statesman(hence his nickname of “Uncle Moody”). He retains his former internal affairsportfolio, in addition to his new responsibilities.

Raila Odinga (56)

Mr Odinga commands considerable (if not total) support among Luo voters. He isone of the most ambitious politicians in Kenya, who has switched party allegianceseveral times, and has been awarded the public works, housing and roads portfolio.Although this appears scant reward for the dynamic role he played in the NARC’selection campaign, his ministry is responsible for a large budget and will be a keyplayer in Mr Kibaki’s anti-corruption drive. Mr Odinga had been promised the postof prime minister, and although this position does not currently exist, it was a keyelement in the proposals for a new draft constitution published in September 2002.

David Mwiraria (62)

A close associate of Mr Kibaki, who is relatively unknown on the national stage,Mr Mwiraria takes over the Ministry of Finance. An economist by training, he has areputation for honesty and efficiency.

Anyang Nyong’o (56)

Mr Nyong’o, a highly respected technocrat, is now minister for planning and nationaldevelopment (a new post). Along with Mr Mwiraria, he will play a key role ineconomic development and will be one of the main points of contact for donors.

20 Kenya


Kiraitu Murungi (55)

Mr Murungi is a human rights lawyer and long-term opponent of the Moi regime,and heads the newly formed Ministry of Justice and Constitutional Affairs, withoverall responsibility for the office of the attorney-general, the judiciary and theElectoral Commission. Although Mr Kibaki retained Amos Wako—a Moi appointee—as attorney-general, the position is no longer of cabinet rank. Mr Murungi willspearhead the stalled constitutional review process.

George Saitoti (58)

An ex-KANU veteran (tainted by old allegations of corruption) who defected to theNARC in 2002, Mr Saitoti is now minister for education. His first priority is to carryout the NARC’s promise of universal, free primary education.

Kalonzo Musyoka (49)

Mr Musyoka defected from the Moi camp in 2002 and has been rewarded with acabinet post. He has returned to the Foreign Ministry, which he headed between1993 and 1998.

Uhuru Kenyatta (41)

Mr Kenyatta is leader of the former ruling party, KANU, and son of Kenya’s firstpresident, Jomo Kenyatta. As a successful businessman in his own right, and backedby his family fortune, he has spared no expense in winning over supporters—hereportedly donated KSh200m (US$2.6m) to help pay for the conference that agreedto the merger of KANU with the National Development Party (NDP) in April 2002.The first challenge for the new leader will be to turn the party into an effectiveopposition, which will enable him to exploit the potential divisions within theruling alliance.

Simeon Nyachae (70)

A former finance minister who resigned from the cabinet following his appointmentto another ministerial portfolio, Mr Nyachae is an ethnic Kisii who impressedinternational donors with his commitment to the economic reform programme. Heenjoys considerable support in the private sector and among young professionals, aswell as from donors. He leads the Ford People-Safina alliance, also known as thePeople’s Coalition, but the alliance has few seats in the current parliament.

Two of the three anti-corruption bills at last became law at the end of April2003: the Anti-Corruption and Economic Crimes Bill and the Public OfficerEthics Bill. The passage of the legislation—along with the successful prosecutionof wrongdoers—has been among the main preconditions for the resumption ofIMF and World Bank lending.

• The Anti-Corruption and Economic Crimes Bill codifies a wide range ofoffences in both the public and the private sectors and provides for the creationof special anti-corruption courts.

• The Public Officer Ethics Bill introduces a code of conduct for all publicservants and is intended to reverse the politicisation of the civil service that tookplace under KANU. In addition, the bill requires public officials—including thepresident, cabinet ministers, judges, MPs and senior civil servants—to declaretheir assets on entering and leaving office. Following the bill’s passage the

Two anti-corruption laws arepassed

Kenya 21


government subsequently announced a 90-day limit for public officials,including the president, to comply with its provisions.

The third piece of legislation—the Constitution of Kenya (Amendment) Bill—providing for a new, independent anti-corruption commission, has not yet beenpassed because of delays associated with the constitutional review process.Despite this setback, the passage of the two other bills represents a major stepforward in the fight against corruption, and donors have reacted favourably.

Kenya is undoubtedly making efforts to stamp out corruption, but the 2003Corruption Perceptions Index (CPI) published by the Berlin-based TransparencyInternational illustrates the sheer scale of the problem. Kenya scored 1.9 (wherezero is totally corrupt and ten is totally clean), the same as in 2002 but lowerthan the score of 2.2 in 1996, when the country was first rated. According to the2003 report, Kenya was the 122nd most corrupt country in the world out of the133 assessed, and within sub-Saharan Africa only Angola, Cameroon andNigeria scored lower. The CPI is a subjective measure that is prone to error,being based on perceptions rather than fact. Nevertheless, it is a useful indicatorof the degree of corruption in a country.

Corruption Perceptions Index 2003: selected countries in Sub-Saharan AfricaCountry 2003 ranking a 2003 score b Earliest score % change c

Botswana 30 5.7 6.1 -6.6South Africa 48 4.4 5.6 -21.4

Ghana 70 3.3 3.3 0.0Tanzania 92 2.5 1.9 31.6

Ethiopia 92 2.5 3.5 -28.6Zimbabwe 106 2.3 4.2 -45.2

Uganda 113 2.2 2.7 -18.5Kenya 122 1.9 2.2 -13.6Angola 124 1.8 1.7 5.9

Nigeria 132 1.4 0.7 100.0

a Out of 133 countries. b Zero indicates totally corrupt; 10 indicates totally clean. c From earliestscore.

Source: Transparency International.

The new government has also recognised that improving the quality of the34,000-strong police force will be a vital part of the anti-corruption campaign.In July 2003 the government announced a series of measures includingsubstantial pay rises, investment in living quarters, the purchase of newequipment, and improved terms and conditions of employment. Human rightseducation will also be introduced into the police training curriculum. The totalwage bill will rise by about KSh2bn (US$26m) per year, the salaries of those onthe lowest rank more than doubling from KSh4,645 to KSh10,000 (aroundUS$30) per month. The government also intends to employ a further 68,000policemen over the next five years, to bring Kenya up to the recommended UNratio of one policeman per 400 people.

Police reforms are introduced

Perceived corruption remainsat a high level

22 Kenya


Anti-corruption drive

Public officials declare their wealth

The president, Mwai Kibaki, and most MPs presented their “declaration of wealth”forms to the speaker of the National Assembly in time to meet the 1st Octoberdeadline, thereby fulfilling their obligations under the new Public Officer EthicsAct. This requires all public servants to declare their assets and income, as well asthose of their spouses and dependants, and to reveal how such assets wereacquired. Several MPs and thousands of minor public officials missed thedeadline but were subsequently given a one-month extension. Those who fail tocomply, or those who lie, will be sacked and could be jailed for a year and finedKSh1m (US$13m). Some judicial and military officers have sought protection underthe respective rules of the Judicial Service Commission and the Defence Council,citing laws that prevent them from disclosing such information to third parties,but the justice minister, Kiraitu Murungi, insists that all civil servants will be forcedto comply.

Following the start of the campaign against judicial graft, the focus of attemptsto root out high-level corruption will also switch to the arena of government,including top civil servants, MPs and cabinet ministers. Compliance with thenew Public Officer Ethics Act is the first step in this process. Addressing theopening session of the African Parliamentary Network Against Corruptionconference in Nairobi in early November, Mr Kibaki promised an all-out war ongraft within his government, and the Kenya Anti-Corruption Police Unit andthe Ministry of Justice are taking steps that could lead to the arrest of corruptofficials. Several ministers could be implicated, especially those that servedunder the Moi regime, but many of the allegations made against senior figureshave proved to be no more than attempts to settle old political scores,according to John Githongo, the president’s leading anti-corruption investigatorand the former head of the Kenyan chapter of Transparency International.Mr Githongo has also said that the government has no constitutional power tosack corrupt MPs and declare their seats vacant, although they can of course bedismissed from government. Furthermore, civil servants that are suspected ofbeing corrupt, but against whom there is no firm evidence, will be transferredrather than sacked.

The Goldenberg scandal

The government has appointed a commission of inquiry

A further sign of the new government’s intention to tackle corruption is theappointment of a judicial commission of inquiry into the largest fraud investigationin Kenyan history, the Goldenberg affair, in March 2003. The commission willinvestigate the fictitious export compensation fraud in which the Central Bank ofKenya paid Goldenberg International an estimated KSh68bn (US$1bn) betweenDecember 1992 and May 2003. The commission of inquiry began proceedings inMarch 2003, with a remit to investigate export compensation payments made to thecompany for fictitious sales of gold and diamonds. The commission will investigatebank accounts held by persons connected to Goldenberg International and will notbe constrained by customer confidentiality. This may be fairly straightforward in

Anti-corruption investigationswill include the government

Kenya 23


Kenya, but it is not clear how the Commission will go about tracing assets heldabroad. It seems likely that the authorities will require the assistance of Interpol andother international law-enforcement organisations, as well as the co-operation ofcountries in which the suspect money is hidden. A large part of the stolen fundsmay be held in foreign accounts, especially in Switzerland, Monaco, the CaymanIslands, and the Isle of Man.The investigation will extend to the conduct of individual judges, prosecutors, andlaw firms, and guilty parties will be named. The previously fugitive billionairebusinessman, Ketan Somaia, for example, told the inquiry of one particular instancewhere KSh1.7bn (around US$22m at 2002 average exchange rate) was moved byanother businessman, Kamlesh Pattni (a principal Goldenberg shareholder), throughthe firm’s account at Delphis Bank (of which Mr Somaia was chairman) in order tofund the election campaign of the Kenya African National Union (KANU). Anotherwitness, Melville Smith, gave dramatic testimony about massive payments toprominent individuals made through Exchange Bank, the de facto financial arm ofGoldenberg International. Mr Smith, a fraud investigator, was hired by the liquidatorof Exchange Bank to reconstruct the institution’s accounts. He further testified that asum exceeding KSh1bn had been paid to Hamilton Harrison and MathewsAdvocates, a firm alleged to have drawn up various agreements for Goldenberginvolving the Exchange Bank and the Central Bank of Kenya. Among those expectedto give evidence are also former high-ranking government officials, journalists,politicians and local and foreign businessmen. The names of two former vice-presidents, Musalia Mudavadi and George Saitoti (the current minister for education),have come up at the inquiry. Both were finance minister at different times during theera of the transactions. By the end of October the commission had secured a courtorder blocking the sale of businesses believed to have been purchased with fundslinked to the Goldenberg scandal, taking advantage of the wider powers afforded itunder new anti-corruption legislation passed in mid-year.

International relations and defence

The East African Community (EAC), which broke up in 1977—mainly because ofpersonal and ideological differences between the heads of state of its members,Kenya, Uganda and Tanzania—was officially re-launched on January 15th 2001.There is broad agreement on the need to establish commissions forco-operation, joint railways operations, the harmonisation of revenue collectionmethods and greater economic integration. In early 2003 the three heads ofstate finally agreed on a maximum common external tariff, which has beenfixed at 25%. The EAC will now have a three-band external tariff: a zero tax oncapital goods and raw materials; 10% on semi-processed goods; and 25% forfinished products. The development was announced at the end of the secondextraordinary summit of heads of state held in Nairobi on 20th June, 2003.Signing of the protocol to establish a customs union for Kenya, Tanzania andUganda, which had been delayed because of lack of agreement on a commonexternal tariff, has now been set for 30th November, or possibly later. However,although the heads of state agreed to end negotiations on the protocol and getit ready for signing by that date, there is still considerable work to do andmeeting the new deadline is likely to prove difficult, although not impossible.

The EAC moves closer tostart-up

24 Kenya


After the September 11th 2001 attacks on the US the Kenyan government statedcategorically its support for the US-led “war on terror”. Kenya’s vulnerability toIslamic terrorists operating under the al-Qaida banner was clearly illustrated bythe suicide bomb attack on the Paradise Hotel near Mombasa in November2002 (which left 13 dead) and the failed attempt at the same time to bring downan Israeli airliner using shoulder-launched missiles. Security risks were againhighlighted in May 2003, when warnings of further attacks led to a six-weeksuspension of commercial flights from the UK and negative travel advisories byseveral Western countries.

This perception was reinforced by the outgoing US ambassador to Kenya,Johnny Carson, who in late June raised the prospect of a permanent closure ofthe US embassy and cast aspersions on the competence of the security forcesby claiming that no one had yet been charged with the 1998 bomb attack on itsNairobi compound. Although Mr Carson’s accusation was somewhat unfair, asKenya has co-operated fully with investigations into the incident, it galvanisedthe government into taking more effective action. Within days, the paramilitaryGeneral Service Unit (GSU) rounded up several hundred people in Nairobi’scrime-ridden Eastleigh area, a popular destination for illegal immigrants. At thesame time, four suspects were charged in relation to the bomb attack on theParadise Hotel: they had originally been arrested in February but stood accusedof less serious offences. A fifth suspect was charged two weeks later. The trialof the five men, which started in August, was switched from the magistrate’scourt to the High Court following an amendment to criminal procedureregulations requiring all murder cases to be heard by a judge.

The US has employed a carrot and stick approach to Kenya: on the one handthreatening to close the US embassy, but on the other extending financialsupport for anti-terrorism measures. In late June the US pledged US$100m tocombat terrorism in East Africa, the bulk of which will go to Kenya. Themoney will be used for equipping and training security forces and agencies,providing security at airports and other ports of entry, and strengthening theimmigration department. The Kenyan government no doubt hopes that thiswill stifle local criticism of its heavy-handed tactics and supposed deference toWestern pressure.

Political and military tensions between the three economic powers of EastAfrica have long been strained as a result of personal animosity between theirleaders. However, these animosities are now largely a thing of the past. In 1998,as a demonstration of the new spirit of co-operation between the threecountries, 1,500 soldiers from Kenya, Uganda and Tanzania took part in a jointtraining exercise in the desert terrain of northern Kenya. The month-longexercise, code-named Natural Fire, was undertaken with the assistance of theUS army.

In late June Mr Kibaki made a three-day official visit to Tanzania, his first visitoutside the country since taking office. Although the visit dealt with all thenormal issues that one would expect the two neighbours to discuss—trade,economic co-operation, regional political developments—it did have animportant underlying purpose: to present a united front to the travel warnings

Kenya supports the war onterror

Regional security co-operation

Kenya 25


of the possible threat of terrorist attacks in their countries issued by the US andnumber of EU countries, which both presidents see as unjustified. (Belgium,France and Germany have lifted their travel bans in the past few months, buthave advised travellers to maintain a high level of security while visiting thetwo countries.)

Mr Kibaki’s visit to Tanzania has also given new impetus to a plan to combatterrorism in East Africa that is being drawn up by the Inter-governmentalAuthority on Development. At a meeting in Addis Ababa in late June a finaldraft of the plan was drawn up, aimed at improving the monitoring of themovement of suspected terrorists across borders and of dubious financial andtrade flows. Other measures include shared intelligence—to develop a databaseto identify terrorist suspects—and the harmonisation of extradition lawsbetween the seven East African states. The plan and the establishment of thedatabase still need to be approved by ministers, which is likely later in the yearor early 2004.

Regular military forces, mid-2002Army 20,000

Navy 1,400Air force 3,000Total 24,400

Source: International Institute for Strategic Studies, The Military Balance, 2002/03.

Apart from an attempted coup by the air force in 1982, Kenya’s armed forceshave not sought to dictate to politicians. In addition to the regular armed forcesthe government can call on a special security force, the 5,000-strong GeneralService Unit, which it frequently does in order to control demonstrations andpolitical rallies. General Daudi Tonje, a member of the same small Tugensubgroup of the Kalenjin, was appointed Chief of the General Staff inNovember 1996.

Security risk in Kenya

Terrorism

In 1998 Nairobi was the site of one of the most serious attacks on American interestsoutside the US itself, when almost 250 people (most of them Kenyans) were killed ina car bomb attack on the US embassy. At least two of those suspected of organisingthe Kenyan bombing have yet to be apprehended, and there have been reports thatthe leader of the militant al-Qaida group, Osama bin Laden—who allegedly directedboth the Kenyan bombing and the attacks on the US in September 2001—has visitedboth Kenya and neighbouring Somalia. Kenya’s vulnerability to Islamic terroristsoperating under the al-Qaida banner was again illustrated by further attacks in 2002,and by warnings of possible terrorist activity in May 2003, which led to a six-weeksuspension of commercial flights from the UK and negative travel advisories byseveral Western countries.Under pressure from the West, Kenya has cracked down on suspected Islamicextremists in 2003—Muslims account for just over 5% of the population, and manyare based in the Mombasa area. Kenya remains particularly vulnerable to Islamicterrorism because of its long, porous border with Somalia, where the rule of law is

No threat from the Kenyansecurity forces

26 Kenya


weak and the fundamentalist presence strong. A recent UN report has noted that theterrorist attacks in Kenya in late 2002 had been planned and prepared inneighbouring Somalia, and warned that the proliferation of arms in Somalia, mainlysmuggled in from Yemen in violation of the UN arms embargo, represented aserious threat to neighbouring states, and that further attacks in East Africa could bein the offing. Attempts to reconcile Somali factions and restore a central government,in which Kenya has taken a leading role, have proved fruitless to date, and an earlyresolution of the problem is not in prospect Foreign firms and visitors are advised tocheck foreign office websites for the most recent advice on security and safety.

Crime

In January 2001 the UN downgraded its security rating for Nairobi from “B” to “C”,giving the Kenyan capital a worse overall security rating than either Bogotá orJerusalem. The reasons behind the rating—which assesses security conditions andthe quality of life for the UN's own personnel—are clear enough. Crime is a seriousand growing problem in Kenya, particularly in Nairobi. According to the NairobiCentral Business Association, the proliferation of homeless families in the capital hasled to a rise in street crime. Although much of this crime is opportunistic and low-level, there is also a substantial risk of more serious attacks. These include daytime“car-jackings” at traffic lights in central city areas, as well as group raids on housesand, on occasion, direct armed attacks on businesspeople at their workplaces. Recentexamples include a series of raids on businesses in which raiders armed withhandguns and semi-automatic rifles held staff members hostage and stole a total ofmore than KSh4m (over US$50,000).The authorities have sought to tackle the surge in armed crime, and measures takenhave included a major security crackdown in Nairobi. However, their efforts havebeen largely unsuccessful so far: the rate of violent crime and burglaries remainsamong the worst in the continent, and there is evidence of police involvement incrime. The number of reported cases of rape and assault also increased by 6% in2002. In most instances, foreign business people would have to be unlucky—orfoolish—to be affected by serious crime. However, the new government is workinghard to improve Kenya’s overall political and security environment by tackling anumber of issues, including reform of the police force and improved governance.

Corruption

Kenya is one of the world's most corrupt states. Pay-offs are common in the political,commercial and business arenas, with kickbacks and inflated contracts underminingaid programmes and deterring foreign investors. According to the 2003 CorruptionPerceptions Index (CPI) published by the Berlin-based Transparency International(TI), Kenya scored 1.9 in 2003 (where zero is totally corrupt and 10 totally clean), thesame as in 2002 but lower than the 2.2 scored in 1996, when the country was firstrated. Kenya was the 122nd most corrupt country in the world out of the 133assessed, and in sub-Saharan Africa only Angola, Cameroon and Nigeria scoredlower. The new government is making progress in the battle against corruption, andseveral high-ranking officials have resigned or been sacked, including the centralbank governor, the heads of most parastatal enterprises and the Chief Justice. Keyanti-corruption bills have now become law, and many other instances of pastmisdeeds are likely to be exposed—and prosecuted—in the coming months and years.Although the investigation into some scandals, such as the so-called Goldenbergaffair, could threaten current members of the cabinet (especially those who defected

Kenya 27


from the Kenya African National Union—KANU), the need for transparency appearsto be outweighing narrower political considerations. However, a number of seniorpositions in the current government will find it hard to break with the traditionalway of conducting business. The ranks of the ruling National Rainbow Coalition(NARC) are full of former KANU politicians who switched sides, and it remains to beseen whether former KANU members are genuinely ready to face life away from theprivileges and money-making opportunities to which they have becomeaccustomed. Kenya’s high level of corruption affects business directly, throughdemands for bribes, and indirectly, since it contributes to the widening of the gapbetween rich and poor, and thus to crime and social breakdown.

Ethnic violence

Before both the 1992 and 1997 elections there was an upsurge of inter-tribal violence.This is widely perceived to have been provoked by KANU representatives in order todrive potential opposition voters out of marginal constituencies. However, genuineethnic tensions exist: in September 2001, for example, clashes between the Wardeyand Pokomo communities in the east of the country resulted in a number of deaths.Anticipated further clashes during the December 2002 elections failed to take place.

Poor infrastructure

Perhaps the greatest threat to foreign businesspeople arises from car use. Kenya hasthe highest rates of road accidents in the world, with 510 fatal accidents per 100,000vehicles, largely owing to poor roads and transportation. Second-ranked South Africahas 260 fatal accidents per 100,000 vehicles; the UK figure is just 20. In comparison,the terrorist threat is negligible.

Resources and infrastructure

Population

During the 1970s and 1980s Kenya had one of the fastest-growing populationsin the world. The 1979 census revealed an astonishing annual growth rate of4.1%. Ten years later the census determined that the rate had slowed to 3.3%, stilla rapid rate of growth. However, since the beginning of the 1990s thepopulation growth rate has continued to fall, partly as a result of a successfulfamily planning awareness campaign.

Population indicators, 2000Population (mid-year; m) 31.2Population growth rate (%) 2.3

Fertility rate (children per woman) 4.7Life expectancy (years) 52

Urbanisation (%; 1995) 32Projected population in 2025 (m)a 50.2

a Economist Intelligence Unit estimate.

Source: Ministry of National Planning and Development, Statistical Abstract.

The results of the 1999 population census were released on February 29th 2000,and put the Kenyan population at 28.7m. However, if the previous census is aguide, these results probably underestimate the population by around 5%: in

Population growth below 2.5%

The provisional populationcensus is released

28 Kenya


the case of the 1989 census, the original figure of 21.4m was later revised to23m. Based on a reasonable underestimate of 5.6%, the 1999 figure would be30.5m. This is close to earlier population forecasts that took into account theimpact of AIDS. The spread of AIDS was declared a national disaster by thethen president, Daniel arap Moi, in late 1999. The rapid decrease in fertility, asrevealed in the 1998 demographic and health survey, is another factorcontributing to the expectedly low 1999 census result.

Population projections with AIDS and without AIDS, 2005-20202005 2010 2015 2020

With AIDs (m) 33.4 36.5 39.7 43.1

Without AIDs (m) 34.8 39.1 43.5 48.2

Source: Central Bureau of Statistics, Ministry of Finance and Planning, Economic Survey, 2003.

In the 1970s there was substantial Asian emigration from Kenya, mainly to theUK, but the Asian population has now stabilised. The 1989 census showed anAsian population of 89,000 (down from 139,000 in 1969). The community has adisproportionately great economic influence, having a marked presence infinance, retail trade, light manufacturing and distribution.

Kenya’s population is heavily concentrated in the central and western regions.These contain the fertile agricultural areas of the Central Highlands and theproductive sugar- and tea-producing regions to the west. The semi-arid anddesert regions of the north-east, with their nomadic pastoral communities,occupy 22% of the land area but support just 1.7% of the population. Kenyansociety is also characterised by wide income disparities. In 1994 the poorest20% of the rural population received only 3.5% of rural income. In urban areasthe situation was marginally better, the poorest 20% receiving 5.4% of totalincome. The richest 20% of the population controlled 61% of rural and 51% ofurban income. The data also indicate that these disparities widened in bothurban and rural areas between 1982 and 1994.

Distribution of population, 2000a

Province ’000 % of totalRift Valley 6,991 24.4Eastern 4,643 16.2Nyanza 4,397 15.3

Central 3,705 12.9Western 3,354 11.6

Coast 2,491 8.7Nairobi 2,137 7.5North-eastern 961 3.4

Total 28,679 100.0

a Provisional estimates.

Source: Ministry of Planning and National Development, Population Census Report.

Kenya’s devastating economic decline in recent years was highlighted in therecent Human Development Report from the UN Development Programme(UNDP). The report pinpointed two regions where human development islagging behind: the former Communist countries of eastern and central Europe,and Africa, where a large number of countries have been affected by HIV/AIDS

Wide regional and incomedisparities

The UNDP highlights thecountry’s decline

Kenya 29


and armed conflict. In the latest report Kenya dropped to 146th position in theUNDP’s Human Development Index (HDI) in 2001—out of the 175 countries thatwere ranked—a sharp fall on preceding years. The fall in the country’s ratingswas unsurprising and reflects the lack of progress in the three basic measures ofhuman development: life expectancy, education and economic wellbeing. Forinstance, the number of people living below the poverty line is estimated tohave increased from 11.3m (48.4% of the population) in 1990, to 17.1m (55.4% ofthe population) in 2001. As well as the low GDP growth rates of recent years,other factors driving the fall in the HDI ranking were the country’s poor healthand education services and the country’s HIV/AIDS crisis. The prospects for animprovement over the coming years are reasonable. Although economicgrowth is expected to pick up—supported by market-oriented reforms anddonor support—the country needs to implement a comprehensive medium-term economic and structural reform programme.

Development indicators, 2001Country HDI rank a HDI index a Life expectancyb Adult literacy c GDP per head d

Norway 1 0.944 78.7 99.0 29,620

UK 13 0.930 77.9 99.0 24,160South Africa 111 0.684 50.9 85.6 11,290

Kenya 146 0.489 46.4 83.3 980Uganda 147 0.489 44.7 68.0 1,490Tanzania 160 0.400 44.0 76.0 520

a Human development index of the UN Development Programme. b At birth in years. c % of population aged 15 and above. d US$ at purchasingpower parity.

Source: UNDP, Human Development Report, 2003.

Education

Recent official data for 2002 suggest that the high levels of governmentspending on education (8% of GDP) have helped to reverse somewhat thedeclining trend in educational standards in recent years. Primary schoolenrolment increased marginally by 0.9%, from 6,314,600 in 2001 to 6,371,200 in2002, and secondary school enrolment rose by a much higher 5.3%, from804,510 in 2001 to 847,287 in 2002. In previous years the downturn wasattributable to a combination of factors, including increasing poverty and theintroduction of user charges (cost-sharing)—both of which are limiting poorfamilies’ access to education—as well as a substantial number of AIDS-relateddrop-outs and an overall economic downturn. In addition, fewer than one-halfof those who enrolled completed their primary education. One major reasonfor poor school attendance was the large proportion of parents who wereunable to pay compulsory school fees. Because of the large size of families inKenya, often only the eldest one or two children (generally the boys) were sentto school. The rest remained at home as productive members of the family.

High expenditure levels helpto increase access to education

30 Kenya


Education facts

Primary school completion rate

44%—well below national (70%) and UN (80%) targets.

National literacy rate

75% in 1994 (83% for men, compared with only 67% for women) against a UN globaltarget of 85%.

Large regional disparities in basic education

Enrolment rate in North-eastern province only 20%, compared with 90% in Westernand Central provinces.

Average performance

In most subjects at Certificate of Primary Education level, average performancedeclined between 1991 and 1994. Poorest performance was in mathematics, scienceand agriculture subjects, with average scores below 50% since 1990.

Post-secondary education

More than 200 non-university or middle-level colleges offer vocational trainingcourses; no increase in enrolment between 1992 and 1996.

Higher education institutions

30 training colleges, three polytechnics, five public and 12 private universities. In 1996only 29% of students in the five public universities were women.

The new government has moved quickly to carry out its electoral promise toprovide free primary level education for all children. The introduction of user-charges in the 1990s led to a sharp decline in school enrolment from near100% in the late 1980s to just 68% in 2002. The president, Mwai Kibaki, recalledparliament barely a week after his election victory in order to push throughthe abolition of user charges and special fees: headteachers who ignore thisface prosecution.

To alleviate the impact on schools, especially in densely populated, low-incomeareas, the government released KSh519m (US$7m) for equipment purchases.The government has conceded that the extra annual cost will be closer toKSh5bn than the initial forecast of KSh2.5bn. This does not include funding the150% pay rise for teachers negotiated by the previous government, which thegovernment will have to honour at some point. As education already accountsfor around 30% of recurrent spending, the pressure on Kenya’s large fiscaldeficit will be considerable, and savings may have to be made in other areas.The government is also relying on the receipt of donor funds earmarked foreducation and has received commitments from UNICEF, OPEC and the WorldBank totalling US$40m-50m.

Health

The government currently spends around 2% of GDP on healthcare. The privatesector, through insurance and direct household payments, contributes a similaramount. In 1989 the Ministry of Health introduced a cost-sharing programme,

Paying for health andproviding primary care

Universal, free educationbecomes a reality

Universal, free primaryeducation becomes a reality

Kenya 31


which established the payment of fees at hospitals and health centres andwhich now accounts for around 7% of all non-personnel expenditure in thesector. In 1998 the health service employed 51,000 medically trained personnel,of whom 4,300 were doctors.

By the mid-1990s improvements in the health sector had been stalled anderoded to the point of gross inefficiency, as illustrated by:

• skewed expenditure in favour of salaries and wages (leaving only 30% ofrecurrent spending to cover operations and the repair and maintenance ofhospital machines and equipment) and curative care (only 30% of healthministry spending is directed towards preventive measures); and

• the poor performance of the National Health Insurance Fund, whichprovides limited coverage (serving only 25% of the population), and remainsunaccountable to its members and unresponsive to their needs; its paymentmechanisms create incentives for the expansion of private bed capacity but notfor quality improvements.

In the prevailing circumstances, serious concerns exist regarding poverty andhealth: about one-half of the population are living in poverty, 40% of the ruralpopulation have no access to health services, and one-quarter of householdsare located more than 8 km from any health facility. Moreover, the introductionof user fees in public facilities, although well-intentioned, has adverselyaffected the access of vulnerable groups to appropriate healthcare.

HIV trends(% of population infected)

1998 1999 2000 2001 2002Urban 18.1 17.8 17.5 17.0 16.5Rural 13.0 13.0 13.0 13.0 12.5

Total 12.5 13.0 13.4 13.0 10.2


The rapid spread of the HIV/AIDS pandemic poses grave health problems, andhas damaging macroeconomic consequences such as reduced savings, fallinglabour productivity and the loss of experienced workers. Health statisticsindicate that the disease kills 700 people under the age of 40 every day, andshort-term economic costs including caring for the sick and lost labour amountto US$6.5m a month. About 2.2m people are infected, 700,000 of whom havefull-blown AIDS status and require urgent treatment in public healthcarefacilities. The number of HIV/AIDS orphans is estimated to have reached 1.1m,making Kenya the third worst affected country in the world. The high rate ofsexual transmission among 15-24-year-olds is expected to increase the numberof those dying from AIDS to 1,400 daily in the next five years.

The national healthcare system is consequently becoming overstretched, asHIV/AIDS patients now occupy 90% of hospital beds. However, more than 250Voluntary Counselling Centres are being set up across the country to enableKenyans to undergo voluntary counselling and testing. The project, which hasalready put in place 85 centres, is being funded by the World Bank. The highcost of AIDS care and the loss of earnings for patients’ families reduces their

The growing threat from AIDS

32 Kenya


access to basic needs, such as healthcare and education. The government facesdifficult policy decisions in balancing care for AIDS patients against otherhealth demands.

Kenya has relied on donor support to fund the bulk of its US$70m preventionproject, but reports in June 2003 suggested that some donors had lostconfidence in the programme because of suspected corruption. To addressthese concerns, the health minister, Charity Ngilu, disbanded provincial anddistrict AIDS control councils and began restructuring the National Aids ControlCouncil (NACC). She admitted that record keeping and reporting at provincialand district level were poor, which may have led to the misappropriation offunds. Local efforts will instead be channelled through constituency AIDScontrol committees. In the same month, the Global Fund Against AIDS,Tuberculosis and Malaria allocated US$55m to Kenya, after receiving anundertaking that the funds would be fully accounted for. The World Bank is themain backer of the NACC and is providing US$56m over a five-year period.

In a further measure to tackle the crisis, the government is incorporatinginformation about HIV/AIDS in the school curriculum. To support theendeavour, the World Bank and the European Union (EU) in liaison with theJoint UN Programme on HIV/AIDS (UNAIDS) will fund the preparation anddistribution of 2.5m textbooks on HIV/AIDS for use in schools. The UNChildren’s Fund (UNICEF) warned in June that the number of AIDS orphansin Kenya is close to 1.2m and could rise to 2.2m by 2010. Assuming annualcosts of US$60 per child to provide for their needs and welfare (includingpayment to fostering households), some US$70m per year will be requireddeal with the crisis.

Natural resources and the environment

In the past three decades Kenya has experienced accelerating deforestation, soilerosion, poaching, depletion of mineral resources, and domestic and industrialpollution. In the past five years the output of the fishing, forestry and miningindustries has also declined substantially. These factors have prompted thegovernment to announce that sustainable policies towards the country’snatural resources are now a priority.

Kenya’s forests are fast diminishing. Overexploitation during the past 30 yearshas reduced the country’s timber resources by one-half. At present only 3% ofthe land is forested and it is estimated that 5,000 ha of forest are lost each year,not only to provide wood fuel but also as a result of clearance for agriculture,construction, tourism and industrial activities.

An increase in soil erosion is affecting agricultural productivity as well ascontributing to the silting of dams. The gradual conversion of land use toagriculture and other economic activities is also rapidly reducing the country’swide biodiversity (there are 35,000 known species of animals, plants andmicro-organisms in Kenya).

Water resources are under pressure owing to overuse, not only for agriculturaland domestic consumption but also for hydroelectric power. Ecological

Kenya 33


disruption of inland lakes, particularly Lake Victoria, is a major concern for thefishing industry. Pollution, overfishing and the use of unauthorised fishingequipment have led to falling catches and have endangered local fish species.

Transport, communications and the Internet

Kenya has an extensive network of about 95,000 miles of roads connectingmost parts of the country, and over 80% of all passenger and freight traffic usesroad transport. However, the extremely poor condition of the country’s roads isa major concern. A chronic lack of investment and widespread corruption haveled to the present situation. A report by the comptroller and auditor-generalissued in late 1999, produced at the insistence of road project donors, confirmedthe existence of false contracts authorised by the Ministry of Public Works. Thereport uncovered cases of embezzlement, which it attributed to the inadequatesupervision or improper execution of projects. It also listed work not carriedout and contracts awarded without being put out to tender; one company wasgiven a contract worth KSh100m (US$1.3m) without any document to verifythat the work had been carried out.

The new government has embarked on the rehabilitation of the national roadinfrastructure. Raila Odinga’s Ministry of Public Works is responsible for themaintenance of Kenya’s 63,000-km network, reflecting recognition of theimportance of improving the road network through regular maintenance andrepair. Domestic funds (generated by the fuel levy) will be supplemented fromdonor sources. The EU has already donated €170m (around US$192m at 2003average exchange rate) for the rehabilitation of sections the main road betweenMombasa and Kisumu, a lakeside port. The five-year project will also restoreroads in the agriculturally rich Mount Kenya region in Central province Theseadditional projects will be funded by the World Bank, the US Agency forInternational Development (USAID) and the African Development Bank (ADB).

Kenya has three international airports, Nairobi’s Jomo Kenyatta InternationalAirport (JKIA), Mombasa’s Moi International Airport and Eldoret InternationalAirport. Other airports are Wilson in Nairobi, Malindi, Kakuma and Kisumu,and there are also more than 300 airstrips throughout the country. Kenya’ssingle-track railway system, which runs from Mombasa through Nairobi to theUgandan border, is managed by Kenya Railway Corporation.

Kenya’s main seaport, Mombasa, has a deep-water port with 21 berths and anannual capacity if 22 m tonnes, and serves most of the East and Central Africancountries as well as international shipping lines. The port has extensivefacilities including cold storage, warehousing and container terminals. TheKenya Ports Authority manages the port and inland container depots inNairobi, Eldoret, and Kisumu, while the terminals are managed by a privateinternational firm on a contractual basis.

Kenya’s telephone system is inefficient and in a state of disrepair, owing toweak management, lack of investment, widespread government involvementand the poor financial condition of the state-owned telecommunications

Ports

Airports and railways

Poor state of roads

Telecommunications

New investment in the roadnetwork is scheduled

34 Kenya


company, Telkom Kenya. In contrast, demand for mobile-telephone licensinghas made this Kenya’s fastest growing industry in 2000-02, putting the countryon a par with such markets as Côte d’Ivoire and Cameroon and creating a verycompetitive market. Mobile telephone use and Internet access are increasinglybecoming necessities for daily business transactions and, according to recentWorld Bank data, although mobile telephone penetration was low in 1999,Kenya is making notable progress in access to Internet services. The number ofmobile telephone subscribers has grow from just 20,000 in 1999 to 1.4m inMarch 2003, following massive investment by the two existing operators,Safaricom (Vodafone and Telkom Kenya) and KenCell (Sameer and Vivendi).Safaricom, the largest operator with about 53% of the market, reported a 171%increase in profits to US$27m in the year to March 2003; revenue rose by 55% toUS$191m. The rapid expansion of the sector was one of the reasons for the newgovernment’s decision to double the excise duty on mobile phone calls to 10%in the 2003/04 budget. This trend is likely to continue for the next few years,but the high price of mobile services may eventually lead many telephonesubscribers back to the fixed-line network.

Africa: access to the Internet and mobile telephones, 2001(per 1,000 people)

Country Internet users Mobile phonesCôte d'Ivoire 70 45Ghana 41 9

Kenya 500 19Mozambique 15 8

Tanzania 300 12Zambia 25 11Zimbabwe 100 24

Source: World Bank, World Development Indicators, 2003.

In June 2003 the government announced a new timetable for the privatisationof Telkom Kenya, the fixed-line monopoly provider, and the licensing of asecond national operator. The sale of Telkom Kenya is scheduled for early 2005:a 25% stake is offered to a strategic investor and a further 20% will be sold onthe Nairobi Stock Exchange. The licensing of a second national operator is dueto take place by June 2005. A previous attempt to privatise Telkom Kenyacollapsed in 2001, as the bid by the Mount Kenya Consortium was deemed tobe too low.

A group of Internet-based telecoms companies, the Telecommunication ServiceProviders of Kenya, issued a statement in early August urging the governmentto speed up the liberalisation of the Internet sector to provide competition andimprove services. Although the government has promised to license fourInternet gateway service providers, Telkom Kenya is not due to lose itsmonopoly in this sector until mid-2004.

During the 1980s and early 1990s the press received heavy-handed treatmentfrom the authorities. Journalists willing to air opposition views were dealt withruthlessly, frequently being thrown into jail for their efforts. Since the advent ofmultiparty democracy and more open, adversarial politics there has been a

There is a relatively free press

The privatisation of TelkomKenya gets a new timetable

Kenya 35


rapid expansion in the number of newspapers and magazines published. Manypublications, whose quality varies widely, are closely allied to oppositionpolitical groupings. Apart from one failed effort by the government in 1998 toban a group of opposition newspapers which it referred to as the “gutterpress”, there has been a considerable relaxation in the attitude of theauthorities towards the media in general. Two independent nationalnewspapers, the Daily Nation and the Standard, maintain a high quality ofreporting, as does a highly respected weekly, The East African, which ispublished in Nairobi, Dar es Salaam and Kampala. The Nation Group wasawarded a broadcasting licence in 2001 and subsequently launched a successfultelevision station, joining two other terrestrial channels, one state-owned (KBC)and the other independent (KTN).

However, the diversity of independent English-language media available in themajor urban centres disguises the dominant influence of the strongly pro-government KBC radio and television among the vast majority of the Swahili-speaking population. Although there are no reliable figures for viewing orlistening audiences, it is clear that these services constitute a major source ofnews information for most ordinary people. The heavy pro-government bias ofKBC during the 1997 elections was strongly criticised by election monitors. Anumber of private radio stations, mainly broadcasting in local languages,including Kameme FM (Kikuyu), Metro East FM (Hindu) and FM (Kalenjin),have recently been established.

Energy provision

Kenya has a fairly well-established power generation network consisting ofhydroelectric and geothermal power. Wood fuel provides more than 70% ofKenya’s total domestic energy demands and provides more than 90% of ruralhousehold energy.

Kenya has no exploited oil, gas or coal reserves, although a Mombasa-basedcompany, Kenya Petroleum Refineries, operates the country’s sole oil refineryand provides 60% of Kenya’s petroleum products. The rest is imported asrefined fuels, and imports of crude and refined petroleum products accountedfor about 26% of the country's total import bill in 2002.. Although petroleumprices were decontrolled in 1994, the government imposed a road maintenancetax on gasoline and diesel, which replaces all taxes except those at theinternational borders. Oil exploration, carried out for more than 30 years, hasnot yielded any commercially viable petroleum deposits in Kenya. In 1997Tornado Resources of Canada signed two agreements for oil and gasexploration, one onshore near the border with Ethiopia and the other offshorenear Tanzania. At the end of 2001 the previous government concludednegotiations with two foreign companies for oil exploration. Dana Petroleum, aBritish company, secured an offshore exploration block to the north of Malindi,and Affrex, an Australian company, has been assigned three exploration blockssituated along the coast. In addition Block 11, situated in Turkana district, hasattracted interest from an American company, and negotiations are in progress.A total of 30 exploratory wells have been drilled in Kenya with promisinggeological results, justifying further exploration.

36 Kenya


Woodside Petroleum (Australia) has taken a 40% stake in four offshore licences,covering 47,400 sq km, after reaching agreement with the current licence-holder,Dana Petroleum. Dana Petroleum will retain a 40% stake and 20% stays withStar Petroleum of Kenya. The key to the deal is the commitment by Woodsideto fund 80% of the exploration programme. The search for oil in Kenyan waterswas called off about 20 years ago, but Dana has identified several prospects byre-evaluating existing data. New seismic surveys are scheduled for later thisyear and drilling may start in 2005

Total power supply in 2002 went up to 4,685.6 gwh, including 51.2% importedfrom Uganda. The supply from the hydroelectric power dams also improvedowing to better weather conditions. Kenya had an installed capacity of 1,147mw, 283 mw more than in 1998, supported by the development of a third unitat Gitaru power station, the Olkaria III geothermal station.

Demand for electricity is growing at an estimated 5% a year, and thegovernment is keen to develop both thermal and geothermal power sources tosupplement hydropower generation. The debt-ridden, state-owned powerdistribution monopoly, the Kenya Power and Lighting Company (KPLC), ispursuing an ambitious expansion programme, and there are also plans for twodiesel plants in Mombasa and two geothermal stations near Naivasha. Twonew diesel power stations, with a combined capacity of 110 mw, are to be builtin Nakuru and Eldoret. However, in late 2000 multilateral and bilateral donorssuspended funding for power generation projects, in response tomismanagement and corruption. Kenya continues to suffer from powerrationing as a result of production problems at its existing plants. Renewableenergy sources remain largely untapped, and the country depends on importsfor a supply of solar panels. Biomass, though cheap and in plentiful supply inrural Kenya, remains unexploited.

The Kibaki government aims to bring down the high cost of electricity—aserious deterrent to private business—by restructuring the debt-ridden, state-owned power distribution monopoly, the Kenya Power and Lighting Company(KPLC). The government also plans to renegotiate supply contracts with powergenerators to cut tariffs paid by KPLC. Turning the sector around will take time,however, given years of neglect, mismanagement and corruption under theregime of former president, Daniel arap Moi. Many of KPLC’s problems stemfrom the poorly planned liberalisation of 1998, which handed responsibility forpower generation to the state-run Kenya Electricity Generating Company(KenGen) and allowed independent power producers to enter the market. Thisdid not, as hoped, lead to greater efficiency but instead encouraged furthermismanagement because of the failure to establish a competent and impartialregulatory authority.

Deliveries of hydroelectricity from KenGen fell sharply in 2000 because ofdrought and KPLC signed long-term supply contracts with independent powerproducers (which rely on thermal capacity). However, agreed tariffs were up tofour times higher than those levied by KenGen, which continues to undermineKPLC’s finances. According to KPLC’s most recent accounts, losses climbed by

Demand for energy is high

Oil exploration is due to startin 2005

The government acts to bringdown electricity prices

Kenya 37


54.2% to KSh2.9bn in the year to June 2003. The deterioration stems fromseveral factors including: increased provisions for pension fund deficits; highertransmission and distribution costs; and the escalating cost of debt repayments.

As part of the drive to make KPLC a profitable concern, the governmentrecently converted the debts of KSh12.2bn (US$160m) owed to KenGen intonew equity in KPLC, which should reduce annual interest payments byKSh850m. The government also plans to negotiate a 25.4% reduction inKenGen’s bulk tariff to KSh1.76/kwh, thereby saving KPLC a further KSh2.3bnper year, and will also seek a better deal from independent suppliers. If thesemoves are successful, KPLC will be able to cut prices to end-users, although thevarious tax surcharges that make up 30% of total electricity charges have so farbeen left untouched.

Current government proposals for revitalising the power sector do not envisageany change in KPLC’s status, but parliament’s Finance Committee has putforward an alternative strategy based on ending KPLC’s monopoly overdistribution and sales. According to the committee, potential players such assugar factories are keen to enter the market but are legally barred from doing so.Ending KPLC’s monopoly would be a positive step, provided the move isaccompanied by the establishment of a competent regulatory authority.

The economy

Economic structureMain economic indicators, 2002Real GDP growth at factor cost (%)a 1.1Consumer price inflation (%)b 1.9Current-account balance (US$ m) c -140

Total external debt (US$ bn) c 5.6Average exchange rate (KSh:US$)b 78.7

Population (m) a 31.4

a Official estimates. b Actual. c Economist Intelligence Unit estimates.

Sources: Economist Intelligence Unit, CountryData; Central Bureau of Statistics, Ministry of Finance and Planning, Economic

Survey, 2003.

The share of GDP generated by agriculture has declined steadily during the pastfour decades. However, the sector still dominates the economy, both in terms ofits size and in terms of the number of people working in agriculture and relatedindustries. Farming output is diverse, consisting of various food crops and cashcrops as well as livestock, forestry and fishing. The most productive of Kenya’sfarmlands are situated in the fertile central and western regions; the rearing oflivestock predominates in the semi-arid regions to the north and east.

The government sees industrialisation as the main development challenge.Since independence the share of manufacturing in GDP has remained relativelyunchanged, at around 10%. Industrial activity is concentrated around the threelargest urban centres, Nairobi, Mombasa and Kisumu. Manufacturing isdominated by food-processing industries such as grain milling, beer production

Economy still dominated byagriculture

A move is made to make KPLCmore profitable

38 Kenya


and sugarcane crushing. Kenya also has an oil refinery supplying petroleumproducts, mainly to the domestic market.

Origins of gross domestic product, 2002a

(% of total; constant 1982 prices)

Agriculture, forestry & fishing 24.3

Manufacturing 13.0Trade, restaurants & hotels 12.7Transport, storage & communications 6.3

Government services 10.5Other (net) 29.3

a Provisional.


The services sector is dominated by tourism, the second largest export revenueearner after tea. Kenya’s coastline and game parks provide the main attractionsfor tourists. However, periodic security concerns and the deteriorating transportinfrastructure have led to a severe slump in the industry in the past few years.

Comparative economic indicators, 2002Kenya Uganda Tanzania South Africa

GDP (US$ bn) 12.3 5.8 9.4 104.5GDP per head (US$) 393 226 266 2,321

Consumer price inflation (av; %) 1.9 -0.3 4.6 9.2Current-account balance (US$ m) -140 -433 -251 289Merchandise exports fob (US$ m) 2,213 443 903 31,085

Merchandise imports fob (US$ m) 3,239 1,118 1,511 26,712Total external debt (US$ bn) 5.6 3.4 6.6 24.3

Debt-service ratio (%) 10.6 20.8 7.9 10.1

Source: Economist Intelligence Unit, CountryData.

Kenya has the largest economy in East Africa (although, per head, it is on a parwith Uganda). However, owing to impressive recent economic growth inUganda and the adoption of liberalising economic reforms in Tanzania, Kenyanow has serious competition in the subregion. Kenya is also losing out ondonor funding as a result of its poor record in tackling government corruption,whereas Tanzania and Uganda both receive substantial bilateral andmultilateral donor funding. The combined GDP of these three East AfricanCommunity countries is equal to only 19% of that of South Africa, theeconomic powerhouse of the continent, and only 1.8% of that of the UK, theformer colonial power.

Economic policy

Kenya’s erratic macroeconomic policies and the slow pace of structural reformhas been blamed not only for below-potential economic performance, but alsofor suspension of donor support in recent years. Real income per head is lowernow than in 1990, and poverty is more widespread. Income per head has fallensteadily since 1996, as real GDP growth has almost stagnated whereas the pop-ulation continues to expand at around 2.6% per year. Donors have consistently

A growing challenge fromwithin the region

Poor economic policy

Kenya 39


the continuing problems affecting governance, and stressed that anti-corruptionmeasures were an integral part of the effort to boost income per head. Attemptsby the previous government to meet the IMF’s conditions with a view to theresumption of donor support in 2001 and 2002 were unsuccessful.

Apart from fulfilling its specific election pledges, the new government’s mainchallenge is to revive the underperforming economy. The government’s shorter-term economic strategy is directed towards normalising relations withinternational financial institutions—especially the IMF and World Bank—as wellas bilateral donors. The new government moved closer to securing a povertyreduction and growth facility (PRGF) with the IMF, following the successfulconclusion of the latest Article IV consultation in May 2003. Most of the donorconditions have now been met, including the passage of anti-corruptionlegislation, a shift towards more transparent and effective governance, and arenewed commitment to structural reform, including privatisation. Yet, even therestoration of their support cannot of course guarantee rising prosperity. Thepresident, Mwai Kibaki—as a trained economist—can have few illusions aboutthe magnitude of the task he faces.

Performance conditions attached to the PRGF

The poverty reduction and growth facility (PRGF) agreed between the IMFand the Kenyan government contains some of the most detailed performancetargets ever set under an IMF lending programme. As well as macroeconomictargets, the agreement sets out a list of performance criteria and structuralbenchmarks against which progress will be judged. These include:

• an amended and expanded code of ethics for public servants;

• an anti-corruption and economic crimes bill, enacted and published in theKenya Gazette, which is similar to that proposed by the parliamentary selectcommittee on anti-corruption;

• reforms of the civil service and completion of the current reform ofthe judiciary;

• greater powers for watchdog institutions such as the Kenya Anti-corruptionAuthority, and the comptroller and auditor-general;

• the privatisation of key government-owned institutions, including KenyaCommercial Bank, Telkom Kenya and Kenya Railways;

• the completion of amendments to the Banking Act to eliminate recklesslending and define clear prudential regulations for all banking activities; and

• progress towards eliminating the import exemptions awarded to thepublic sector.

Economic revival is a topgovernment priority

40 Kenya


Two decades of under-investment and rampant corruption have seriouslyweakened Kenya’s infrastructure, and inefficient and overstaffed parastatalscontinue to dominate many areas of the economy. At the same time, HIV/AIDShas emerged as a public health crisis—13% of adult Kenyans are now infected.The privatisation of key assets in telecommunications, ports, railways andbanking is more tricky. Although the government has promised an open debateon privatisation, sell-offs are unlikely to take place until the enterprises inquestion are returned to profit (which will obviously increase their value):commercialisation is, therefore, the immediate priority. The private sector hasproved exceptionally resilient, however, and is expected to respond favourablyto promised economic reforms.

The government has set ambitious four-year targets for economic growth,revenue collection and investment. These have been outlined in a publicationfrom the Ministry of Planning and National Development, Recommended FiscalStrategy Paper for Medium-Term Expenditure Framework, 2003/04-2005/06. Themain objective is to raise real GDP growth to 6.5% by 2007 to create an averageof 500,000 jobs a year. To bring this about, the government hopes to raise theinvestment/GDP ratio from 14.7% in fiscal year 2001/02 (July-June) to an averageof 23% over the forecast period. The authorities also aim to keep inflation atabout 3.5% per year and to cut the fiscal deficit. The paper restates thegovernment’s priority of improving governance in the public sector andmaintaining good relations with donors and foreign investors. The documentformed the basis of a proposed new poverty reduction strategy paper—aprerequisite for negotiating a hoped for poverty reduction and growth facility(PRGF) from the IMF.

The IMF finally approved a new three-year, US$252.75m PRGF on November24th, following the successful Article IV consultations in mid-2003 and evidencethat the government is serious about tackling corruption. As a result, Kenya candraw an amount equivalent to about US$36.11m under the arrangementimmediately. The resumption of donor support will boost the government'scredibility and investor confidence.

The IMF deal will also allow for the release of funds from other multilateraland bilateral donors, such as the World Bank and the EU, and pave the way fora new round of debt rescheduling with the Paris Club of official creditors.Kenya still has active debt treatments with the Paris Club, one from 1994covering US$535m, and one from 2000 for US$300m. The London Club dealfrom January 2003 is believed to have treated US$45m, following an earlieragreement in 1998 covering US$49m. However, prospects for more substantialrelief are limited, as Kenya’s external debt is considered sustainable by thestandards of the Highly Indebted Poor Countries (HIPC) initiative. External debtis estimated to have totalled US$5.6bn in 2002, equivalent to 45.5% of GDP; thenet present value (NPV) of the debt/exports ratio was 111% and the debt-serviceratio 10.6%. The resumption of donor funding will help the government to retiredomestic debt, which rose to 29.2% of GDP in July 2003 (from 24.6% a yearearlier). Under the PRGF it would fall to under 10% of GDP by 2007/08,according to the IMF.

The IMF deal will allow fornew debt relief

The government sets boldmedium-term targets

The IMF awards a newthree-year PRGF

Kenya 41


The EU approved a KSh20.25bn (US$265m) country assistance programme forKenya in mid-October, covering the 2003-07 period, which is geared to long-term development projects. Of the total amount, KSh6.75bn has beenearmarked for macroeconomic development; KSh4.2bn for agriculture; KSh3.3bnfor transport; and KSh1bn for small business, export promotion, tourism andnon-governmental organisation. The remainder—KSh4.95bn—has been reservedfor emergency funding, although Kenya is lobbying for it to be used in supportof the struggling tourism sector. In addition, the European Investment Bank(EIB) plans to open a new office in Nairobi to offer and manage soft loans tosupport private-sector marketing initiatives. The EU noted that the adoption ofthe programme was an important sign of the European Commission’s renewedconfidence in Kenya’s economic and social development.

The finance minister, David Mwiraria, presented the government’s first budgetin June, covering the 2003/04 fiscal year (July-June). His ambition to move theeconomy on to a higher growth path and thereby reduce poverty is to beapplauded, but few doubt that the budget represents no more than a first stepon what is likely to be a long journey. Mr Mwiraria had little room formanoeuvre, at least in the short term: the election commitments of theNational Rainbow Coalition (NARC) demand increased fiscal spending, butrevenue will be constrained by sluggish economic growth and large-scale donorfunding has yet to resume.

It is therefore not surprising that Mr Mwiraria announced a planned rise in thebudget deficit to 6.5% of GDP, although this was revised down to 6.2% of GDPin July, following a review of planned spending that trimmed projected outlays.This compares with a deficit of 4.8% of GDP in 2002/03, according toprovisional figures from the Central Bank of Kenya. The revised outlook for2003/04 projects a 9% rise in current spending to KSh260.5bn (US$340m) and amore rapid 35% jump in capital spending to KSh59.5m, taking total plannedexpenditure to KSh320bn. Domestic revenue is forecast to increase by 6% toKSh236.5bn, but even with a 49% rise in external grants to KSh21.1bn, theprojected deficit comes in at KSh62.5bn.

Despite the difficult operating environment, the budget has forecast importantcuts in selected taxes and duties to stimulate consumption and investment.

• The rate of value-added tax was lowered from 18% to 16% to boostconsumer demand.

• The 10% excise duty on locally assembled motor vehicles was removed tomake imported second-hand cars less attractive.

• Excise duties on fuel oil used by the power sector were reduced by 50% toboost electricity generation.

• Duty on bulk imports of electricity from Uganda was removed.

• Excise duty on aviation fuel was eliminated and the 20% withholding taxon aircraft leasing was removed to help the tourism industry.

The EU agrees a five-yeareconomic recovery strategy

The budget has announcedimportant cuts

The budget for 2003/04 aims tostimulate the economy

42 Kenya


• Import duty on computers and accessories was removed to promote thespread of new technology.

• Duty on imports of capital goods used for investment was waived.

• The threshold for import duty savings in new investments was loweredfrom US$5m to US$70,000.

• The tax allowance for investments was increased from 60% to 100% topromote new ventures in the manufacturing and hotel sectors.

To fund these measures, the budget increased the duty on mobile telephonecalls from 5% to 10%. The government also hopes to raise at least KSh3.7bn fromthe sale of a third mobile telephone licence in December, which is the onlyprivatisation factored into the budget. Other sales of state assets await theenactment of a new privatisation bill. The above tax cuts are in line with theNARC’s manifesto commitment to reduce the tax burden while simultaneouslyimproving collection. Tax revenue is forecast to increase slightly as a proportionof GDP, from 21% to 21.2%, and total domestic revenue as a proportion of GDPis projected to rise from 22.4% to 23.7%. The government has also set aninvestment target of 23.3% of GDP, compared with an average over the pastdecade of just 16% of GDP.

The government’s strategy of combining tax cuts with increased spending inorder to kick-start the economy is commendable but risky, given the largeprojected budget deficit. If real GDP growth does not revive during the currentfinancial year, or if spending control becomes lax, the deficit could mushroomand force the authorities to implement austerity measures.

Government finances, 2003/04(KSh bn)

% change, year on yearRevenue 257.6 8.6 Domestic revenue 236.5 6.0 External grants 21.2 49.3Expenditure 320.0 13.1 Current spending 260.5 9.0 Capital spending 59.5 34.9

Balance -62.5 36.8 % of GDP 6.2 –

Source: Central Bank of Kenya, Monthly Economic Review, September 2003.

Proposed shifts in expenditure are far less dramatic, although the governmenthas identified several priority areas including physical infrastructure (especiallyroads), healthcare, education, water, energy and security. In comparison to2002/03, the budget proposes extra spending on education (KSh7.2bn), roads(KSh3.6bn), water (KSh2.2bn), healthcare (KSh2bn, including KSh1.5bn to tackleHIV/AIDS) and police and prisons (KSh700m). At the same time, wages andsalaries will continue to consume at least 30% of current spending. Thegovernment will be hard-pressed to reduce this figure, given the announcedpay rises for several categories of civil servants (including teachers, magistrates,the police and, more controversially, MPs), which are viewed as necessary forcombating corruption.

The budget proposes higherspending on priority sectors

Kenya 43


Economic policy

Banking sector reforms

Recognising that private-sector-led growth depends on the emergence of a moredynamic and solvent banking system, the 2003/04 budget either introduced orinitiated several important financial sector reforms. The minimum capitalrequirement for banks was halved to KSh250m in an attempt to introduce morecompetition, and their daily minimum cash ratio requirement (the amount depositedwith the Central Bank) was cut from 8% to 6% to free resources for lending to theprivate sector. The efficacy of these changes is questionable, however, as the bankingsector is dogged by a high level of non-performing loans. To tackle this, the financeminister proposed the establishment of a new agency to help banks clean up theirbalance sheets, as well as a judicial tribunal with powers to demand the repaymentof loans. Although most bad debts are unlikely to be recovered, the governmenthopes to contain the problem in future.

In 1996 an amendment to the Central Bank of Kenya Act accorded greatercontrol of the country’s monetary policy to the Central Bank, which has aimedto maintain price stability and administer the financial sector. Tight monetarypolicy exercised by the bank has helped to reduce the country’s averageinflation rate from 46% in 1993 to only 0.8% in 2001, but higher borrowing bythe government on the domestic market to finance the fiscal deficits hasresulted in persistently high interest rates in recent years. However, thebenchmark 91-day Treasury-bill rate dipped from 20.5% in 1999 to just 0.8% inSeptember 2003, and rates for longer-term instruments have followed a similartrend. Investors have responded to the decline in rates by turning to the stockmarket, thereby boosting equity prices, and by purchasing Tanzanian andUgandan treasury securities, which offer higher returns. Demand for short-termT-bills remains strong, however, and issues are typically oversubscribed. Interestrates have also been depressed by the likely return of donor funding, whichwill curb the government’s appetite for domestic credit, and little change inrates is expected before the end of 2003

In a highly controversial move, the labour minister, Ali Mwakwere, announcedin October that work permits for two-thirds of the 25,000-strong expatriateworkforce, over half of whom are ethnic Asians from either the UK or theIndian subcontinent, will not be renewed. The government argues that suitablyqualified Kenyans are available to fill the posts, but the decision echoes IdiAmin’s expulsion of Asians from Uganda in 1972 and could prove damaging forthe economy. In an attempt to minimise negative sentiment, the ministerpointed out that the move will be spread out over two years and that allexisting permits will be honoured. Furthermore, senior managerial andtechnical staff in multinational companies are to be spared, while the threat toclose private, British-run schools was lifted following appeals by other cabinetministers fearful of disrupting their children’s education.

The chief targets are skilled and semi-skilled jobs in manufacturing, includingmiddle management, but the clear out will also hit the tourism and hospitalitysectors and possibly Asian-dominated commerce as well. The government isalso targeting skilled expatriates who have stayed on in Kenya and taken new

Monetary policy

The government plans cuts inthe expatriate workforce

44 Kenya


jobs after their initial permits expired, in violation of existing laws. Expatriateworkers and their families are required to leave the country within two monthsof their permits expiring. Multinationals will not welcome the governmenttelling them who they can or cannot hire, and the new labour policy may deterpotential investors. The government claims the move is consistent with itspledge to create an extra 500,000 job openings for Kenyans, but this can onlybe achieved via faster economic growth, not by simply replacing expatriateswith locals. The reverse is more likely to be true, as any decline in the skillsbase will dampen economic expansion.

Economic performance

From the mid-1980s until 1990 real GDP grew by more than 4% a year, leadingto a rise in income per head. However, the freeze by donors on quick-disbursingaid, the drought in 1992 and poor management of the economy all contributedto a sharp slowdown in 1991-93, when annual real growth averaged 0.9%. Poorharvests, especially of food crops, played their part: real agricultural outputshrank by 3.7% in 1992 and by a further 3.3% in 1993. The influence ofagriculture on overall growth is clear from the fact that, although real output inthe five other main sectors expanded in 1993, GDP grew by just 0.4% as a resultof the contraction in agricultural production. Improved harvests, the opening ofthe East African Community market to well-placed Kenyan manufacturers, andthe development of service industries all contributed to improved overallgrowth after 1993, to a peak of 4.6% in 1995.

Gross domestic product(% real change, year on year)

2000 2001 2002a

Agriculture -2.1 1.3 0.7Manufacturing -1.4 0.8 1.2

Trade, restaurants & hotels 1.0 1.3 1.6Financial services 0.4 1.0 0.7

Government services 0.7 0.7 0.9GDP incl others -0.3 1.2 1.1

a Provisional.


The Kenyan economy continued to stagnate in 2002, real GDP growing by just1.1%, compared with 1.2% in 2001. The sluggish performance was the result toseveral factors, including election uncertainties, the continued suspension ofdonor assistance, low investor confidence and the continuing deterioration inKenya’s infrastructure, which inflates business costs. The rise in oil prices in thesecond half of the year also did not help.

Despite hopes of an economic revival under the reform-minded Kibaki regime,economic growth has remained sluggish in 2003, partly because of delays insecuring a new agreement with the IMF. Real GDP growth edged up to 1.4% (onan annualised basis) in the first seven months of 2003, compared with 0.9% inthe same period of 2002, but the population is growing at a faster rate and per-

Growth continues to slow in2002

Real GDP growth is slowerthan hoped for in 2003

Kenya 45


capita income continues to decline. Although imports rose by 14.5% in January-July 2003 compared with a year earlier, this had more to do with the decline ofthe shilling against sterling and the euro than any upswing in economic activity.

Gross domestic product(% real change year on year unless otherwise indicated)

2002 2003% of GDP Jan-Jul a Jan-Jul a

Agriculture 24.0 1.0 1.2Manufacturing 13.0 0.9 1.2

Trade, tourism & hotels 12.7 2.5 3.0Financial services 10.5 0.8 0.9

Transport & communications 6.3 2.7 3.0Building & construction 2.3 0.4 0.1Government services 14.6 0.7 1.2

GDP incl others 100 0.9 1.4

a Annualised.


All sub-sectors apart from construction grew slightly faster in the first sevenmonths of 2003 year-on-year, but apart from “tourism, restaurants and hotels”,and “transport and communications”, growth was weak. The dominantagricultural sector grew by just 1.2%, despite largely favourable rainfall, as higherhorticulture and coffee output was offset by declines in tea and sugar.Manufacturing also posted 1.2% year-on-year growth in the first seven monthsof 2003, driven by a 12.5% rise in exports, which reflects better access to marketsin the Common Market for Eastern and Southern Africa (Comesa), the EastAfrican Community (EAC) and the Africa Growth and Opportunity Act(AGOA). Consumption of electricity, a key input, was up by 3.2% year on year,although manufacturing capacity utilisation remains low and domesticdemand sluggish.

Inflation trends in Kenya strongly reflect movements in food prices, whichcarry a 50% weighting in the consumer price index. Inflation fell significantly in2002, averaging only 1.9% for the year, compared with an average rate of 5.7% in2001 and 10% in 2000. The low rate of inflation was caused mainly by theslump in food prices, subdued domestic demand and continued tight monetarypolicy. The rate of inflation edged up in the first few month of 2003, to 14.9%year on year in May, but slid to 7.9% in September, following better rainfall anda steady fall in vegetable prices. It climbed again in October, to 9.1%, as cerealprices rose prior to the start of the main harvest. Inflation is expected to resumea downward trend in the last two months of 2003, with the year-on-year figurefalling to 7% in December. The impact of this earlier rise will inevitablydissipate during the fourth quarter, but the Economist Intelligence Unit expectsaverage inflation for 2003 as whole of 9.6%.

Food prices influence the rateof inflation

46 Kenya


Economic sectors

Agriculture

Farming and cattle rearing are still the most important economic activities inKenya, accounting (with forestry and fishing) for around 24% of GDP and 18%of wage employment in the formal sector in 2002 (agriculture is the mainsource of employment in the informal sector). Almost one-half of allagricultural output is for subsistence and is therefore not marketed. Tea, coffee,sugar and horticultural produce provide just over 50% of total merchandiseexport revenue. The government aims to achieve self-sufficiency in majorstaples such as maize by 2010, but the production of such crops has fluctuatedwidely, owing to highly variable climatic conditions. Droughts in 1993-94 and in1997 were followed by widespread flooding at the end of 1997 and into 1998, aresult of the El Niño weather phenomenon. Kenya suffered another severedrought in 2000, but improved weather conditions in 2001-02 and into 2003helped agricultural output to rise.

Kenya’s population is heavily concentrated in areas of fertile land in the centreand west of the country. The resulting competition for productive areas hasfrequently been a source of ethnic tension. An estimated 75% of the populationoccupies the 13% of the total land area rated as “high potential” (with annualaverage rainfall of at least 900 mm), while the balance occupies the remaining“marginal” land area. Although there are large tea and coffee estates inoperation, smallholders supplied 60% of tea output and co-operatives produced60% of coffee output in 2001-02.

Structure of land ownership in the tea industry, 2002Area

(’000 ha)Production

(’000 tonnes)Average yield

(kg/ha)Smallholders 95.47 175.90 2,078

Estates 44.51 111.20 3,294Total 139.98 287.10 n/a

Source: Kenya Tea Manufacturers’ Association.

An economy dominated byagriculture

Pressure on fertile land is high

Kenya 47


The economic liberalisation programme has been extended to agriculture,bringing to an end the monopolies enjoyed by most commodity marketingboards. The government continues to make slow progress towards thederegulation of the food crops subsector, citing the need to protect small-scalefarmers from the highly unpredictable harvests that result from climaticvariations. After several changes in policy and disagreements with donors, theex-president, Daniel arap Moi, announced in September 1995 that the NationalCereals and Produce Board (NCPB) would only trade in maize at market prices.The NCPB is also responsible for managing the National Strategic Food Reserve,a mechanism for cushioning Kenyans against food shortages. The reserve hasbeen unable to operate effectively, however, owing to excessive exports of foodcommodities without proper assessment of the needs of the population beforeand after harvests.

Cash crop production(% change, year on year)

2002 20032001 2002 Jan-Jul Jan-Jul

Tea 24.7 -2.6 -5.7 -4.5Horticulture -4.0 22.6 12.5 24.5Coffee -44.3 -14.5 -24.8 51.5

Sugarcane -9.9 26.9 32.9 -14.8Pyrethrum 5.1 -20.6 -20.4 -6.4

Sources: Central Bureau of Statistics; Kenya Sugar Authority; Sisal Board of Kenya; Pyrethrum Board of Kenya.

After considerable delay, the liberalisation of the lucrative coffee marketingbusiness moved towards a conclusion in June 2002, when the previousgovernment implemented the provisions of the new Coffee Act (2001). Thegovernment closed the old Coffee Board of Kenya—a prime example ofmismanagement and corruption, which had monopolised marketing since the1930s—and replaced it with a new, slimmed-down organisation responsibleonly for regulation. The main aim of the changes is to give farmers greatercontrol over the industry (by allowing them to choose between marketingagents) and to improve their earnings (by reducing deductions and ensuringprompt payment). Under the former system, farmers had to wait severalmonths to be paid and typically received less than 20% of the real market valueof their produce. This contributed to a rapid decline in coffee production,which fell by around 50% to 51,700 tonnes in the 2000/01 season (October-September) compared with the previous season’s output. The collapse inmarketed coffee output from 100,700 tonnes in 1999/2000 to 48,000 tonnes in2001/02, owing to the steep fall in world prices and incomplete reforms in thesector, was reversed in 2002/03 as world prices moved up slightly. Coffeeoutput jumped by 51.5% year on year in the first seven months of 2003, to43,170 tonnes, because of better weather, improved crop husbandry, theelimination of tax on coffee inputs and ongoing reforms in the sector. Theupturn may be temporary, however, as world coffee prices show little sign ofimproving in the short term, and farmers are once again pulling up coffeebushes and switching to other crops.

Coffee marketing is liberalised

Liberalisation of agriculturehas been patchy

48 Kenya


Bid for greater valued added in tea exports

The Kenya Tea Development Agency (KTDA), which accounts for two-thirds ofthe country’s output, is spending KSh25m (US$326,800) building testing roomsand blenders in Mombasa in an attempt to add value in-country. Most Kenyantea is currently sold unblended and in bulk to the main national consumers,Pakistan and the UK, where it is subsequently mixed with other blends. TheKTDA, however, is seeking to penetrate the US speciality tea market, whereprices per kilo are ten times higher than those earned from conventionalbuyers. It is already forging links with Tazo, the tea operation of US beveragescompany Starbucks, and the authorities are promising to grant tea factoriesexport-processing-zone status to boost their international competitiveness.

The tea industry is by far the largest export earner, and Kenya is now theworld’s leading supplier of black teas. Throughout the 1990s revenue from teaexpanded rapidly, and the El Niño rains of 1997/98 resulted in a record harvestof 264,000 tonnes. According to the Tea Board of Kenya, the present low worldprices have so far had only a limited impact on the country’s tea production, asthe crop has been recovering from the poor weather conditions in 2000(ranging from frost to drought), which pushed production and exports down.Output of tea slumped by 4.5% in the first seven months of 2003, comparedwith the year-earlier period, because of drier than usual conditions in growingareas. The government still anticipates a small (3%) rise in tea production for2003 as a whole, but may be disappointed given the poor prognosis for lateseason rainfall.

Tea exports1998 1999 2000 2001 2002a

Volume (m kg) 263.8 260.2 217.3 270.5 272.7

Average price (KSh/kg) 125 127 162 127 126

a Provisional.

Sources: Ministry of Planning and National Development, Economic Survey 2003

Horticulture has seen spectacular growth since the mid-1980s, exporting tomeet off-season demand for fresh fruit, vegetables and flowers in Europe:Kenya currently meets 25% of European demand, compared with Colombia’s17% and Israel’s 16%. Kenya’s success in this area reflects the efforts made bymembers of the Kenya Flower Council, who account for 65% of nationalproduction, to comply with international standards. The value of productiondoubled between 1995 and 2001, and in 1998 horticultural exports for the firsttime earned more foreign exchange than coffee, at US$230m. The industry isimportant because of its ability to create jobs quickly, and it has become a goodexample of private-sector expansion with limited government intervention.Kenyan horticulture achieved a public relations coup by overtaking Israel in1996 to become the leading supplier of cut flowers to the Dutch auctions. Morerapid growth in agriculture during the first part of 2003 was partly attributableto a sharp rise in production of horticultural export crops. The upward trend inhorticulture output continued in the first seven months of 2003, with output

Tea production slumpedin 2003

Horticulture becomes a majorgrowth area

Kenya 49


rising by 24.5% and export sales by 26% (to US$196m) compared to the sameperiod in 2002. All subsectors, including fruits, flowers and vegetables postedsolid growth, partly because of greater irrigation, and exports were boosted bythe development of new markets in East Asia, the US and Australia and thedecline in Zimbabwe’s production. Production has also been encouraged by theremoval in July 2003 of the 20% withholding tax on commissions paid byflower growers to non-resident agents overseas.

Exports of fresh horticultural produce1998 1999 2000 2001 2002

Volume (’000 tonnes) 78.4 99.0 99.2 98.9 121.1

Value (KSh bn) 9.7 14.2 13.9 20.2 26.7

Source: Horticultural Crop Development Authority (HCDA).

Sugar registered the most disappointing performance, with output tumbling by14.8% in January-July 2003. This illustrates the crisis enveloping the sugarindustry, which has turned into a problem for the new government as itattempts to balance competing demands from producers, consumers and tradepartners. With consumption averaging 610,000 tonnes/year in 1999-2002 andproduction averaging 436,000 t/y in the same period, Kenya is reliant onimports. However, imports are far cheaper, which has obliged the authorities toerect trade barriers to protect the local industry. However, Kenya’s commitmentto free trade within Comesa limits the scope of such barriers, as membercountries enjoy a duty-free quota of 89,000 t/y. Enforcement is lax, however,and illegal dumping common. According to the Sugar Board, imports in the firsthalf of 2003 were higher than in 2002 as a whole. Stocks at local refinerieshave continued to mount, leading to plant closures. The brunt has been borneby farmers who, backed by sympathetic politicians, have blamed unregulatedimports, although this is clearly only one aspect of the problem.

Sugar production, imports and consumption(‘000 tonnes)

1999 2000 2001 2002Production 470.8 402.0 377.4 494.2Imports 57.7 118.0 182.5 110.6Consumptiona 609.4 631.2 600.0 600.0

a Production and imports do not equal consumption in any particular year because of retained stocks

Sources: Central Bank of Kenya, Economic Survey, 2003; Kenya Sugar Authority

Mining and semi-processing

The mining and quarrying sector accounts for only 0.14% of GDP, the majorityof which is contributed by the soda ash operation at Lake Magadi. Both sodaash and fluorspar are exported, but stagnant world prices have had a negativeimpact on the sector in recent years. The depressed state of the domesticeconomy has also led to a fall in demand for industrial inputs. Producers havealso blamed much of the decline on cheap imports as a result of liberalisationand the removal of tariffs.

Crisis hits the sugar industry

50 Kenya


Mineral production, 2002a

’000 tonnesSoda ash 304Fluorspar 85

Salt 19Crushed refined soda 474

Total (incl others) 889

a Provisional.


In late June 2003 the new government issued a 16-year licence to Canada’sTiomin Resources to exploit mineral sands deposits near Kwale, near Kenya’ssouthern coast. The project will be Kenya’s largest mining venture sinceindependence and is expected to produce more than 300,000 t/y of ilmenite,38,000 t/y of zircon and 75,000 t/y of rutile. Tiomin had been seeking approvalfor the venture since 1995 but faced sustained opposition fromenvironmentalists and local residents, leading to a series of court cases. Onemajor hurdle was overcome in mid-December 2002 when the outgoing KenyaAfrican National Union (KANU) government accepted the company’senvironment management plan; however, the National Rainbow Coalition(NARC) administration made the company renegotiate compensation fordisplaced residents. Tiomin subsequently raised compensation fromKSh9,000/acre to KSh80,000/acre, extra being paid for the loss of buildings,trees and houses. Furthermore, the 450 families affected (numbering 5,000people) will each be given 15 acres of land in another location.

Construction is expected to start soon and production will begin 12 monthslater. Final investment is likely to exceed US$150m but, given favourable worlddemand prospects, the company expects to achieve capital recovery withinthree and a half years. The project will have several benefits for the Kenyaneconomy. At a local level, it will boost activity in the immediate vicinity andcreate much-needed jobs. At a national level it is expected to generate KSh460mper year in tax revenue for the first five years and KSh810m per year thereafter.The official go-ahead for the project will also encourage foreign investors inother fields. Furthermore, Tiomin has agreed to the government’s demand forthe development of local processing, although details are still lacking. On thedownside, critics contend that environmental problems, including radioactivity,the depletion and contamination of water resources and the rehabilitation ofmined-out areas, have not been adequately dealt with.

Manufacturing

Although Kenya is the most industrially developed country in East Africa, manu-facturing still accounts for only 13% of GDP. Expansion of the sector was initiallyrapid after independence but has slowed since the 1980s. Import substitutionwas the official policy in early years, and Kenya quickly developed a number ofsubsectors with an emphasis on consumer goods: beverages and tobacco,textiles, miscellaneous food products, petroleum products, electrical appliancesand machinery, printing, paper products, and sugar and confectionery.

The Kwale titanium mine getsthe go-ahead

Liberalisation of the sector

Kenya 51


Towards the end of the 1980s industrial policy shifted from import substitutionto trade liberalisation and export promotion. Import tariffs were substantiallyreduced across the board but remain an instrument of policy in some sectors,particularly the sugar industry. However, these changes, which were intendedto establish a level playing field for importers and manufacturers, have failed todo so. This is mainly because of very widespread evasion of duties, andparticularly of those on sugar and maize. Strenuous recent efforts by the KenyaRevenue Authority to clamp down on this have had some success, but themajor fraudsters continue to operate with relative impunity, often with theprotection of senior officials. In order to strengthen the performance of thesector the government has in the past five years signed several tradeagreements, including the African Growth and Opportunity Act (AGOA), a USgovernment initiative. It has also introduced favourable tax measures (includingthe removal of duty on capital equipment and other raw materials) in thebudget for fiscal year 2002/03.

Towards the end of the 1990s industrial performance was severely constrainedby structural factors. The poor state of the country’s infrastructure, particularlythe road network, has served to increase freight costs and extend deliverytimes. The El Niño rains of 1997-98 caused severe damage to transportinfrastructure, and highlighted the inadequacy of the government’s repair andmaintenance policy. The sector’s output continued to decline in 2000-02, failingto the meet the government’s target of 7.8% growth as contained in the NationalDevelopment Plan.

There is also a substantial informal sector involved in small-scalemanufacturing. Jua kali (literally “hot sun”) industries operate in fields asdiverse as the fabrication of household goods, motor vehicle parts and farmingimplements. Evidence suggests that this sector is expanding rapidly andaccounts for a significant proportion of domestic manufacturing, and that itcontributes perhaps 18% of GDP. However, there are no reliable statistics on thecontribution of the jua kali sector.

Kenya’s industrialisation drive experienced a setback in May 2002 when themodern Thika brewery, opened by South African Breweries International(SABI) in 1998 after an investment of US$35m, was closed. The closure was partof a complicated share swap involving Tanzania Breweries (TB), in which SABIhas a 67% stake, and Kenya’s dominant brewer, East African Breweries (EAB), inwhich Guinness has a 50% stake. Under the terms of the arrangement, EABacquired the Thika plant (known as Castle Breweries Kenya) from SABI inreturn for a 20% shareholding in EAB. At the same time, SABI took over EAB’sKibo brewery in Tanzania in return for a 20% stake in TB. Neither Thika norKibo will continue to function as going concerns.

The move brought to an end four years of fierce competition betweenGuinness and SAB for control of the Kenyan and Tanzanian beer markets, andconstituted a return to the former situation of monopolistic control. Faced withdeclining profits, both companies opted to cut their losses. The main problemhas been the decline in consumption of Western style beers—despite extensiveprice-cutting and advertising—in favour of traditional products. Beer

Thika brewery closes in ashake-up of the industry

Manufacturing growth ishampered by structural factors

52 Kenya


consumption in Kenya has declined from 3.6 hectolitres per head in 1996 toaround 2.4 hectolitres, largely because of the recession in the Kenyan economy.

Construction

The construction industry enjoyed short-lived prosperity in 1990-92 owing toan office-building boom in Nairobi. Parastatals and private-sector groups suchas the British company Lonrho embarked on prestigious projects such as theconstruction of head offices, which have altered the skyline of the capital.However, central government spending on roads, housing and other buildingwork has been constrained not only by fiscal limitations but also by somequestionable policy choices. The recent economic downturn has furtherdampened construction industry activity, although central Nairobi hasundergone major rebuilding following the terrorist bombing in 1998.

The overall performance of the building and construction sector remainedsubdued in 2000-02, mainly because of depressed public- and private-sectorinvestment. The sector also suffered from reduced state spending—aconsequence of the government’s financial austerity measures—and thesuspension of donor funds. Government expenditure on roads increased inboth 2001 and 2002, but all other parts of the sector continued to decline.Employment in the construction industry also declined in 2001-02, reflectingbudgetary constraints and the slow pace of economic recovery.

Expenditure on roads(KSh m)

2001/02 2002/03a

Development Trunk roads 1,385 1,103 Primary roads 601 808 Secondary roads 636 346Recurrent (maintenance & repair) 8,042 8,782

Total 10,665 11,039

a Provisional.


Financial services

At the end of July 2003 Kenya’s banking system comprised of 43 commercialbanks (down from 48 in 2001), two non-bank financial institutions, twomortgage finance companies, four building societies and 47 foreign-exchangebureaus. The decline in the number of institutions is owing to mergers,liquidation and the voluntary winding-up of certain institutions. According tothe Central Bank, unaudited pre-tax profits for the financial sector as wholewere 32% higher in the first five months of 2003, at KSh5.8bn, than in the sameperiod of 2002. Interest income on advances declined, but earnings fromservice charges, commission, foreign-exchange dealings and governmentsecurities increased. Profits were bolstered by lower outlays on salaries andwages, as well as on interest paid to depositors. Overall asset quality remainedpoor, however, and the ratio of non-performing loans to total loans declined

Structure of the financialsystem

A brief period of prosperity

Kenya 53


slightly to 29.4% in May 2003 from 29.8% a year earlier. Six state institutionswere responsible for 58% of all bad debts. The problem is attributed to poor riskmanagement, the depressed state of the economy, ineffective administration ofjustice and pressure from dominant shareholders. Measures to tackle theproblem were announced in the 2003/04 budget (see Economic policy).

Banking indicators(KSh bn unless otherwise indicated; Jul)

2002 2003 % changeTotal assets 449.9 478.1 6.3 Loans 246.8 255.9 3.7 Government securities 94.2 116.3 23.4Non-performing loans 72.4 73.5 1.5 % of total advances 29.3 28.7 -


Is the private sector being crowded out?

Commercial bank loans to the government (via the purchase of treasurysecurities) jumped 27.1% year-on-year to KSh127.6bn in July 2003, while creditextended to the private sector rose by 6.2% to KSh252.2bn. This appears toconfirm suspicions that the private sector is being crowded out, but thesituation is more complicated. The main reasons for slow growth in privatesector lending are: the failure by banks adequately to assess credit risk,which makes them tend towards conservatism in an attempt to avoiddefault; and the failure by prospective borrowers to make convincing cases.It has little to do with government demand for credit per se, as is clear fromongoing excess liquidity in the banking system. The problem has more to dowith a perceived shortage of opportunities than a shortage of funds. On amore positive note, bank lending to the private sector picked up morestrongly in the three months to July 2003 in areas such as agriculture, trade,construction, real estate, and consumer durables.

Two major banks, Barclays and Kenya Commercial Bank (KCB), earned healthyprofits in the first half of 2003, according to figures released in early August.Barclays’ pre-tax profits rose by 61% year on year to KSh2bn, owing to increasedlending (especially to consumers), an increase in customers and highercommission income. Income rose by 18.7% to KSh6.4bn in the first half of 2003compared with a year earlier, and assets were 5% higher at KSh90bn, includinga 6% rise in deposits to KSh73bn. Profits were slightly reduced by a 21.4% rise inbad debt provisions to KSh1bn, although the company said that this was nomore than a precautionary move. Non-performing loans declined slightly toKSh7.8bn, equivalent to 14.2% of gross loans, roughly half the level for thebanking sector as a whole.

KCB recorded net profits of KSh295m in the first half of 2003, compared with afull-year loss of KSh3bn in 2002. The deposit base rose by 13.9% to KSh52.5bn.The bank has long been scheduled for privatisation, and its return toprofitability, if maintained, will make it more attractive to investors.

Barclays and KCB postfirst-half profits

54 Kenya


The Nairobi Stock Exchange (NSE) 20-share index continued a seven-monthbull-run in April 2003, potentially rewarding (selling) investors with a 77%return over the period. Sentiment (and share values) rose strongly in December2002—by 17%—because of perceptions that the election would be non-violent,and post-election euphoria drove the index up by a further 10% in January2003. The market appeared to pause for breath in February and March 2003,rising by 3% in each month, but positive results from blue chip companiesduring March drove the NSE higher, to a near 15% month-on-month rise inApril. The mood for equities has also been boosted by the compression of realinterest rates, brought about by higher inflation coupled with falling nominalrates. Crucially, this divergence of potential returns has caused institutionalinvestors to return to the equity market. The government’s apparent dedicationto structural reforms has also bolstered interest in the stockmarket because ofthe potential cut in business costs—stemming from increased public-sectorefficiency and the removal of infrastructural constraints to growth—which inturn should fuel economic and corporate growth.

Other services

Tourism accounts for 20% of GDP and is a major employer; it is also Kenya’sthird largest foreign-exchange earner after tea and horticulture. Against abackground of tribal clashes, negative publicity, crumbling infrastructure,inadequate marketing and increased competition from destinations such asTanzania, Mauritius and South Africa, the sector registered an unprecedenteddecline between 1995 and 2000. In 2001 the tourism sector’s performance wasmixed. The global recession, coupled with the aftermath of September 11thterrorist attacks on the US, did not augur well. During this period annual touristarrivals declined by 1.5% and receipts fell by 19.5%. Tanzania is increasinglymarketing itself as a tourism destination and privatising many of its facilities. In2001 the tourism sector’s performance was mixed. The global recession,coupled with the aftermath of September 11th terrorist attacks on the US, didnot augur well. A gentle pick-up in tourism activity in the first half of 2001 wasquickly reversed in the second half of the year.

Tourism, 2002a

’000 bed-nights % change, year on yearVisitors from: Europe 2,208.9 14.1 Africa 849.6 -14.2 America 194.5 -9.9 Asia 124.2 -12.7 Australia & New Zealand 21.9 6.3Total incl others 3,436.8 2.4

a Provisional.


Official data suggest that tourism performed better than expected in the first halfof 2003, but negative sentiment generated by the heightened threat of terrorismin East Africa dampened activity in the second half of the year. Travel warnings

Tourism has been through adeep trough

Equities rise by 77% in sevenmonths

Tourism slumps after apromising start in 2003

Kenya 55


issued by Western governments in May 2003, including the UK and Germany(Kenya’s main markets), proved particularly damaging, and even though theywere subsequently withdrawn, potential holidaymakers remain extremely wary.Tourism suffered a new setback in October 2003 with the suspension of charterflights to Mombasa by the UK-based Tui travel agency because of weak demand.The company was the main agent for three of Europe’s leading charter carriers—Britannia, Monarch and Air 2000—and handled nearly 75% of peak-season trafficto Kenya’s coastal belt. Tui’s withdrawal has led to the cancellation of 13,000hotel bookings between October 2003 and April 2004 and may cut earningsfrom tourism by KSh770m (US$9.6m). Local tour companies have called on thegovernment to cut charges for visas and landing rights in order to minimise thedamage. Some have also criticised the government’s focus on East Asia,declaring that any funds available would be better spent on increasing thenumber of scheduled flights to traditional European markets, thereby cuttingreliance on more fickle charter outfits.

The external sector

Trade in goods

Kenya has traditionally run a trade deficit. Recent data indicate a narrowing ofthe trade gap to US$1.3bn in 2001, when imports increased by 4.3% to US$3.2bn,and exports increased by 6.2% to US$1.9bn. The unfavourable terms of traderecorded in the previous two years worsened in 2002. Although export priceindices for all items rose by 3.1%, and import price indices for all importsincreased by 5%. In Jan-July 2003 exports rose by 13.8% year on year, to US$2.3bn,driven by horticulture and “others” (that is, sugar, leather, iron and steel, cement,and textiles), but imports climbed by 14.5%, to US$3.7bn. Capital equipmentposted the greatest proportional increase following the purchase of road vehiclesand general industrial machinery. Rapid growth in both exports and importsmainly reflects the depreciation of the Kenya shilling against the euro (althoughnot the US dollar), rather than shifts in trade volume. Nevertheless, imports grewfaster than exports and the trade deficit widened by 15.7%, to US$1.4bn.

Foreign trade, 2002a

(KSh m)

Total exports (incl re-exports) fob 131,394 Tea 34,376 Horticulture 28,334 Coffee 6,541 Petroleum products 3,896 Cement 1,479Total imports cif -257,710 Industrial & electrical machinery 25,474 Refined petroleum products 22,065 Crude petroleum 23,940 Motor vehicles & chassis 14,382Trade balance -126,316

a Provisional.

Source: Central Bureau of Statistics, Ministry of Planning and National Development, Economic Survey 2003.

Kenya runs a trade deficit

56 Kenya


Since 1995 the Common Market for Eastern and Southern Africa (Comesa) hasovertaken the EU as the main destination for Kenya's exports. The country’sexports to Comesa as a proportion of total exports are estimated to haveincreased from 43% in 1997 to 46% in 2001. Kenya's exports to the East AfricanCommunity (EAC) have also increased tremendously over the last few years,from KSh32bn in 1997 to KSh44bn in 2001 (an increase of about 40%). Kenya'strade with Comesa and the EAC is dominated by manufactured goods—unlikeits trade with the European Union, which is dominated by primary products.The expansion of regional markets has also created a wider market for goodsproduced in Kenya and is therefore important for foreign direct investment(FDI), which is looking for a platform from which to supply wider markets.

Main trading partners, 2002a

(% of total)

ExportsUganda 18.5UK 11.6Tanzania 8.4Netherlands 6.5ImportsUAE 11.3UK 8.2Japan 6.7USA 5.7

a Provisional.

Source: Ministry of Planning and National Development, Economic Survey, 2003

Africa Growth and Opportunity Act attracts investors to Kenya

The World Bank has billed Kenya’s garment sector as a success story, largelybecause of investment related to the Africa Growth and Opportunity Act(AGOA), which totalled US$12.8m in 2001 and 2002. The garment sector’sperformance compares favourably to the rest of the manufacturing sector,which has struggled to attract foreign direct investment. A recent studyrevealed that the textile sector contracted rapidly in the 1990s, but picked upstrongly after the introduction of AGOA, with exports rising from US$10m in1999 to US$127m in 2002 and an estimated US$200m in 2003. However, twoclouds loom over the horizon.

• First, as from September 2004, AGOA beneficiaries cease to benefit fromthe concession allowing the sourcing of cloth from outside Africa. Mostinvestment has been undertaken by Asian firms seeking to exploit cheaplabour, but they import most of their raw materials. It is uncertain whetherlocal mills will be able to take up the challenge of supplying cloth ofsufficiently high quality.

• Second, the Multi-Fibre Agreement—under which the AGOA pact isadministered—will end in 2005, in effect liberalising the global textile industry.The US government is currently lobbying for an extension of AGOA, but untilthe issue is settled new investment will be deterred.

Africa rivals EU as Kenya’smain trading partner

Kenya 57


Invisibles and the current account

In recent years Kenya’s current account has remained firmly in deficit asimports have exceeded exports and earnings on services such as tourism(which alone generates around 20% of all foreign-exchange revenue) havedeclined. The shortfall on the current account has been offset by netinvestment inflows, which has kept the overall balance of payments in surplus.However, this surplus has steadily declined, and is in danger of moving intodeficit as financial inflows decline. This change can be traced back to a collapsein investor confidence in the second half of 1997, following the suspension ofIMF structural funding in July and fears over political stability during theelections later the same year. Despite high domestic rates of interest in 1998, thenet outflow of capital continued; it then accelerated as interest rates fell fromlate 1998 and continued to do so during 1999-2001, pushing down the balance-of-payments surplus.

Kenya has run a consistent surplus on its invisibles balance, mainly owing toearnings from tourism and to donor funding. However, a disastrous few yearsfor the tourist industry have had a damaging impact on invisible earnings. Theother principal component of the current account, net current transfers, showsa regular surplus as a result of donor grants and private transfers, althoughinterruptions to large-scale bilateral aid following the suspension of the IMFstructural loan in mid-1997 and again at end-2000 have had a significantnegative impact.

Kenya’s current-account deficit widened to US$126m in the year to July 2003, asthe merchandise trade deficit grew faster than the invisible trade surplus. Theinvisible trade surplus climbed by 15% to US$1.27bn, as higher receipts fromtourism and other non-factor services (such as royalties, licence fees andtelecoms earnings) compensated for the decline in current transfers. Privatetransfers remained on a downward path, although official transfers will becomea significant factor in the current-account when donor support resumes.

Balance of payments(US$ m; year to end-July)

2002 2003 % changeMerchandise exports fob 2,007 2,283 13.8Merchandise imports cif -3,215 -3,681 -14.5Trade balance -1,208 -1,398 -15.7Invisible trade (net) 1,106 1,272 15.0Current-account balance -102 -126 -23.5Capital account 211 254 20.4Overall balance 109 128 17.4


Capital flows and foreign debt

Kenya remained an unattractive destination for inflows of FDI according to the2003 World Investment Report by the UN Conference on Trade andDevelopment (UNCTAD), although admittedly this is based on the situation

Structural imbalances in thebalance of payments

Foreign direct investmentinflows remain at a low level

58 Kenya


prior to the election of the new National Rainbow Coalition (NARC)government. In terms of both performance and potential, Kenya lags some waybehind its East African Community partners, Tanzania and Uganda. FDI toKenya reached a peak of US$127m in 2000, following investment in mobiletelephone networks, but fell to US$50m in both 2001 and 2002. This took thetotal stock of FDI in Kenya to US$1.1bn, less than half the level in Tanzania.

FDI inflows into East Africa(US$ m)

2000 2001 2002 2002flow flow flow stock

Tanzania 463 327 240 2,351

Uganda 254 229 275 1,759Kenya 127 50 50 1,097

Sources: UN Conference on Trade and Development, World Investment Report 2003.

Kenya slipped from 90th to 118th position out of 140 countries between 1990and 2001—to lie sandwiched between Sierra Leone and Burkina Faso—according to UNCTAD’s performance index, which compares share of globalFDI to share of global GDP. On the more sophisticated potential index, which isbased on a range of structural variables such as telephone density, commercialenergy use and the number of students in tertiary education, Kenya slippedfrom 84th to 127th place over the same period, and was named amongst the 20worst laggards. Foreign companies held back from investing in Kenya for avariety of reasons, including high levels of corruption, the suspension of donorfunding, and uncertainty in the run-up to the end-2002 elections; other foreigncompanies have divested.

FDI is highly likely to have remained muted in 2003, given delays in theresumption of donor support and the need to see just how committed thegovernment is to economic and institutional reform, but the EconomistIntelligence Unit expects FDI to move up in coming years, partly because of theprospective privatisation of state firms such as Telkom Kenya.

Net inflows of short-term capital have sustained a healthy capital-accountsurplus in recent years. High yields on government securities ensured thearrival of new foreign speculative investment. However, a turnaround occurredin mid-1997, when IMF funding was suspended and investor confidenceconsequently collapsed. Political and economic uncertainty at the time of theelections in late 1997 created a further disincentive to investors.

It was hoped that as the political outlook stabilised during 1998-99 the “hotmoney” would return. However, for the first time since early 1995 the capitalaccount registered a net outflow in the middle of 1998, reflecting an ominousand continued fall in foreign investor confidence. The level of long-term privateinvestment has also been disappointing. Government data indicate netoutflows throughout 1993-2002. This suggests that foreign companies are notonly holding back from capital investment in Kenya, but that some are divestingthemselves of longer-term commitments. The implication is that foreigninvestors, whether speculative or long-term, are waiting to see whether the

Investors are losing confidence

Kenya 59


political and economic climate improves before they take advantage of anyinvestment opportunities.

According to the World Bank’s recently published Global Development Finance,Kenya’s debt stock fell from just under US$6.3bn in 2000 to US$5.83bn in 2001and an estimated US$5.6bn in 2002. This was owing to the fact that new debtinflows into Kenya have largely dried up, whereas repayments have continuedin line with historical norms. By the Bank’s reckoning, external debt amountedto 51.9% of gross national income (GNI), compared with 67.7% of GNI for Sub-Saharan Africa as a whole. The ratio of debt to exports of goods and serviceswas put at 192.2%, compared with 170.2% for the region as a whole.

Finland has written off the KSh107m (US$1.4m) in bilateral debt owed byKenya, including both principal and interest. Although the amount is small incomparison with Kenya’s total external debt of an estimated US$5.6bn in 2002,the decision is symbolic of the improvement in relations with the donorcommunity and represents a vote of confidence in the new Kenyangovernment. Finland had already written off Tanzania and Uganda’s debt, buthad not been prepared to extend the same generosity to the corrupt regime ofthe previous president, Daniel arap Moi.

On November 15th 2000, before the crisis with the IMF emerged, the Kenyangovernment agreed a new external debt repayment schedule at a meeting heldin France with representatives of the Paris Club. The two sides negotiated therescheduling of US$300m of debt arrears, repayment of which was supposedto be made during the 2000/01 financial year (July-June). However, Kenya isstill a long way from qualifying for the kind of debt relief available under theIMF-World Bank’s heavily indebted poor countries (HIPC) initiative. It isextremely unlikely that Kenya will be considered for HIPC until it candemonstrate a commitment to economic reform and good governance andconvince donors that any debt write-off will be used to alleviate poverty.

Agreement is reached with theParis Club

New data indicate Kenya’slimited access to funds

Finland cancels Kenya’s debt

60 Kenya


Foreign reserves and the exchange rate

The government is trying to maintain reserves covering three months’ worth ofimports, and at the end of July 2003 they stood at US$1.25bn or 3.7 months ofimport cover. Of this total, two-thirds of reserves are held by the central bankand one-third by commercial banks.

The abolition of the official exchange rate for the Kenya shilling in October 1993and the dismantling of the Central Bank of Kenya’s controls on the foreign-exchange market were widely expected to lead to a rapid depreciation of thecurrency on the interbank market. In fact the reverse happened, and the shillinghas shown remarkable resilience. The shilling moved through two distinctphases in the first nine months of 2003, with rapid appreciation betweenJanuary and May—reflecting confidence in the new government and weaknessin the US dollar—being followed by similarly rapid depreciation between Mayand September. This reversal can be attributed to several factors, including:intervention by the Central Bank to forestall an erosion in Kenya’s internationalcompetitiveness; the ebbing of confidence because of disputes within the rulingNational Rainbow coalition and delays in the return of donor support; andseasonal trends in foreign-exchange inflows.

The shilling weakened sharply in the first half of September, reaching a low ofKSh79.2:US$1 in mid-month because of strong corporate demand for foreignexchange, but subsequently recovered as earnings from tea, coffee andhorticulture picked up. The shilling continued to appreciate during October,ending the month at close to KSh76.5:US$1, as the imminent resumption ofdonor support boosted confidence. The shilling’s relatively strong showingagainst the US dollar in the year to September 2003 is mainly the result of theweakness of the US dollar against other major currencies. By contrast, theshilling depreciated by 6.1% against sterling, 14.8% against the euro and 25.4%against the rand over the same period.

Reserves provide over threemonths’ import cover

Kenya 61


Appendices

Sources of information

Central Bank of Kenya, Monthly Economic Review

Central Bank of Kenya, Annual Report

Ministry of Planning and National Development, Development Plan 1998-2002

Ministry of Planning and National Development, Economic Survey (annual)

Ministry of Planning and National Development, Statistical Abstract (annual)

The Economic Survey is the most comprehensive of the national publications. Itis produced each year in June or July and brings together a wide range ofstatistical data relevant to the economy, on both the macroeconomic and thesectoral levels. In most cases, the Economic Survey presents five years of figuresup to the last full year before publication. It contains more than 200 separatetables and, although not always presented in a readily accessible form, mostrequired data can eventually be retrieved from these. Some sections, such asthose on energy and manufacturing, are notably weaker than others. Thepublication’s one big drawback is that it is difficult to judge the reliability of thedata given, particularly at the sectoral level, and it is usually not possible torefer back to the source of the data.

The Monthly Economic Review, produced by the Central Bank of Kenya, is awell-presented and up-to-date source for a wide range of monetary data on thedomestic economy. It includes tables and charts on exchange rates and interestrates, money supply, domestic debt, bank ratios, public finances and thebalance of payments. It is available at www.africaonline.co.ke/cbk/.

The Statistical Abstract, published each year, presents a wide range of nationaldata over a longer timeframe than the Economic Survey. Much of the data ispresented in ten-year time series.

It is often said that international statistics on African countries are in someways superior to national data. However, this overlooks the fact that theprincipal international sources, such as the IMF’s International FinancialStatistics, draw almost exclusively on national sources. This is unavoidable,since they do not have the resources or the remit to gather and collate theirown figures on domestic money supply, credit, public finances and trade. It istherefore not surprising that international and national sources tend to tell thesame story (with a few exceptions, such as Nigeria, where the volume of oilexports is disputed, and Angola, where 20 years of civil war have created anenormous parallel non-oil economy that dwarfs the formal sector). One furthercomplication is that the IMF and the World Bank produce internal documentswhich can sometimes be obtained informally at their regional offices; theseoften form the basis for lending decisions by the institutions’ boards ofdirectors, and tend to diverge more widely from national data than do thestatistics that they release to the general public.

National statistical sources

International statistical sources

62 Kenya


For Kenya, divergence is not generally a problem. The main internationalsources other than International Financial Statistics are three annual publicationsfrom the World Bank, Global Development Finance, World Tables and Trends inDeveloping Economies, and the OECD’s Geographical Distribution of FinancialFlows to Aid Recipients. For information on the financial sector (such as balance-sheet totals, net profit, board directors and shareholdings in institutions), theGeneva-based Sifida Investment Company produces the useful African BankingDirectory. Data on energy provision can be obtained from Energy DataAssociates, Bishops Walk House, 19-23 High Street, Pinner, Middlesex HA5 5PJ.

Daily Nation, Nairobi (www.nationaudio.com/News/DailyNation/Today/)

East African Standard (daily), Nairobi

The People (daily), Nairobi

The East African (weekly), Nairobi, Kampala and Dar es Salaam(www.nationaudio.com/News/EastAfrican/Current/index.htm)

Finance (weekly), Nairobi

East African Alternatives (bi-monthly), Nairobi

IMF, Kenya: Selected Issues and Statistical Appendix, July 2003

UN, Common Country Assessment for Kenya, March 1998

Republic of Kenya, National Poverty Eradication Plan, 1998

World Bank, Kenya Poverty Assessment, March 1995

Jonah Anguka, Absolute Power: The Ouko Murder Mystery, Pen Press,London, 1998

Diana Hunt, The Impending Crisis in Kenya: The Case for Land Reform, Gower,Aldershot, 1984

International Institute for Strategic Studies, The Military Balance, London

Andrew Morton, Moi: The Making of an African Statesman, Michael O’MaraBooks, London, 1998 (currently the subject of a libel action by Richard Kwach)

Smith Hempstone, Rogue Ambassador, University of the South Press, Sewanee,Tennessee, 1997

Chester Stern, Dr Iain West’s Casebook, Little, Brown, London, 1996 (the chapteron the Ouko murder is currently the subject of a libel action by NicholasBiwott)

David Throup and Charles Hornsby, Multiparty Politics in Kenya, J. Currey,Oxford, EAEP, Nairobi, and Ohio University Press, Athens, Ohio, 1998

Select bibliography andwebsites

Kenya 63


Reference tablesPopulation(m unless otherwise indicated)

1997 a 1998 1999 2000 2001Total 28.41 29.34 30.03 30.67 31.29 % change -10.7 3.3 2.4 2.1 2.0

a Break in series data.

Source: IMF, International Financial Statistics.

Labour force(’000 unless otherwise indicated)

1998 1999 2000 2001 2002 a

Informal sector 3,353.5 3,738.8 4,150.9 4,624.4 5,086.4Private sector 967.2 989.9 1,002.9 1,018.7 1,041.0 Agriculture & forestry 245.2 249.6 251.3 254.7 256.3 Manufacturing 180.8 183.6 182.9 183.1 196.4 Community, social & personal services 229.3 239.4 247.8 256.5 261.5 Trade, restaurants & hotels 144.3 147.3 149.1 150.8 151.4Public sectorb 711.2 698.8 692.5 658.5 658.8 Community, social & personal services 492.8 486.3 485.3 463.1 465.5 Agriculture & forestry 64.6 62.9 60.9 57.8 57.3 Transport & communications 42.6 40.9 39.7 38.1 37.8 Manufacturing 36.7 36.3 35.8 33.5 33.4

Self-employed & unpaid family workers 64.8 65.1 65.3 65.4 65.5Total 5,096.7 5,492.6 5,911.6 6,366.9 6,851.6 % of male workforce (wage employment) 70.8 71.5 70.5 70.4 70.4

a Provisional. b Revision of public-sector employment.


Transport and communications1998 1999 2000 2001 a 2002

RailPassenger journeys (’000) 2,843 4,700 4,200 5,517 4,794Freight carried (’000 tonnes) 1,688 2,200 2,400 2,330 2,227RoadNew motor vehicle registrations 31,718 27,892 20,236 26,024 32,638ShippingFreight handled at Mombasa port (’000 tonnes) 9,688 9,498 10,580 12,717 12,783Air (Nairobi & Mombasa)Passengers carried (’000) 3,163 3,558 3,847 3,819 3,948Freight carried (’000 tonnes) 120,844 128,997 143,383 143,109 172,054CommunicationsNew radios sold & licensed (’000) 75 104 85 69 62New television sets sold & licensed (’000) 28 43 38 37 35Average daily newspaper circulation (’000) 292.1 298.5 511.5 1,342.3 1,526.8

a Provisional.


64 Kenya


National energy statisticsa

(’000 tonnes oil equivalent unless otherwise indicated)

1998 1999 2000 2001 2002 b

Net trade in petroleum products 2,937 2,801 2,921 2,732 2,367Local energy production 322 283 167 194 282 Hydro power 289 251 135 155 244 Geothermal power 33 33 32 39 39

Stock changes & production losses -612 -361 -341 -238 57Total energy consumption 2,606 2,679 2,700 2,655 2,707 Coal & coke 73 72 66 66 99 Liquid fuels 2,199 2,312 2,448 2,385 2,306 Hydro & geothermal 334 296 186 204 303Local production (% of total consumption) 12 11 6 7 10

Energy consumption per head (kg oil equivalent) 91 91 89 86 87

a Excluding fuel wood and charcoal. b Provisional.


Government financesa

(KSh m unless otherwise indicated)

1998/99 1999/2000 2000/01b 2001/02 b 2002/03 c

Current revenue 179,838 181,042 191,274 185,325 222,320Current expenditure 165,525 154,756 181,088 195,634 238,966

Current balance 14,312 26,287 10,187 -10,308 -16,646Capital revenue 489 3,508 947 2,538 737

Capital expenditure 12,344 19,418 30,817 26,065 44,027Net lending 3,058 1,599 2,372 -21 31External grants 4,920 4,247 9,299 5,367 14,245

Overall balance 4,319 13,025 -12,827 -28,448 -45,723 % of GDP 1 2 -2 -3 -5

FinancingExternal loans (net) -16,523 -8,858 -15,733 -10,031 -15,169Total domestic borrowing 11,144 11,878 624 39,703 33,180 Long-term (net) 27,500 -22,590 -3,892 62,073 29,804 Short-term (net) -16,356 34,468 4,516 -22,370 3,376Change in cash balances (- indicates increase) 1,061 -16,045 27,936 -1,224 27,712

a Fiscal years starting July 1st. b Provisional. c Estimates.


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Government revenue and expenditure(KSh m unless otherwise indicated)

1998/99 1999/2000 2000/01a 2001/02 a 2002/03 b

Revenue 180,327 184,551 192,221 187,864 223,056 Income tax 55,235 53,317 53,429 55,862 67,529 Indirect tax 100,289 103,649 112,486 106,603 122,768 Other revenue & income 24,803 27,585 26,306 25,399 32,759Expenditure 177,831 178,973 211,705 221,499 282,793 Current expenditure 165,487 154,555 180,888 195,434 238,766 Consumption of goods & services 72,831 65,447 79,276 84,747 109,747 Total interest payments (foreign & domestic) 36,090 28,918 24,426 29,851 38,762 Transfers & others 56,566 60,190 77,186 80,836 90,257 Capital expenditure 12,344 19,418 30,817 26,065 44,027 Gross fixed capital formation 12,099 17,008 28,475 23,929 33,025 Capital transfers 245 2,410 2,342 2,136 11,002Key fiscal trends (% of GDP)Total government expenditure 35.2 30.5 33.9 35.0 35.3Total government revenue 26.0 24.5 24.0 21.0 22.9Overall deficit 0.6 1.8 -1.6 -3.2 -4.7

a Provisional. b Official estimates.


Money supply and credit(KSh m unless otherwise indicated; end-period)

1998 1999 2000 2001 2002Money (M3)a 285,131 277,067 254,066 246,525 262,603 % change, year on year 3.3 -2.8 -8.3 -3.0 6.5Total domestic credit 357,980 363,904 342,667 343,006 384,743 Central government & other public sector 96,328 93,960 91,847 108,410 121,400 Private sector 254,302 277,407 289,478 271,800 288,831

a The Central Bank of Kenya revised its monetary definitions in April 1998, resulting in a decrease in M3 of approximately 0.2%. Data for this newseries have been calculated back to 1995 by the Central Bank. The 1994 data have not been revised.


Interest rates(%; end-period unless otherwise indicated)

1998 1999 2000 2001 200291-day Treasury bills 11.1 20.5 13.5 10.8 8.4Interbank rate 9.4 13.0 13.0 9.8 10.4Commercial bank loans plus advances (maximum;

under 3 years) 27.1 25.2 19.6 19.5 18.3

Commercial bank savings deposits (av) 8.0 6.2 4.5 4.4 3.5Memorandum itemConsumer price inflation (annual average) 6.6 5.8 10.0 5.8 2.0


66 Kenya


Gross domestic product at factor cost1998 1999 2000 2001 2002a

Total (KSh m)At current prices 596,539 639,056 685,436 770,028 850,910At constant (1982) prices 102,253 103,701 103,456 104,731 105,900 Real change (%) 1.8 1.4 -0.3 1.2 1.1Per head (KSh)b

At current prices 20,748 21,737 22,691 24,988 26,998At constant (1982) prices 3,556 3,527 3,429 3,399 3,360 Real change (%) -0.6 -0.8 -2.8 -0.8 -1.1

a Provisional. b Calculated using government population estimates.


Gross domestic product by expenditure(KSh m; current prices)

1998 1999 2000 2001 2002a

Private consumption 513,249 540,400 609,862 685,607 693,171

Government consumption 113,568 125,943 139,159 168,731 184,337Gross fixed capital formation 113,879 112,961 116,369 123,079 127,141

Change in stocks 6,210 7,142 6,142 5,282 4,542Exports of goods & services 171,895 189,265 211,433 234,294 257,074Imports of goods & services -224,772 -232,232 -286,621 -334,268 -296,912

GDP at market prices 694,029 743,479 796,343 882,725 969,354

a Provisional.


Gross domestic product by sector(KSh m; current prices)

1998 1999 2000 2001 2002 a

Agriculture, forestry & fishing 155,080 147,486 132,955 141,004 136,847Mining & quarrying 823 994 1,143 1,260 1,442

Manufacturing 66,006 79,121 88,715 96,969 110,853Electricity & water 5,444 5,822 6,332 6,938 8,943

Building & construction 21,404 24,470 26,466 30,025 34,228Trade, restaurants & hotels 123,453 138,031 162,391 193,783 224,276Transport, storage & communications 43,255 45,617 50,339 57,972 69,506

Finance, insurance, real estate & business services 78,093 76,078 69,750 74,174 70,099Ownership of dwellings 22,353 24,369 27,264 29,596 32,260

Domestic services 6,710 7,294 8,099 8,932 9,223Government services 83,075 88,909 94,421 103,695 118,234

Other services 23,721 27,790 31,986 36,774 42,906Imputed bank service charges -47,127 -42,178 -30,758 -28,433 -26,776GDP at factor cost (incl others) 596,539 639,056 685,436 770,028 850,910

a Provisional.


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Consumer pricesa

(Oct 1997=100 unless otherwise indicated; annual averages)

1998 1999 2000 2001 2002Lower-income index 109.1 113.4 123.4 127.9 130.0 % change 9.1 3.9 8.8 3.6 1.6

Middle-Upper income index 104.7 111.3 118.4 123.4 126.0 % change 4.7 6.3 6.4 4.2 2.1

Overall index 108.2 113.0 122.4 127.0 129.2 % change 8.2 4.4 8.3 3.8 1.7

a Indices for Nairobi.


Average wage earnings per employee(KSh per year unless otherwise indicated)

1998 1999 2000a 2001 2002a

Private sector 131,152 152,459 175,846 202,083 231,453 % change 26.5 16.2 15.3 14.9 14.5

Public sector 132,136 147,279 168,956 193,827 223,940 % change 25.9 11.5 14.7 14.7 15.5

a Provisional.


Agricultural productiona

(KSh m unless otherwise indicated)

1998 1999 2000 2001 2002b

Cereals 6,780 5,414 5,617 8,761 6,378 Maize 2,800 3,098 2,915 6,142 4,126 ’000 tonnes 218 223.5 201.2 461.5 399.1 Wheat 2,986 1,006 1,133 1,429 978 ’000 tonnes 176.7 52.9 70.5 77.7 57.2

Other crops 63,912 52,855 59,209 56,631 52,358 Coffee 13,198 10,050 11,282 6,424 5,441 ’000 tonnes 51.3 64.3 98.0 54.6 46.7 Tea 39,138 31,088 35,970 38,565 33,415 ’000 tonnes 294.2 248.8 236.3 294.6 287.1 Sisal 796 874 810 957 938 ’000 tonnes 19.9 21.9 21.4 23.2 22.1 Sugarcane 7,968 7,639 7,942 7,155 9,072 m tonnes 4.6 4.4 3.9 3.6 4.5Livestock & products 14,110 15,043 13,949 15,555 17,636 Cattle & calves 8,878 8,886 8,040 9,079 11,827 ’000 head 1,800 2,536 2,870 1,952 1,854 Dairy produce 1,946 2,694 2,051 1,920 2,469 m litres 126 180 137 148 178

Total 84,802 73,313 78,775 80,947 76,372

a Marketed. b Provisional.


68 Kenya


Forestry and fishing1998 1999 2000 2001 2002 a

Forestry (’000 ha)Area felledb 2.0 19.0 1.0 1.0 1.0Area plantedb 2.0 2.0 4.0 4.0 6.7Total area remainingc 147.2 147.2 147.2 120.0 120.0Wood processed (’000 cu metres) 288.1 345.7 216.8 197.2 162.0Softwood 287.7 345.7 216.8 197.2 162.0Hardwood 0.4 0.0 0.0 0.0 0.0Fish landed (tonnes) 172,848 213,396 202,639 163,225 179,106Freshwater 167,850 208,164 197,876 157,671 173,402Marine 3,966 4,090 3,779 4,234 4,445Crustaceans 800 880 777 1,036 968Other marine products 232 262 207 284 291

a Provisional. b Plantation Area. c Overall forest.

Source: Central Bureau of Statistics, Ministry of Finance and Planning, Economic Survey, 2003

Minerals production1998 1999 2000 2001 2002a

Volume (’000 tonnes)Soda ash 242.9 245.7 238.2 297.8 304.1Fluorspar 60.9 93.6 100.1 118.9 85.0Salt 21.7 44.9 16.4 5.7 18.8Crushed refined soda 370.0 335.2 382.6 207.6 474.0Value (KSh m) 2,229 3,411 3,611 4,754 4,868Soda ash 1,473 1,849 1,956 2,716 2,862Fluorspar 342 651 628 727 633Salt 66 136 52 99 61Crushed refined soda 30 37 42 23 38

a Provisional.


Industrial production(’000 tonnes unless otherwise indicated)

1998 1999 2000 2001 2002 a

Refined petroleum products 1,722 1,698 2,013 1,696 1,581Cement 1,426 1,389 1,367 1,319 1,463

Sugar 449 471 402 377 494Maize meal 266 205 154 135 141Wheat flour 230 225 189 181 188

Rice 9.4 5.7 4.9 4.6 4.0Beer (m litres) 263 188 203 184 n/a

Spirits (’000 litres) 22,115 17,748 19,366 20,400 n/aIndustrial output index (1976=100) 282.2 285.6 281.4 283.6 287.0 % change 3.4 1.2 -1.5 0.8 1.2

a Provisional.


Kenya 69


Construction statistics1998 1999 2000 2001 2002 a

Reported building work completed (KSh m)b

Private 1,589 1,324 1,342 1,184 1,512Public 44.0 31.2 16.0 29.1 28.0Government expenditure on roads (KSh m)c

New construction 2,686 863 2,624 2,622 2,257Maintenance & repair 5,074 5,922 6,696 8,042 8,782Cement consumption (’000 tonnes) 1,072 1,111 1,067 1,089 1,173Employment in building & construction (’000) 79.3 79.2 78.6 76.7 76.5

a Provisional. b Nairobi, Mombasa, Nakuru, Kisumu and Malindi. c Fiscal years starting July 1st.


Banking statistics(KSh m unless otherwise indicated; year-end)

1998 1999 2000 2001 2002Central Bank assetsForeign exchange 45,989 56,550 69,934 82,238 81,211Advances to banks 1,140 904 4,884 1,362 7,484Advances to government 6,609 6,664 8,595 42,853 43,867Others (incl Treasury bills & bonds) 71,240 62,110 57,642 24,023 21,827Central Bank liabilitiesCurrency 44,486 50,157 51,914 53,080 62,525Deposits 69,843 69,404 75,525 73,103 70,833Others 6,812 1,790 8,275 2,925 4,600

Commercial banksDeposit liabilities 257,954 279,450 294,924 302,895 334,976Liquid assets 99,113 111,245 125,721 137,855 147,786Current liquidity ratio (%) 38 40 43 46 44


Tourism statistics1998 1999 2000 2001 2002a

Tourist departures (’000) 868.1 968.4 995.2 990.9 1,013.4

Average length of stay (days) 9.8 9.4 8.7 8.4 8.5Beds occupied (’000 bed-nights) Germany 419 536 605 541 721 Kenya 697 654 794 740 656 UK 516 399 559 606 591 Switzerland 130 164 175 175 218

Beds available (’000 bed-nights) 7,976 8,711 9,382 8,328 8,183Bed occupancy rate (%) 35.3 33.9 39.3 40.3 42.0

a Provisional.


70 Kenya


Import and export prices(Feb-Mar 1982=100 unless otherwise indicated; annual averages)

1998 1999 2000a 2001 2002a

Exports 615 576 620 637 657 % change 1.2 -6.3 7.6 2.7 3.1

Imports 614 667 739 807 847 % change 2.7 8.6 10.7 9.2 5.0

Terms of tradeAll items 100 86 84 79 78Non-oil items 96 90 89 79 79

a Provisional.


Exports by value(KSh m; fob)

1998 1999 2000 2001 2002a

Tea 32,971 33,065 33,150 34,485 34,376

Horticultural productsb 14,938 17,641 21,216 19,846 28,334Coffee 12,817 12,029 11,707 7,460 6,541

Petroleum products 9,127 9,555 9,429 12,345 3,896Fish & fish products 2,791 2,267 2,953 3,858 4,205Cement 1,443 1,248 1,358 1,031 1,479

Soda ash 1,236 1,280 1,440 1,993 2,127Pyrethrum extract 716 656 704 993 798

Sisal 689 636 606 728 792Fluorspar 213 501 644 652 734Tobacco & tobacco products 1,607 1,554 2,167 2,887 3,454

Total incl others 114,445 115,406 119,764 121,434 131,394

a Provisional. b Include cut flowers, fruits and vegetables, both fresh and processed.


Main exports by volume(’000 tonnes unless otherwise indicated)

1998 1999 2000 2001 2002a

Cement 417 284 301 233 292Horticultural productsb 232 201 194 193 263

Tea 264 246 217 270 273Soda ash 214 210 236 274 302

Coffee 52 72 87 64 49Fish & fish products 14 16 17 19 18Petroleum products (m litres) 792 765 1,155 845 224

a Provisional. b Includes cut flowers, fruits and vegetables, both fresh and processed.


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Imports by value(KSh m; cif)

1998 1999 2000 2001 2002a

Industrial machinery 31,262 30,753 39,438 37,933 25,474Refined petroleum products 16,318 18,433 21,773 26,035 22,065

Crude petroleum 15,036 22,355 41,907 31,179 23,940Motor vehicles 14,681 11,906 9,659 14,524 14,382

Vegetable oils & fats 8,750 9,184 8,016 10,125 14,333Iron & steel 7,900 9,103 8,604 11,969 11,115

Resin & plastics 7,128 7,083 8,446 9,131 8,816Pharmaceuticals 6,559 6,373 5,976 7,188 8,678Wheat (unmilled) 4,794 5,899 6,989 7,515 5,577

Maize 4,758 906 4,664 3,342 229Sugars, molasses and honey 4,232 1,468 2,730 6,648 3,074

Fertilisers 3,516 5,488 5,448 6,307 5,497Paper & paper products 2,536 2,305 2,613 3,978 3,319Total incl others 197,789 206,401 247,804 290,108 257,710

a Provisional.


Main trading partners(KSh m)

1998 1999 2000 2001 2002a

Exports to:Uganda 19,466 21,189 24,186 30,040 31,280UK 16,228 17,014 18,655 16,382 19,631Tanzania 16,116 13,767 11,092 13,511 14,181Netherlands 5,284 6,152 7,293 9,912 11,028Pakistan 8,276 9,020 9,987 8,877 8,341EU 36,347 38,146 40,029 39,979 46,628Imports from:UAE 17,810 25,529 48,212 41,465 29,060UK 24,355 23,123 25,136 21,989 21,138Japan 15,675 15,336 12,514 14,436 17,242US 16,509 13,190 10,084 38,967 14,648India 8,649 8,995 10,139 12,830 13,810EU 64,385 62,971 75,653 72,028 83,090

a Provisional.


72 Kenya


Balance of payments(US$ m)

1997 1998 1999 2000 2001Goods: exports fob 2,063 2,017 1,757 1,782 1,894Goods: imports fob -2,948 -3,029 -2,732 -3,044 -3,176

Trade balance -886 -1,012 -975 -1,262 -1,282Net services 89 136 364 269 262

Net income -232 -174 -159 -133 -148Net current transfers 573 574 681 922 850

Current-account balance -457 -475 -90 -204 -318Net direct investment 20 11 14 111 5Net portfolio investment -34 -1 8 -7 -13

Other net investments -54 -59 -90 -56 -86Capital & financial balance 363 562 166 157 84Net errors & omissions 33 -89 -166 -10 117Overall balance 16 83 -34 -7 -48Financing (- indicates inflow)Movement of reserves -16 -83 34 7 48Use of IMF credit & loans -67 -63 -60 1 -24Liabilities & exceptional financing -19 -25 103 113 239


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1997 1998 1999 2000 2001Public medium & long-term 5,224 5,561 5,323 5,180 4,930 Official creditors 4,745 5,007 4,801 4,659 4,498 Bilateral 1,890 2,008 1,917 1,828 1,740 Multilateral 2,855 2,999 2,884 2,831 2,758 Private creditors 480 554 522 521 432Private medium- & long-term 325 280 220 175 109Short-term debt 803 844 812 813 695 Interest arrears 34 68 102 62 126Use of IMF credit 250 196 131 127 99Total external debt 6,603 6,881 6,487 6,295 5,833Principal repayments 449 467 529 350 340Interest payments 221 205 174 131 124 Short-term debt 29 39 40 41 41Total debt service (paid) 669 672 703 481 464Ratios (%)Total external debt/GDP 63.6 61.1 62.6 61.0 51.9Debt-service ratio, paida 22.3 23.3 25.8 17.1 15.4

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Kenya 73


Net official development assistancea

(US$ m)

1997 1998 1999 2000 2001Bilateral 288.0 394.2 342.1 664.3 384.6 Japan 40.2 93.8 -9.7 77.0 92.4 Belgium 23.7 36.5 62.6 21.7 75.1 UK 62.8 36.0 141.8 335.4 60.1 Netherlands 21.4 32.0 47.7 31.2 34.4 Germany 18.1 32.1 52.9 46.1 29.1Multilateral 372.1 460.8 336.8 854.2 515.0 IDA 72.3 108.4 55.1 141.5 80.9 EC 40.6 42.5 11.0 18.6 72.7 ADF 42.4 9.1 4.5 1.8 8.7

Total 447.8 414.8 310.1 512.3 452.6 Grants 382.4 350.4 335.9 340.1 389.5

a Disbursements minus repayments. Official development assistance is defined as grants and loanswith at least a 25% grant element, provided by OECD and OPEC member countries and multilateralagencies, and administered with the aim of providing development and welfare in the recipientcountry.

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients, 2003.

Foreign reserves(US$ m unless otherwise indicated; end-period)

1998 1999 2000 2001 2002Foreign exchange 765.0 772.2 881.2 1,048.1 1,050.0

SDRs 0.6 2.4 0.3 1.0 0.8Reserve position in IMF 12.4 12.4 12.5 12.5 12.6

Total reserves incl gold 783.1 791.6 897.7 1,064.9 1,068.0


Exchange rates(period averages unless otherwise indicated)

1998 1999 2000 2001 2002KSh:US$ 60.4 70.3 76.1 78.6 78.7

KSh:£ 100.0 113.8 115.5 113.2 118.2KSh:SDR (year-end) 87.2 100.1 101.7 98.8 104.8


Editors: Pratibha Thaker (editor); David Cowan (consulting editor)Editorial closing date: November 20th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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