Country Report November 2003
Kenya
Kenya at a glance: 2004-05
OVERVIEW The honeymoon period enjoyed by the president, Mwai Kibaki, and his National Rainbow Coalition (NARC) coalition is well and truly over, and the president’s political skills will be sorely tested as he struggles to keep the fragile alliance together and kick-start the economy. The appointment of the respected but elderly Moody Awori as vice-president will help to cement party unity, particularly as he hails from the Liberal Democratic Party (LDP), the most fractious coalition member. Provided Mr Kibaki can hold the coalition together, NARC will be judged mainly on its performance in the economic arena.
Key changes from last month Political outlook • Tension within NARC has declined following the decision by the LDP leader, Raila Odinga, to drop his quest to become prime minister, but inter- party scheming and jostling for advantage will continue throughout the forecast period. Economic policy outlook • The IMF has postponed a final decision for Kenya’s new, three-year, US$250m poverty reduction and growth facility (PRGF), from 5th November to 21st November, in order to conduct “further technical analysis”. The main problem is that in January 2003 the government negotiated with individual banks to secure new terms on commercial debt, rather than with the London Club as a whole, which violated the principle of equal treatment for all creditors. However, Kenya has made progress on a number of IMF demands and the Economist Intelligence Unit now expects the government to secure a new IMF agreement by the end of 2003, although it is likely to come with strict conditionalities attached and initial funds will not be disbursed until early 2004. Economic forecast • The resumption of donor support will provide the necessary boost to investor confidence, but the government’s ability to significantly stimulate demand via fiscal and monetary policy will be fairly limited: real GDP growth is forecast to rise from a low of 1.7% in 2003 to just over 3% per year in 2004-05. November 2003
The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.
London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Website: www.eiu.com
Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office
Copyright © 2003 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-4239
Symbols for tables “n/a” means not available; “–” means not applicable
Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Kenya 1
Contents
3 Summary
4 Political structure
5 Economic structure 5 Annual indicators 6 Quarterly indicators
7 Outlook for 2004-05 7 Political outlook 8 Economic policy outlook 10 Economic forecast
12 The political scene
19 Economic policy
23 The domestic economy 23 Economic trends 27 Agriculture and horticulture 28 Industry 29 Finance 30 Transport and communications
32 Foreign trade and payments
List of tables 10 International assumptions summary 12 Forecast summary 23 Gross domestic product by sector 24 Government finances 25 Government domestic debt, 2003 26 Monetary indicators 27 Exchange rate, 2003 28 Cash crop production 32 Balance of payments 33 FDI inflows into East Africa
List of figures 12 Gross domestic product 12 Consumer price inflation 27 Inflation weights
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003
Kenya 3
Summary November 2003
Outlook for 2004-05 The honeymoon period enjoyed by the president, Mwai Kibaki, and his National Rainbow Coalition (NARC) coalition is well and truly over, and the president’s political skills will be sorely tested as he struggles to keep the fragile alliance together and kick-start the economy. The appointment of the respected but elderly Moody Awori as vice-president will help to cement party unity, particularly as he hails from the Liberal Democratic Party (LDP), the most fractious coalition member. Relations with donors should be normalised before the end of 2003, although a resumption of funds is not expected until early 2004. Combined with a favourable harvest, and provided that the economy makes gradual progress on a number of fronts, this should ensure real GDP growth of over 3% per year in 2004-05.
The political scene The constitutional review has failed to make any progress, following the murder of the committee chairman, Crispin Odhiambo Mbai. Mr Kibaki has suspended half of Kenya’s top judges in one of the most significant steps to date in the fight against high-level corruption. The UN has warned of further terrorist attacks in East Africa.
Economic policy The IMF had been expected to conclude a new three-year PRGF programme with Kenya in early November, but a final announcement was put on hold until later in the month pending the outcome of a debt sustainability study. An IMF agreement would facilitate the release of other donor funds and allow for a new round of debt rescheduling with official Paris Club creditors. Kenya’s position as one of the most corrupt countries in the world remains unchanged, according to a recent report by Transparency International. Tackling graft remains one of the government’s top priorities.
The domestic economy Economic growth remained lacklustre in the first seven months of 2003, with real GDP growing by 1.4% (annualised), reflecting severe financial constraints, a downturn in tourism and low investor confidence. Inflation subsided between May and September but picked up again in October owing to the pre-harvest rise in cereal prices. Kenya has awarded a third mobile phone licence but the deal remains on hold pending legal action by a failed bidder.
Foreign trade and payments Kenya’s current-account deficit is reported to have widened to US$126m in the year to July 2003, despite an improved surplus on invisible trade, as imports grew more strongly than exports. Tourism earnings have suffered a new setback with the suspension of flights to Mombasa by Europe’s leading charter company. According to UNCTAD, FDI inflows into Kenya remained muted in 2002 because of the high level of corruption, the suspension of donor funding and uncertainty in the run-up to the end-2002 election.
Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: November 14th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Kenya
Political structure
Official name Republic of Kenya
Form of state Unitary republic
Legal system Based on English common law and the 1963 constitution; the draft of a new constitution was published in September 2002
National legislature Unicameral National Assembly of 210 elected members plus 12 nominated members, the attorney-general and the speaker; a multiparty system was introduced in December 1991
National elections Next presidential and legislative elections are to be held in December 2007
Head of state President, directly elected by simple majority and at least 25% of the vote in five of Kenya’s eight provinces
National government The president and his cabinet, composed entirely of members of the National Rainbow Coalition (NARC)
Political parties in parliament National Rainbow Coalition (NARC, 125 seats); Kenya African National Union (KANU, 64 seats); Forum for the Restoration of Democracy-People (Ford-People, 14 seats); Safina (2 seats); Ford-Asili (2 seats); Sisi Kwa Sisi (2 seats); Shirikisho (1 seat)
President & commander-in-chief Emilio Mwai Kibaki Vice-president Moody Awori
Key ministries Agriculture Kipruto Arap Kirwa Attorney-general Amos Wako Energy Ochilo Ayacko Environment & natural resources Newton Kulundu Finance David Mwiraria Foreign affairs Kalonzo Musyoka Home affairs Moody Awori Planning & national development Anyang Nyong’o Justice & constitutional affairs Kiraitu Murungi Wa t e r re s o u rce s Martha Karua Health Charity Ngilu Education George Saitoti Gender, sport & culture Najib Balala Transport & communications John Njoroge Michuki Labour & manpower development Chirau Ali Mwakwere Lands & settlement Amos Kimunya Local government Karisa Maitha Regional development Musikari Kombo Roads, public works & housing Raila Odinga Tourism & information Raphael Tuju Trade & industry Mukhisa Kituyi
Head of the civil service Francis Muthaura
Central Bank governor Andrew Mullei
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 5
Economic structure
Annual indicators 1999a 2000a 2001a 2002b 2003b GDP at market prices (KSh bn) 743.5 796.3 882.7 969.4 1,004.7 GDP (US$ bn) 10.6 10.5 11.2 12.3 13.2 Real GDP growth (%) 1.3 -0.2 1.1 1.1c 1.7 Consumer price inflation (av; %) 5.7 10.0 5.7 1.9a 9.6 Population (m) 29.4 30.1 30.7 31.4a 32.0 Exports of goods fob (US$ m) 1,756.7 1,782.2 1,894.0 2,213.1 2,339.0 Imports of goods fob (US$ m) 2,731.8 3,044.0 3,176.1 3,238.9 3,368.4 Current-account balance (US$ m) -89.6 -203.6 -317.9 -71.5 -140.0 Foreign-exchange reserves excl gold (US$ m) 791.6 897.7 1,064.9 1,068.0a 1,250.0 Total external debt (US$ bn) 6.5 6.3 5.8 5.6 5.9 Debt-service ratio, paid (%) 25.8 17.1 15.4 10.6 9.9 Exchange rate (av) KSh:US$ 70.33 76.18 78.56 78.75a 76.04 a Actual. b Economist Intelligence Unit estimates. c Provisional estimate.
Origins of gross domestic product 2002a % of total Components of gross domestic product 2002a % of total Agriculture, forestry & fishing 24.3 Private consumption 71.5 Manufacturing 13.0 Government consumption 19.0 Trade, restaurants & hotels 12.7 Gross domestic investment 13.1 Transport, storage & communications 6.3 Stockbuilding 0.0 Government services 10.5 Exports of goods & services 26.2 Others (net) 29.3 Imports of goods & services -30.6
Principal exports 2002a US$ m Principal imports cif 2002a US$ m Tea 436 Industrial machinery 323 Horticultural products 328 Refined petroleum products 280 Petroleum products 158 Crude petroleum 304 Coffee 83 Motor vehicles 182 Fish products 53 Iron & steel 141
Main destinations of exports 2002a % of total Main origins of imports 2002a % of total UK 13.5 UK 12.0 Tanzania 12.5 United Arab Emirates 9.8 Uganda 12.0 Japan 6.5 Netherlands 6.5 India 4.4 a Provisional estimates.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 6 Kenya
Quarterly indicators 2001 2002 2003 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (KSh m) Revenue & grants 45,960 47,842 49,407 62,337 48,564 51,545 58,342 n/a Expenditure & net lending 55,287 52,551 55,274 69,424 56,790 65,751 62,651 n/a Balance -9,327 -4,709 -5,867 -7,087 -8,226 -14,206 -4,309 n/a Prices Consumer prices, Nairobi (1995=100) 160.2 159.8 159.1 162.2 163.2 164.4 171.8 184.0 Consumer prices, Nairobi (% change, year on year) 3.8 2.4 1.2 1.8 1.9 2.9 8.0 13.4 Financial indicators Exchange rate KSh:US$ (av) 78.96 78.87 78.30 78.42 78.80 79.47 77.05 73.66 Exchange rate KSh:US$ (end-period) 79.02 78.60 78.06 78.79 79.03 77.07 76.65 74.17 Deposit rate (av; %) 6.51 6.26 6.02 5.58 5.14 5.21 4.71 4.24 Discount rate (end-period; %) 18.14 16.81 16.05 13.50 n/a n/a n/a n/a Lending rate (av; %) 19.56 19.57 19.11 18.54 18.14 18.02 18.78 18.45 Treasury bill rate (av; %) 12.62 11.25 10.44 8.94 8.05 8.35 7.16 4.50 M1 (end-period; KSh bn) 120.36 126.33 124.86 131.57 133.24 149.71 147.89 153.68 M1(% change, year on year) 7.3 6.2 6.3 17.0 10.7 18.5 18.4 16.8 M2 (end-period; KSh bn) 344.94 351.57 352.64 360.40 372.23 392.68 393.31 400.92 M2 (% change, year on year) 3.1 2.5 3.2 8.2 7.9 11.7 11.5 11.2 Stockmarket NSE 20 (1996=100) 1,401 1,355 1,183 1,087 1,043 1,363 1,608 1,935 Stockmarket NSE 20 (% change, year on year) -30.1 -29.2 -35.4 -34.4 -25.5 0.6 35.9 78.1 Sectoral trends (annual totals; ‘000 tonnes)a Tea production ( 216.8 ) ( 287.0 ) n/a n/a Coffee production: unroasted ( 52.2 ) ( 59.3 ) n/a n/a Foreign trade (KSh m) Exports fob 37,864 35,251 40,818 43,333 41,423 41,061 50,054 44,289 Imports cif -74,139 -60,303 -69,652 -60,467 -59,517 -65,933 -70,008 -70,375 Trade balance -36,275 -25,052 -28,834 -17,134 -18,094 -24,872 -19,954 -26,086 Foreign reserves (US$ m) Reserves excl gold (end-period) 1,054.5 1,064.9 1,077.9 1,137.7 1,119.7 1,068.0 1,206.1 1,261.5 a Estimates. Sources: Food & Agriculture Organisation; IMF, International Financial Statistics; Central Bank of Kenya, Monthly Economic Review.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 7
Outlook for 2004-05
Political outlook
Domestic politics Now that the honeymoon period is well and truly over for Kenya’s president, Mwai Kibaki, his political skills will be strenuously tested as he struggles to keep the fragile National Rainbow Coalition (NARC) together and kick-start the economy. On September 25th Mr Kibaki named his close ally, Moody Awori, as vice-president, more than a month after the death of the previous incumbent, Michael Kijana Wamalwa. The delay reflects the difficulties faced by Mr Kibaki in trying to satisfy all of the constituent parties in the ruling NARC coalition, which secured a landslide election victory in December 2002 and cuts across many traditional divisions in terms of both ethnicity and ideology. Mr Awori has many factors in his favour and the choice has cemented party unity, at least in the short-term, rather than undermined it. Most importantly, he belongs to the Liberal Democratic Party (LDP), which has repeatedly criticised Mr Kibaki for failing to implement the terms of a pre-election memorandum of understanding. Mr Awori is also a member of the Luhya tribe (as was Mr Wamalwa), the second largest of Kenya’s 40-plus ethnic groups, and one that gave strong backing to NARC at last year’s election. Apart from the promotion of Musikari Kombo of the Forum for the Restoration of Democracy- Kenya (Ford-Kenya) to the cabinet to placate the party for the loss of the vice- presidency, few other changes were made to the cabinet, although a more comprehensive reshuffle is likely within the next few months. The damaging dispute between Mr Kibaki’s National Party of Kenya (NAK) and Raila Odinga’s LDP has eased. Mr Odinga has officially abandoned his quest to become prime minister, a position promised him in the pre-election memorandum of understanding. The post, which does not currently exist, had been proposed in last year’s new draft constitution as a way of curbing presidential powers. This does not suggest that Mr Odinga is any less ambitious, but reflects the tacit acceptance within NARC that creating competing centres of power could result in divided and ineffective government, and that Mr Kibaki should not be obliged to “share” the authority he has so recently acquired. Mr Odinga and other power-hungry politicians will instead set their sights on the presidency, which may become vacant in 2007 if Mr Kibaki opts not to stand again (or even sooner if his health should fail). Constitutional reform now represents something of a headache for NARC but there are potential pitfalls in doing nothing. While having a powerful presidency may not be a problem when the post is occupied by a credible figure such as Mr Kibaki, he is old and his successor may not embody the same qualities. Significant differences of opinion still exist between NARC’s component parties, including over the proposal for a formal merger, but this now appears to have been put on the back burner because of opposition from the LDP and Ford- Kenya. Inter-party scheming and jostling for position will continue over the forecast period, and Mr Kibaki will need to exert all his authority to keep NARC from fracturing. He will be hoping that the appointment of the well-respected
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 8 Kenya
“Uncle Moody” will help to reassert the unity that helped the coalition to power in the first place.
International relations Over the forecast period Kenya’s foreign policy will be dominated by attempts to strengthen the country’s relations with its major trading partners and donors, as well as the ongoing threat of terrorist attacks by Islamists in the Horn of Africa. Mr Kibaki’s first official visit to the US, which took place recently, was largely to secure the resumption of crucial donor funds and revive inflows of foreign direct investment. He also called on the US government to lift its negative travel advisory for visitors to Kenya. Although the US has commended measures to improve airport security, the warning is unlikely to be dropped in the short term. A recent UN report noted that last year’s suicide bombing of the Paradise Hotel and the simultaneous but failed attempt to bring down an Israeli passenger jet using shoulder-launched anti-aircraft missiles had been planned and prepared in neighbouring Somalia, where the rule of law is weak and the fundamentalist presence is strong. The report also warned that the proliferation of arms in Somalia, mainly smuggled in from Yemen in violation of the UN arms embargo, poses a serious threat to neighbouring states, and that further attacks could be in 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 early resolution of the problem is not in prospect.
Economic policy outlook
Policy trends The government will focus on implementing policies to promote economic recovery in order to generate sustainable employment opportunities. In recent years real economic expansion has struggled to keep pace with population growth and, consequently, poverty and unemployment remain widespread. The government launched a highly ambitious policy blueprint in June—the Economic Recovery Strategy for Wealth and Employment Creation. This promises 500,000 new jobs per year; real GDP growth of 4.6% per year; average annual inflation of under 5%; an average investment/GDP ratio of 23.3%; and real private consumption growth of 4.4%. The government has identified improved security and public-sector governance as the catalysts for economic revival and hopes to create a climate conducive to private-sector investment. Following the successful conclusion to the IMF’s Article IV consultations in mid- 2003 and the passage of anti-corruption legislation, the IMF had been expected to award Kenya a new, three-year, US$250m poverty reduction and growth facility (PRGF) in early November, but the announcement was delayed pending the outcome of a debt sustainability study. The Economist Intelligence Unit now expects the government to secure a new agreement by the end of the year, although it is likely to come with strict conditionalities attached, and initial funds will not be disbursed until early 2004. The resumption of donor support will provide the necessary boost to investor confidence, but the government’s ability to significantly stimulate demand via fiscal and monetary policy will be fairly limited. Pressure to reduce total spending owing to financial constraints and the need to generate lower primary deficits are expected to remain. Also, the pace of investment growth
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 9
will be somewhat constrained by continuing policy uncertainties and the slow pace of reform. A series of measures are needed, including structural fiscal reform, the restructuring and divestment of state assets, reform of the banking sector, the restoration of dilapidated infrastructure, and the reduction of the high cost of doing business. The government will also move cautiously on privatisation in 2004-05 and first seek to return parastatals—such as Kenya Commercial Bank, Telkom Kenya, Kenya Railways Corporation and Kenya Ports Authority—to profit. Telkom Kenya is expected to lose its monopoly on fixed lined services in mid-2004 and partial privatisation is scheduled to take place in 2005. The long-delayed Privatisation Bill, which calls for the establishment of a new Permanent Privatisation Commission, is still pending.
Fiscal policy The 2003/04 budget (July-June) projects a deficit of KSh62.5bn, or 6.2% of GDP, compared to 4.4% of GDP in 2002/03, based on a 9% rise in current spending to KSh260.5bn (US$340m) and a more rapid, 35%, jump in capital spending to KSh59.5m, taking total planned expenditure to KSh320bn. The government has identified several priority areas including physical infrastructure (particularly roads), healthcare, education, water, energy and security. Wages and salaries will consume about 40% of current spending, but even this may be an underestimate owing to the implementation of several pay awards for civil servants, a move considered necessary to reduce incentives for corruption. Domestic revenue is forecast to increase by 6% to KSh236.5bn, although the sale of a third mobile phone licence is only expected to raise half the KSh3.7bn factored into budget calculations, while external grants are projected to rise by 49% to KSh21.1bn. Overall, we expect the fiscal deficit to rise to 6.7% of GDP in 2003/04. In 2004/05 the fiscal picture should improve slightly. We expect government revenue to increase to 27% of GDP, buoyed by external funds and as domestic investment and consumption growth recover. The increase in current spending is likely to fall back slightly as donors force the government to make a renewed effort to tighten spending; the public-sector wage bill is expected to fall gradually in accordance with the privatisation programme and civil-service reforms. Capital expenditure should increase, with infrastructure development being financed as far as possible by mulitlateral funds. This will help to reduce the overall deficit to 5.5% of GDP. Funding for these deficits will come from a mixture of Treasury-bill issues and an increasing use of external borrowing.
Monetary policy Monetary policy in 2004-05 will be geared towards keeping inflation below the official 5% target and maintaining exchange-rate stability. Fears that the government’s almost exclusive reliance on domestic borrowing to finance the fiscal deficit would push up interest rates have not been realised because of excess liquidity in the banking system. The benchmark rate on 91-day T-bills has remained below 1.5% since July because of competition between banks for the limited supply of government paper and is not expected to climb significantly in the short term. Banks remain averse to lending to the private sector, as it is seen as far riskier, but credit extension to business has shown signs of picking up. The Central Bank of Kenya has lengthened the maturity profile of government debt, and the ratio of Treasury bonds to bills is nearing the 70:30
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 10 Kenya
target. The growing importance of medium-term bonds will facilitate the development of capital markets.
Economic forecast
International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.3 3.9 4.1 OECD 1.8 1.8 2.4 2.6 EU 1.0 0.6 1.9 2.3 Exchange rates ¥:US$ 125.3 115.7 109.8 114.8 US$:€ 0.945 1.132 1.230 1.185 SDR:US$ 0.772 0.714 0.683 0.698 Financial indicators € 3-month interbank rate 3.33 2.30 2.08 2.94 US$ 3-month Libor 1.80 1.17 1.47 3.66 Commodity prices Oil (Brent; US$/b) 25.0 27.6 19.6 18.9 Gold (US$/troy oz) 310.3 354.0 323.8 307.5 Tea (US$/kg) 1.5 1.5 1.4 1.4 Coffee (Arabica; US cents/lb) 61.5 64.0 62.7 62.0 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Better than expected performance in Japan and the US prompted us to revise up both our estimate for global GDP growth in 2003 and our forecast for 2004 for the second consecutive month in October, although our November figures are unchanged, and risks to the outlook remain weighted on the downside. An upturn in the US economy will be driven by extremely accommodating fiscal and monetary policy. There have also been recent indications that an upswing in the EU—critical for Kenyan trade—will take place in 2004, driven by improving business and consumer confidence. However, with GDP growth in the EU forecast at 1.9% in 2004, the recovery in the euro area is expected to be gradual, reflecting fiscal constraints, consumer caution and the renewed appreciation of the euro. The outlook for Kenya’s main commodity exports, such as coffee and tea, is less encouraging. Although coffee prices have rallied slightly in 2003—we expect the price of arabica coffee to average 64 US cents/lb—prices are still forecast to fall back in 2004-05 as oversupply continues to plague the market. Although the world’s major tea producers, including Sri Lanka, India, Kenya, Tanzania and Uganda, agreed in September to cut output of lower grade tea by 1% a year to boost prices, overall excess supply will lead to a marginal fall in tea prices in 2004-05.
Economic growth Our baseline forecast assumes that the resumption of donor support and gradual progress on a number of fronts will boost economic growth from an estimated 1.7% in 2003 to over 3% per year in 2004-05. The agricultural sector is forecast to pick up in 2004-05, assuming normal rainfall. Projected new investment in telecommunications, higher textiles production—owing to improved access to the US market under the Africa Growth and Opportunity
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 11
Act (AGOA)—and improved electricity supplies should boost industrial growth from 1.8% in 2003 to 3% in 2004 and 3.6% in 2005. A recovery in tourism, combined with increased activity in trade and finance, will boost the growth of services. Exports of goods and services are forecast to grow more strongly over the forecast period, in line with an upturn in global demand. Imports will track domestic consumption and investment trends and start to recover in 2004, rebounding more strongly in 2005 as the overall economy gradually improves.
Inflation Year-on-year inflation eased to 7.9% in September as a result of improved food supply and the cut in both VAT and excise duties in the 2003/04 budget, but rose again to 9.1% in October because of a temporary rise in cereal prices prior to the start of the main harvest. For the remainder of 2003 favourable weather conditions, continuing high levels of unemployment, moderate rates of expansion of aggregate demand and prudent monetary policy suggest that inflation will edge down to 7% in December, but average 9.6% for the year as a whole. For the forecast period, although domestic demand will be stronger, favourable harvests and weaker oil prices will support a low inflationary environment. For its part, the Central Bank will continue to pursue a monetary policy stance that neutralises any incipient pressures on prices. As a result, inflation is forecast to average 5% in 2004 and 3.5% in 2005.
Exchange rates Following a long period of stability, the Kenya shilling appreciated strongly against the US dollar in the first five months of 2003, reflecting seasonal inflows of foreign exchange and weakness in the American currency. The Central Bank subsequently intervened in the market to reverse this trend, which threatened to erode Kenya’s export competitiveness, and the shilling depreciated to KSh77.9:US$ in September, but strengthened again in October as the expected resumption of external financing moved closer. For the remainder of the year we expect the shilling to edge down gently to average KSh76.04:US$1 in 2003. Over the forecast period, we expect the shilling to come under some more downward pressure to average KSh79.34:US$1 in 2004 and KSh82.35:US$1 in 2005.
External sector Prospects for the external account are mixed. Export receipts are expected to rise steadily in line with the surge in textile sales to the US under the provisions of AGOA, higher volumes of tea and coffee exports, and further expansion of horticultural exports. Imports are forecast to climb at a similar pace, reflecting strengthening investment and consumption, but the growth rate will be moderated by the expected slide in oil prices. The services account will remain in surplus owing to an upturn in tourism receipts. However, tourism is unlikely to recover as quickly as hoped for because of ongoing security risks in the region and the suspension of most charter flights between Europe and Mombasa. Any rebound will at best take place in the second half of 2004. The invisibles balance will also benefit from reduced interest charges after a Paris Club debt rescheduling. Our forecast for the current account is based on the assumption that debt owed to private external creditors will be significantly reduced. The resumption of donor support will also push up current transfers in 2004-05. Overall, we expect a modest widening of the current-account deficit to 1.8% of GDP in 2004 and 2.1% of GDP in 2005.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 12 Kenya
Forecast summary (% unless otherwise indicated) 2002a 2003b 2004c 2005c Real GDP growth 1.1 1.7 3.1 3.5 Industrial production growth 1.2 1.8 3.0 3.6 Gross agricultural production growth 0.7 1.6 2.0 2.0 Consumer price inflation (av) 1.9 9.6 5.0 3.5 Consumer price inflation (year-end) 2.5 7.5 4.3 3.3 Short-term interbank rate 18.4 16.0 14.0 12.0 Government balance (% of GDP) -3.5b -4.4 -6.7 -5.5 Exports of goods fob (US$ bn) 2.2b 2.3 2.5 2.6 Imports of goods fob (US$ bn) 3.2b 3.4 3.6 3.8 Current-account balance (US$ bn) -0.1b -0.1 -0.2 -0.3 Current-account balance (% of GDP) -0.6b -1.1 -1.8 -2.1 External debt (year-end; US$ bn) 5.6b 5.9 5.9 6.3 Exchange rate KSh:US$ (av) 78.75 76.04 79.34 82.25 Exchange rate KSh:¥100 (av) 62.82 65.72 72.29 71.68 Exchange rate KSh:€ (year-end) 80.83 94.92 96.38 98.25 Exchange rate KSh:SDR (year-end) 104.8 114.0 115.8 119.5 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
The political scene
Moody Awori is appointed as The death of the vice-president, Michael Wamalwa, in late-August did not come vice-president as a surprise, as he had been seriously ill for some time, but choosing a successor posed a difficult challenge for the president, Mwai Kibaki, because of the need to maintain the ethnic and party political balance within the National Rainbow Coalition (NARC). It took over a month for Mr Kibaki to make a final decision, but his eventual selection of Moody Awori was in many ways an inspired choice and one that has cemented party unity (at least partly) rather than undermined it. For a start, Mr Awori belongs to the Liberal Democratic Party (LDP), the most disgruntled member of the coalition, and one that has consistently criticised Mr Kibaki for failing to implement the terms of a pre- election memorandum of understanding, which promised the LDP a significant
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 13
role in government. In addition, Mr Awori, aged 76, is even older than the president and poses no threat to the longer-term ambitions of younger politicians. Furthermore, Mr Awori, like Mr Wamalwa, is an ethnic Luhya, which forestalls potential dissent from what is Kenya’s second largest tribe and which backed NARC in the December 2002 election. Mr Awori is also respected as an elder statesman (hence his nickname of “Uncle Moody”), and as chairman of NARC summit is a key proponent of coalition unity. He retains his former home affairs portfolio, in addition to his new responsibilities. Other potential candidates for the post included LDP cabinet ministers, Raila Odinga and Kalonzo Musyoka, and the former education minister, George Saitoti, of the Kenya African National Union (KANU), but their selection could have proved more divisive. The main problem was how to placate Mr Wamalwa’s Forum for the Restoration of Democracy-Kenya (Ford-Kenya) for the loss of the vice-presidency, but this was solved by handing the regional development portfolio to Musikari Kombo (the former assistant planning minister) and elevating the post to cabinet status. This has proved a popular move with Ford-Kenya, and Mr Kombo was elected party leader a month later.
The LDP drops demands for The damaging dispute within NARC between Mr Kibaki’s National Alliance earlier promises to be fulfilled Party of Kenya and Mr Odinga’s LDP because of the president’s failure to abide by pre-election commitments has eased, at least in the short-term, partly because of the elevation of Mr Awori to the vice-presidency. Mr Odinga had been promised the post of prime minister, and although this position does not currently exist, it was a key element in the proposals for a new draft constitution published in September 2002. The document called for the appointment of a prime minister with significant executive authority in order to curb the power of the presidency. Mr Odinga has now officially abandoned his quest to be prime minister and the LDP are no longer insisting that the pre-election memorandum of understanding be implemented in full. There are several factors behind this turnaround, but probably the most important is the tacit acceptance within NARC that whether or not the constitutional review process creates the post of prime minister, executive power will not be part of the package. It is not surprising that Mr Kibaki is loathe to cede the authority he so recently gained, but he is not alone in this view. Ambitious politicians (such as Mr Odinga) see greater reward in aspiring to the presidency than pursuing a path that would create competing centres of power and which has the potential to result in divided and ineffective government. With hindsight, the widespread desire to curb presidential power was more of a reflection of the need to clip the wings of the former president, Daniel arap Moi, than anything else. Constitutional reform now represents more of a problem than a solution for NARC (and probably KANU as well, given their ambition to return to power), although liberal reformers and donor countries are not yet convinced that it is unnecessary. A powerful presidency may not be a problem when occupied by a credible figure such as Mwai Kibaki, but he is old and may not stand again in 2007, and his successor may not embody the same qualities.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 14 Kenya
The LDP’s turnaround has The LDP’s climbdown over pre-election promises is a double-edged sword: it is implications both a concession to NARC unity but also an implicit statement of independence. The LDP’s acceptance of Mr Kibaki’s change of heart similarly grants them the moral authority to renege on their commitments, both past and future, which could prove damaging for the coalition. On the other hand, NARC’s hurried union left no room to consider how constituent parties would relate in the future, in which case the LDP’s stance is better viewed as an attempt to clarify, but more especially to influence, NARC’s structure and direction. This is most clearly seen in the dispute over whether NARC components should embark on a formal merger, the route favoured by Kibaki supporters, or whether they should retain their separate identities, the LDP’s preferred option. That this debate has now been put on the back burner is further testament to the LDP’s influence and to Mr Kibaki’s desire to keep them on board. It was inevitable that NARC’s component parties would take time to develop a comfortable working relationship, but having cleared so many hurdles without fracturing, the prospects for continued union have brightened. Most players in NARC appear to have realised that a failure to put country before party will only play into KANU’s hands, although this will not put an end to scheming and jostling, as they are, of course, politicians.
The NARC coalition aims to NARC has faced a barrage of criticism since the election over its propensity for display greater unity in-fighting, but by most of the measures used to judge the effectiveness of coalition government they have not fared badly, and key legislation, such as the new anti-corruption laws, has not been unduly delayed. NARC leaders have nevertheless been stung by a stream of derisive comments about government effectiveness, which have not been stilled by claims that political conflict is a sign of real democracy, and they now appear more determined to present a united front, at least in public. At a fundraising event in early November, for example, supposed opponents of Mr Odinga and Kiraitu Murungi (a Kibaki loyalist) publicly declared their friendship and blamed the media (the usual scapegoat) for suggesting otherwise. If such unity is maintained (even if only on the surface) the proposed NARC summit may turn out to be less traumatic than earlier supposed. The chair of the NARC summit, Mr Awori, said in early November that the summit will define the party’s structure at a grassroots level—no easy task given ethnic and ideological differences, although no date has yet been set for what will be a defining event in Kenyan politics.
Ford-Kenya is wooed by the Ford-Kenya (FK) has, somewhat perversely, emerged as a more prominent LDP and KANU player within NARC following the death of its former vice-president, Mr Wamalwa, and his replacement by Mr Awori. In particular, delegations from both the LDP and KANU visited Ford-Kenya headquarters in late October to congratulate Musikari Kombo on his election as party leader, just a month after he was promoted to Mr Kibaki’s cabinet as regional development minister. The twin visits provoked a mass of press comment about whether or not the LDP and Ford-Kenya would revive earlier plans for a “Western Alliance”, in order to counteract the influence of Mr Kibaki’s “Mount Kenya” cabal, but both parties refuted these allegations. Notably, Mr Odinga was not part of the LDP delegation, a move that was no doubt intended to curb speculation. As for
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 15
KANU, they seem to be willing to take every opportunity to try and weaken NARC unity, be it talking to Ford-Kenya or cheering Mr Odinga at campaign meetings. Just as NARC is finding its feet as the governing party, so KANU, under the youthful Uhuru Kenyatta, is developing into a more effective opposition. Mr Kombo has been at pains to stress that Ford-Kenya is not interested in any formal alliance with another party, either within NARC or without, although his comment about continuing the “Grand March” to State House suggests that his ambitions extend beyond the Regional Development Ministry. As if to confirm this, he declared his desire to transform Ford-Kenya from a regional, into a national, party and clearly seems intent on positioning himself as a possible presidential candidate in 2007, if Mr Kibaki opts out of standing for a second term.
The constitutional review is to Little progress has been made on the constitutional reform front in recent restart in January 2004 months. The last session of the National Constitutional Conference (Bomas II) was marked by disputes over contentious issues, particularly the proposal to devolve power from the president to an executive prime minister. The session was also marked by the murder of the committee chairman, Crispin Odhiambo Mbai. It appears that Kibaki loyalists (and other NARC factions as well) have become less committed to constitutional reform, fearing a loss of the president’s authority so soon after his electoral triumph. Furthermore, if the clause requiring presidential candidates to be under 70 years of age is accepted, Mr Kibaki will be barred from standing again, even it he wanted to do so.
Mr Kibaki suspends half of In the boldest move yet against the scourge of corruption, five out of nine Kenya’s top judges Appeal Court judges, 18 out of 36 High Court judges, and 82 out of 254 magistrates were suspended in mid-October for alleged wrongdoing and will be investigated by special tribunals. The clean-up of the judiciary is a vital step in the battle against high-level corruption, which has bedevilled Kenya for years, and donors have praised the initiative. The spotlight will now be turned on lawyers, other judicial officers and the police. The judges were named in a report produced by the Integrity and Anti- Corruption Committee of the Judiciary, headed by Chief Justice Aaron Ringera, the former boss of the Kenya Anti-Corruption Authority (KACC). The “Ringera” report cited credible evidence of several offences, including direct corruption, abuse of office, lack of integrity and unethical conduct, and noted that “corruption has resulted in a loss of public confidence in the judiciary as an institution and in the individual judicial officers”, which has undermined the rule of law. Specific charges include soliciting bribes from litigants, delaying judgements for as long as five years and assuming ownership of property under dispute. Judicial verdicts often bear little relation to the facts of a case, and instead depend on who pay the biggest bribes, with US$200,000 being the going rate for an Appeal Court judge. There is a long-standing joke in Kenya, “Why hire a lawyer when you can buy a judge”. Several judges opted to resign immediately, thus ensuring they retain their pension benefits, but most have opted to fight their case in tribunal. However,
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 16 Kenya
if found guilty, they will be forced to resign, will loose all benefits and face prosecution. The tribunal into the Appeal Court judges, to be chaired by a retired judge, Akilano Molande Akiwumi, has been sworn in and expects to start work on December 1st. Not surprisingly, the accused judges claim to be victims of a witchhunt, and say their suspensions (including being stripped of their cars, drivers and bodyguards, and put on half pay) are unconstitutional. However, there is little sympathy for their position and the “Ringera” report is widely seen as a credible record of the state of the judiciary.
New judges are appointed but Mr Kibaki has appointed 11 new acting judges (one to the Appeal Court and 10 the court backlog grows to the High Court) but the suspensions are having a major impact on the functioning of the legal system and a backlog of cases is building up. The Goldenberg Enquiry (see below) and the East African Court of Justice (a regional body set up to handle transborder disputes involving Kenya, Tanzania and Uganda) have also been affected. Moreover, several of the new appointees were transferred from the Constitution of Kenya Review Committee (CKRC), which will hamper the institution’s work. The judicial suspensions will also lead to a spate of appeals against earlier verdicts handed down by judges now deemed to be corrupt.
The Goldenberg enquiry The Commission of Enquiry into the Goldenberg scandal, appointed by continues Mr Kibaki in February 2003 with a remit to investigate a series of fraudulent export deals in the early 1990s that cost the country some US$600m, was adjourned after vice-chairman, Daniel Aganyanya, was named in the “Ringera” report as one of the 23 corrupt judges. However, he was replaced by veteran lawyer, Philip Nzamba Kitonga, the immediate former chairman of the East African Law Society and a former chairman of the Law Society of Kenya, and the stoppage proved short-lived. Mr Kitonga’s star has risen fast under Mr Kibaki: he was conferred the rank of senior counsel earlier in the year, the most revered status among private legal practitioners, and was recently appointed to serve on the tribunal investigating corrupt Appeal Court judges. In a separate development, the KACC has secured a court order blocking the sale of businesses believed to have been purchased with funds linked to the Goldenberg scandal. The KACC took advantage of the wider powers afforded it under new anti-corruption legislation passed in mid-year. 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 October deadline, thereby fulfilling their obligations under the new Public Office Ethics Act. This requires all public servants to declare their assets and income, as well as those of their spouses and dependents, and reveal how such assets were acquired. Several MPs and thousands of minor public officials missed the deadline but were subsequently given one month’s extension. Those who fail to comply, or those who lie, will be sacked and could be jailed for a year and fined KSh1m. Some judicial and military officers have sought protection under the respective rules of the Judicial Service Commission and the Defence Council, citing laws that prevent them from disclosing such information to third parties, but justice minister Kiraitu Murungi insists that all civil servants will be forced to comply.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 17
Anti-corruption investigations Following the start of the campaign against judicial graft, the focus of attempts will include the government to root out high-level corruption will switch to the arena of government, including top civil servants, MPs and cabinet ministers. Compliance with the new Public Officer Ethics Act is the first step in this process. Addressing the opening session of the African Parliamentary Network Against Corruption conference in Nairobi in early November, Mr Kibaki promised an all-out war on graft within his government, while the Kenya Anti-Corruption Police Unit and the Ministry of Justice are taking steps that could lead to the arrest of corrupt officials. Several ministers could be implicated, particularly those who served under Mr Moi’s regime, but many of the allegations made against senior figures have proved to be no more than attempts to settle old political scores, according to John Githongo, the president’s leading anti-corruption investigator and the former head of the Kenyan chapter of Transparency International. He advocates a very careful approach, noting that one wrong move could damage the credibility of the entire process. Mr Githongo also said that the government has no constitutional power to sack corrupt MPs and declare their seats vacant, although they can, of course, be dismissed from government. Furthermore, civil servants that are suspected of being corrupt, but against which there is no firm evidence, will be transferred rather than sacked, although they will be watched carefully in future.
Kenya plans to deal with Perhaps the most controversial element of the government’s overall strategy to human rights abuses uncover past misdeeds is the proposed establishment of a Truth, Justice and Reconciliation Commission, modelled on its South African counterpart. The body will be empowered to investigate human rights violations dating back to independence, according to the justice minister, Kiraitu Murungi (a former human rights lawyer), who said that “we cannot understand the past unless we find out what atrocities were committed, who committed them, where they were committed and against whom”. Among the thorniest issues the commission will have to deal with are the alleged assassinations of two cabinet ministers, Thomas Mboya in 1969 and Robert Ouko in 1990, who challenged the authority of two presidents—Jomo Kenyatta and Mr Moi. The recent killing of Mr Mbai, the chair of the committee on the devolution of executive powers, is also alleged by some to have been politically motivated. The commission will also consider a range of other abuses including arbitrary political arrests, torture, ethnic clashes, economic crimes and violence against women. The exercise is fraught with danger, as it could implicate people regarded as national icons, and has the potential to provoke a new wave of inter-ethnic conflict, but it may be the only way to lay past demons to rest.
Universities close as lecturers All the six state universities were closed by the government on November 10th strike for higher wages for an indefinite period, as Kenya’s 3,200 lecturers went on strike demanding substantial wage hikes. The education minister, Mr Saitoti, urged them to postpone the strike and pledged extra money from February 2004, pending a government report into academic salaries, but his appeals were rejected. The
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 18 Kenya
University Academic Staff Union (UASU) has been pressing for a rise since March 2003 and was not prepared to wait any longer, especially as other public-sector officials, such as MPs and the police, have already had their pay scales upped. It will not be easy to reconcile the demands, and an early settlement is not in prospect unless either side backs down.
Judicial proceedings against The murder trial of six men accused of involvement in the November 2002 terror suspects are delayed suicide bomb attack on the Paradise Hotel near Mombasa was adjourned in late October for three weeks for procedural reasons. The presiding judge ruled that the case should be adjourned pending the outcome of a separate hearing involving two other suspects who are seeking to have the charges against them dealt with by a lower court. The six, including supposed ringleader, Omar Said Omar, have all pleaded not guilty. The prosecution claims to have a mass of evidence, but most of it is circumstantial, based on alleged sightings of the men in the presence of the alleged bombmaker–Saleh Nabhan, who remains at large–and the marriage of their daughters to supposed al-Qaida operatives. The defence claims that the charges are politically motivated, and are the result of intense pressure applied by the US to secure convictions. Whether the Kenyan judiciary is sufficiently robust to deal with the cases in an impartial manner remains to be seen. No charges have yet been brought in relation to the failed missile attack on an Israeli airliner.
Mr Kibaki builds bridges In his first official visit outside of Africa, Mr Kibaki travelled to the US capital in during a visit to Washington early October for talks with the president, George W Bush, and other top officials. He also held discussions with the IMF and the World Bank in an attempt to speed the resumption of donor funding. The US views Kenya as a key ally in the war against terrorism in the Horn of Africa, but rejected Mr Kibaki’s plea for an immediate lifting of the “unwarranted and unfair” negative travel advisory issued in mid-year, even though other Western countries have withdrawn similar warnings. US caution is not unwarranted, however, given the attack on its Nairobi embassy in 1998 and the November 2002 suicide bombing of the Paradise Hotel near Mombasa. The US commended new security measures at Kenyan airports—such as increased surveillance of perimeter fences and the training of new wardens—and said that the situation is being reviewed on a daily basis, but it will have been deterred by warnings from the UN of further possible attacks. Bilateral relations were further cemented in mid-October when the US secretary of state, Colin Powell, travelled to Nairobi to take part in Sudanese peace talks. He commended the campaign against judicial corruption and promised increased defence-related funding under the new East Africa Counter-Terrorism Initiative.
The UN warns of new terror The bombing of the Paradise Hotel (which left 15 dead) and the simultaneous attacks in East Africa but failed attempt to down an Israeli passenger jet using shoulder-launched anti-aircraft missiles, were planned and prepared by al-Qaida cells in neighbouring Somalia under the guise of a lobster fishing operation, according to a recent report submitted to the UN Security Council. Kenya is particularly vulnerable to Islamist terrorism because of its long, porous border with Somalia, where the rule of law is weak and the fundamentalist presence strong.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 19
Investigators studying violations of the UN arms embargo against Somalia (in place since 1992) said the attacks had been planned a year in advance and involved four separate terrorist cells. One remained in Mogadishu, a second targeted the Paradise Hotel, a third launched the anti-aircraft missiles, while the fourth prepared a getaway boat. The operation was controlled by Fazul Abdallah Mohamed, a Comoran national on America’s wanted list, who is also blamed for the 1998 bombing of the US embassy in Nairobi. The anti-aircraft missiles were probably smuggled in from Yemen but may have come via Eritrea or been purchased from commercial dealers. The proliferation of arms in Somalia, most of which come in the form of “micro-shipments” carried by traditional Arab dhows, represents a serious threat to other countries in the region, according to the UN. The report also warned that the preparation and planning of further attacks has been undertaken during 2003, although this is probably based more on conjecture than hard evidence. Kenya fails to meet UN deadlines for the submission of anti-terror reports
The UN criticised Kenya in early November for failing to submit a progress report on actions taken to prevent terrorist attacks. Kenya was one of 58 countries that missed the 27th October deadline but has promised to deliver within a month. Kenya is also four months late in providing information to the UN panel monitoring activity by al- Qaida. Kenya’s laxity is somewhat surprising, given the damaging impact of terrorism on the vital tourism sector, but cementing unity in the ruling National Rainbow Coalition and securing the return of donor funding have taken precedence. On a more positive note, the UN has commended Kenya for its crucial role in facilitating the Somali National Reconciliation Process, despite the failure to make much headway. Economic policy
The IMF postpones the award The IMF had been expected to approve a new three-year, US$250m poverty of a new three-year PRGF reduction and growth facility (PRGF) on November 5th, given the successful Article IV consultations mid-year and evidence that the government is serious about tackling corruption. However, perhaps not surprisingly, things did not go according to plan, and the IMF postponed a final decision until November 21st in order to conduct “further technical analysis”. The main problem is that the government, in January 2003, negotiated with individual banks to secure new terms on commercial debt, rather than with the London Club as a whole, which violated the principle of equal treatment for all creditors. The Fund is also concerned about the accumulation of external debt arrears and demanded a fresh analysis of Kenya’s debt sustainability, including full disclosure of the terms agreed with commercial creditors, which explains the delay in finalising the PRGF. The Fund is also concerned about excess liquidity in financial markets and the rising civil-service wage bill, which could threaten fiscal sustainability, but also stressed that Kenya has made considerable progress in fulfilling conditionalities, particularly in the fight against corruption. The government has also lodged a letter of intent with the IMF setting out intended reforms. The government’s
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 20 Kenya
five-year economic recovery strategy (2003-2007), published in mid-year, is expected to serve as the required poverty reduction strategy paper (PRSP) and will be presented to donors at a National Investment Conference on 20th-21st November and a Consultative Group meeting called by the World Bank for 24th-25th November. It is highly likely that the PRGF will be awarded on November 21st, thereby boosting the government’s credibility, but final approval is unlikely until the IMF Board meets a month later, implying that funds will not be released until early 2004. The PRGF will boost the government's credibility, but will contain strict conditions with regard to structural benchmarks and performance criteria.
The IMF deal will allow for The expected agreement with the IMF will allow for the release of funds from new debt relief other multilateral and bilateral donors, such as the World Bank and the EU, and pave the way for a new round of debt rescheduling with the Paris Club of official creditors. Kenya still has active debt treatments with the Paris Club, one from 1994 covering US$535m, and one from 2000 for US$300m. The London Club deal from January 2003 is believed to have treated US$45m, following an earlier agreement in 1998 covering US$49m. But prospects for more substantial relief are limited, as Kenya’s external debt is considered sustainable by the standards of the heavily indebted poor countries (HIPC) initiative. External debt is estimated to have totalled US$5.6bn in 2002, equivalent to 45.5% of GDP, while the net present value (NPV) of the debt-to-exports ratio was 111% and the debt-service ratio 11%. The resumption of donor funding will also allow the government to retire domestic debt, which rose to 29.2% of GDP in July 2003 from 24.6% of GDP a year earlier. Under the PRGF it would fall to under 10% of GDP by fiscal year 2007/08 (July-June), according to the IMF. Proposals to improve debt management
It is not yet clear what action will be taken to improve Kenya’s debt management under the poverty reduction and growth facility, but there is a clear need to revise existing legislation, such as the Internal Loans Act and the External Loans and Credit Act, both of which are about 40 years old. Other possible steps include establishing a separate agency with overall responsibility for debt management. More radical proposals are contained in the draft Public Debts Management Bill 2003, which calls for government debt to be restricted to 25% of GDP. However, it is unlikely that the bill will be passed in its present form and some measures will probably be dropped or watered down. World Bank lending is The World Bank has continued to disburse new project funding to Kenya, expected to gather pace including US$50m for free primary education and US$60m for the Arid Lands Programme, in June 2003, but more substantial support is in prospect once the PRGF has been finalised. In particular, the World Bank may release the second US$50m tranche of the US$150m economic and public sector reform credit (EPSRC), which was agreed in August 2000 but suspended in January 2001 after the release of the first instalment because of the failure to meet the required targets. The EPSRC was due to expire in August 2003, but Kenya has negotiated an extension until April 2004. According to a World Bank memo in September 2003, Kenya has fulfilled some of the conditions attached to the second tranche, such as adopting new
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 21
government procurement regulations. A directorate for public procurement has been established and a new Public Procurement Bill is expected to come before parliament by the end of the year. However, the implementation of civil-service reforms has been less successful, despite significant retrenchment in 2000/01. The second tranche may be released, but it is unlikely that the third and final tranche will be, as it is dependent on the privatisation of Telkom Kenya, which is not scheduled to start until 2005. Other pending World Bank loans include the US$75m Privatisation and Private Sector Development Project (on hold since 2001) and the US$174m Northern Corridor Transport Improvement Project (first put forward in March 2003). The World Bank calls for further reforms
The Kenya country director of the World Bank, Makhtar Diop, has said there is a risk that the Kenyan economy will not recover unless the government urgently addresses the policy constraints hindering growth. He called on the government to speed up structural reforms, enhance private-sector involvement in the provision of key infrastructure services, improve the allocation of public funds and maintain macroeconomic and political stability. This echoed the recommendations of the World Bank’s Country Economic Memorandum of August 2003 (the first produced on Kenya since 1995), which highlighted the need for: maintaining macroeconomic equilibrium by controlling public spending; improving food security by switching from subsistence to commercial farming; and improving the investment climate by strengthening governance and ensuring better delivery of key services and inputs such as energy, telecommunications, transport and water. The EU agrees a five-year The EU approved a KSh20.25bn (US$265m) country assistance programme for economic recovery strategy Kenya in mid-October, covering 2003-07, which is geared to long-term development projects. Additional budgetary support may be forthcoming, but is dependent on a PRGF being put into place. Of the total amount, KSh6.75bn has been earmarked for macroeconomic development; KSh4.2bn for agriculture; KSh3.3bn for transport; and KSh1bn for small business, export promotion, tourism and non-governmental organisations. The remainder—KSh4.95bn—has been reserved for emergency funding, although Kenya is lobbying for it to be used in support of the struggling tourism sector. In addition, the European Investment Bank plans to open a new office in Nairobi to offer and manage soft loans to support private-sector marketing initiatives. The EU noted that the approval of the programme was an important sign of the Commission’s renewed confidence in Kenya’s economic and social development.
Perceptions of corruption Kenya is undoubtedly making efforts to stamp out the scourge of corruption, remain high but the 2003 Corruption Perceptions Index (CPI) published by Berlin-based Transparency International illustrates the sheer scale of the problem. Kenya scored 1.9 in 2003 (where zero is totally corrupt and ten is totally clean), the same as in 2002 but down from the 2.2 in 1996 when the country was first rated. According to the 2003 report, Kenya was the 122nd most corrupt country in the world out of the 133 assessed, and within sub-Saharan Africa only Angola, Cameroon and Nigeria scored lower. However, the CPI is a subjective measure that is prone to error and is based on perceptions not fact. At the same time, it is a useful indicator of the degree of corruption in a country.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 22 Kenya
Corruption Perceptions Index 2003: selected countries in Sub-Saharan Africa Country 2003 rankinga 2003 scoreb Earliest score % changec Botswana 30 5.7 6.1 -6.6 South Africa 48 4.4 5.6 -21.4 Ghana 70 3.3 3.3 0.0 Tanzania 92 2.5 1.9 31.6 Ethiopia 92 2.5 3.5 -28.6 Zimbabwe 106 2.3 4.2 -45.2 Uganda 113 2.2 2.7 -18.5 Kenya 122 1.9 2.2 -13.6 Angola 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 earliest score. Source: Transparency International.
The government plans cuts in In a highly controversial move, the labour minister, Ali Mwakwere, announced the expatriate workforce in October that work permits for two-thirds of the 25,000-strong expatriate workforce, over half of whom are ethnic-Asians from either the UK or the Indian subcontinent, will not be renewed. The government argues that suitably qualified Kenyans are available to fill the posts, but the decision echoes Idi Amin’s expulsion of Asians from Uganda in 1972 and could prove damaging for the economy. In an attempt to minimise negative sentiment, the minister pointed out that the move will be spread out over two years and that all existing permits will be honoured. Furthermore, senior managerial and technical staff in multinational companies are to be spared, while the threat to close private, British-run schools was lifted following appeals by other cabinet ministers fearful of disrupting their children’s education. The chief targets are skilled and semi-skilled jobs in manufacturing, including middle management, but the clear-out will also hit the tourism and hospitality sectors and possibly Asian-dominated commerce as well. The government is also targeting skilled expatriates who have stayed on in Kenya and taken new jobs after their initial permits expired, in violation of existing laws. Expatriate workers and their families are required to leave the country within two months of their permits expiring. Some UK businessmen and economists have described the move as “racist” and “economic suicide”, which is a little harsh, but there are likely to be negative consequences. Politicians are hardly the best judges of whether or not there are enough skilled Kenyans to replace the departing expatriates, and a number of foreign firms have already complained of problems in securing permits for key technical staff with skills not available locally. Multinationals will not welcome the government telling them who they can or cannot hire, and the new labour policy may deter potential investors. The government claims the move is consistent with its pledge to create an extra 500,000 job openings for Kenyans, but this can only be achieved via faster economic growth, not by simply replacing expatriates with locals. The reverse is more likely to be true, as any decline in the skills base will dampen economic expansion.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 23
The domestic economy
Economic trends
Real GDP growth is slower Despite hopes of an economic revival under the reform-minded regime of than hoped for in 2003 Mwai Kibaki, economic growth has remained sluggish in 2003, partly because of delays in securing a new agreement with the IMF. Real GDP growth edged up to 1.4% (on an annualised basis) in the first seven months of 2003, compared with 0.9% in the same period in 2002, but the population is growing at a faster rate and income per head continues to decline. Although imports rose by 14.5% in January-July 2003 compared to a year earlier, this had more to do with the decline of the shilling against sterling and the euro than any upswing in economic activity.
Gross domestic product by sector (% real change, year on year, unless otherwise indicated) 2002 2002 2003 % of GDP Jan-Jula Jan-Jula Agriculture 24.0 1.0 1.2 Manufacturing 13.0 0.9 1.2 Trade, tourism & hotels 12.7 2.5 3.0 Financial services 10.5 0.8 0.9 Transport & communications 6.3 2.7 3.0 Building & construction 2.3 0.4 0.1 Government services 14.6 0.7 1.2 GDP incl others 100 0.9 1.4 a Annualised. Source: Central Bank of Kenya, Monthly Economic Review, September 2003.
All subsectors apart from construction grew slightly faster in the first seven months of 2003 year-on-year, but apart from tourism, restaurants and hotels, and transport and communications, growth was weak. The dominant agricultural sector grew by just 1.2%, despite largely favourable rainfall, as higher horticulture and coffee output was offset by declines in tea and sugar. Manufacturing also posted 1.2% growth in the first seven months of 2003 compared to a year earlier, driven by a 12.5% rise in exports, which reflects better access to markets within the Common Market for Eastern and Southern Africa and the East African Community and to market opportunities created by the Africa Growth and Opportunity Act. Consumption of electricity, a key input, was up 3.2% year-on-year, although manufacturing capacity utilisation remains low and domestic demand sluggish. The tourism and hotel sector grew by 3% in the first seven months of 2003 year-on-year, despite the heightened threat of terrorism, but the rate of increase slowed markedly in July. Passenger throughput at the main Jomo Kenyatta International Airport rose by just 0.3% in January-July 2003 year-on- year, partly because of the negative travel advisories issued by the UK, the US and other European countries in May 2003, according to the Central Bank of Kenya. Apart from the US warning, all other advisories were subsequently
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 24 Kenya
lifted, but the pick-up in tourism during the first half of 2003 is unlikely to be repeated in the second half. Growth in transport and communications continues to be driven by the mobile phone sector: the total number of subscribers jumped by 64% to 1.6m in the 12 months to June 2003. Cargo handled by the Kenya Ports Authority climbed by 9.4% in the first seven months of 2003 year-on-year, and oil-product throughput by the Kenya Pipeline Company rose by 5%. However, freight on Kenya Railways (KR) slid by 7.1% as firms turned to the more reliable road network. In an attempt to become more competitive, KR cut freight tariffs in November 2003, cutting the cost of transporting a standard 20ft container from Mombasa to Nairobi by 15% to KSh29,640 (US$390). Building and construction grew by a disappointing 0.1% in January-July 2003. No significant work was initiated to repair the dilapidated infrastructure because of a shortage of funds.
More rapid growth is expected Estimates of real GDP growth in 2003 range from a conservative 1.3% (the IMF) in the final quarter of 2003 to an optimistic 2.3% (the Central Bank), but the Economist Intelligence Unit expects the final figure to be close to 1.7%. The delayed resumption of donor support has left the public sector short of funds and the private sector short of confidence. The potential benefits of donor funding will not be felt until December 2003 at the earliest and will play little part in this year’s growth calculations. Growth is nonetheless expected to be more robust in the fourth quarter of the year because of the improved food harvest and a recovery in manufacturing fuelled by tax and duty incentives in the budget for fiscal year 2003/04 (July-June). Set against these positive trends is ongoing weakness in tourism.
The fiscal deficit in July 2003 The actual budget deficit in 2002/03 was KSh31.7bn, or 3.2% of GDP, according was close to budget targets to the Central Bank—much lower than expected because of strong revenue collection and spending restraint. The deficit in July 2003–the first month of the 2003/04 fiscal year–reached KSh5.8bn, slightly under budget but higher than a year ago. The full-year budget assumes a deficit of KSh62.5bn, or 6% of GDP. Notably, both revenue and spending were significantly below budget targets in July 2003 because of slower than projected GDP growth, but were more than 10% higher year-on-year.
Government finances (KSh bn) Jul 2002 Jul 2003 Actual Actual Budget Total revenue 13.6 15.2 26.9 Revenue 12.9 15.1 24.6 External grants 0.7 0.2 2.3 Total expenditure 18.8 21.0 32.8 Recurrent spending 17.0 19.1 27.8 Development spending 1.8 1.9 5.0 Deficit (commitments basis) -5.2 -5.8 -5.9 % of GDP -0.5 -0.6 -0.6
Source: Central Bank of Kenya, Monthly Economic Review, September, 2003.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 25
Fiscal revenue is close to its According to the Kenya Revenue Authority (KRA), tax collection in the first target for 2003/04 quarter of financial year 2003/04 (July-September) rose by 10% year-on-year to KSh50.8bn, nearly 98% of target. The main reason for the improvement was a 10% rise in income tax to KSh18.3bn (110% of target), but customs duties and VAT moved up more slowly to KSh25.4bn (93% of target) and KSh6.5bn (85% of target) respectively. The poor performance of VAT partly reflects the reduction in the tax rate from 18% to 16% in June 2003, as well as poor collection; only 25% of registered traders pay VAT according to a recent report.
The government continues to In the absence of new donor funding, the government has continued to rely rely on domestic financing exclusively on domestic sources to finance the budget deficit and meet repayment obligations on foreign loans. The financing requirement in July 2003 was KSh5.7bn, of which KSh3.3bn was raised from the sale of Treasury securities and KSh2.4bn provided by way of a Central Bank overdraft. As a result, the stock of public-sector domestic debt climbed to KSh292.3bn in July 2003, equivalent to 29.2% of GDP, up from 24.6% of GDP a year previously.
Government domestic debt, 2003 (KSh bn) Feb Mar Apr May Jun Jul Government securities 254.8 256.7 263.6 272.7 278.3 280.2 Treasury bills 81.8 79.2 77.8 79.1 78.7 77.3 Treasury bonds 135.0 139.5 147.8 155.6 161.6 165.0 Total incl others 264.2 270.7 276.1 280.9 289.4 292.3
Source: Central Bank of Kenya, Monthly Economic Review, September 2003.
The maturity profile of The Treasury has successfully lengthened the maturity profile of government domestic debt lengthens debt by switching to medium-term bonds from short-term bills. Bonds amounted to KSh165bn and bills KSh77.3bn in July 2003, producing a ratio of 68:32, close to the 70:30 target. Bond terms are also lengthening, with the value of 1-3 year paper falling to 58.2% of the total outstanding in July 2003 from 75.4% a year earlier, while the proportion of 7-10 year bonds climbed from zero to 11.5%. The average maturity of public debt therefore lengthened from one year and six months to two years and five months in the year to July 2003. Reliance on longer-term bonds will attract greater interest from non-bank financial institutions, and theoretically free up bank credit for the private sector, but banks have also been drawn to the longer-term bonds (up to 5 years) because of the decline in interest rates on shorter-term paper. Is the private sector being crowded out?
Commercial bank loans to the government (via the purchase of Treasury securities) jumped by 27.1% year-on-year to KSh127.6bn in July 2003, while credit extended to the private sector rose by 6.2% to KSh252.2bn. This appears to confirm suspicions that the private sector is being crowded out but the situation is more complicated. The main reasons for slow growth in private-sector lending are: the failure by banks to adequately assess credit risk, which makes them tend towards conservatism in an attempt to avoid default; 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 from the ongoing, excess liquidity in the banking system.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 26 Kenya
The problem has more to do with a perceived shortage of opportunities than a shortage of funds. On a more positive note, bank lending to the private sector picked up more strongly in the three months to July 2003 in areas such as agriculture, trade, construction, real estate, and consumer durables.
Excess liquidity pushes interest Commercial banks remain awash with funds, with the liquidity ratio holding rates down steady at 46% in August 2003 (more than double the 20% legal minimum), partly because of the cut in the daily minimum cash requirement lodged with the Central Bank from 10% to 6% as from 1st July. Demand for risk-free Treasury securities—the banks’ preferred investment vehicle—has therefore increased but, with supply remaining steady (or falling in the case of short-term paper), interest rates have tumbled. The benchmark 91-day Treasury-bill rate dipped from 6.3% in April to just 0.8% in September, before edging up to 1.05% in October, while rates for longer-term instruments have followed a similar trend. Investors have responded to the decline in rates by turning to the stock market, thereby boosting equity prices, and by purchasing Tanzanian and Ugandan Treasury securities, which offer higher returns. Demand for short-term T-bills remains strong, however, and issues are typically oversubscribed. Interest rates have also been depressed because of the likely return of donor funding, which will curb the government’s appetite for domestic credit, and little change in rates is expected before the end of 2003.
Monetary indicators, 2003 (%) May Jun Jul Aug Sep Oct 91-day Treasury-bill rate 5.8 3.0 1.5 1.2 0.8 1.1 Overdraft ratea 17.2 14.9 14.4 15.0 n/a n/a Money supply (M3X) growthb 10.6 10.9 11.7 n/a n/a n/a Inflationb 14.9 13.7 10.9 8.3 7.9 9.1 a Average of commercial banks. b Year-on-year. Sources: Central Bank of Kenya, Monthly Economic Review; Weekly Report.
Inflation eases but remains Inflation trends in Kenya strongly reflect movements in food prices, which high carry a 50.5% weighting in the consumer price index. Inflation slid from 14.9% year-on-year in May 2003 to 7.9% in September, following better rainfall and a steady fall in vegetable prices, but moved up again to 9.1% in October, as cereal prices climbed prior to the start of the main harvest. Inflation is expected to resume a downward trend in the last two months of 2003, with the year-on- year figure falling to 7% in December. Average annual inflation climbed to 8.4% in the year to September 2003 from 7.9% in year to August, as the surge in prices between October 2002 and May 2003 continued to feed into the data. The impact of this earlier rise will dissipate during the fourth quarter, but we expect average inflation for 2003 as whole to be 9.6%, compared to 1.9% in 2002.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 27
The shilling strengthens after The exchange rate of the shilling against the US dollar moved through two several months of depreciation distinct phases in the first nine months of 2003, with rapid appreciation between January and May—reflecting confidence in the new government and weakness in the US dollar—being followed by similarly rapid depreciation between May and September. This reversal can be attributed to several factors including: intervention by the Central Bank to forestall an erosion in Kenya’s international competitiveness; the ebbing of confidence because of disputes within the ruling National Rainbow coalition and delays in the return of donor support; and seasonal trends in foreign-exchange inflows.
Exchange rate, 2003 May Jun Jul Aug Sep Oct KSh:US$ (av) 71.6 73.7 74.7 76.0 77.9 77.0
Sources: Central Bank of Kenya; IMF, International Financial Statistics, November 2003; Economist Intelligence Unit.
The shilling weakened sharply in the first half of September, reaching a low of KSh79.2:US$1 in mid-month because of strong corporate demand for foreign exchange, but subsequently recovered as earnings from tea, coffee and horticulture picked up. The shilling continued to appreciate during October, ending the month at close to KSh76.5:US$1, as the imminent resumption of donor support boosted confidence. The shilling’s relatively strong showing against the US dollar in the year to September 2003 is mainly the result of the weakness of the US dollar against other major currencies. In contrast, the shilling depreciated by 6.1% against sterling, 14.8% against the euro and 25.4% against the rand over the same period.
Agriculture and horticulture
Horticulture and coffee output The upward trend in horticulture output continued in the first seven months of rise sharply 2003 with output rising by 24.5% and export sales by 26% (to US$196m) compared to the same period in 2002. All subsectors, including fruits, flowers and vegetables, posted solid growth, partly because of greater irrigation, while exports were boosted by the development of new markets in East Asia, the US and Australia and the decline in Zimbabwe’s production. Production has also
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 28 Kenya
been encouraged by the removal in July 2003 of the 20% withholding tax on commissions paid by flower growers to non-resident agents overseas. Coffee output jumped by 51.5% year-on-year in the first seven months of 2003 to 43,170 tonnes because of better weather, improved crop husbandry, the elimination of tax on coffee inputs and ongoing reforms in the sector. The upturn may be temporary, however, as world coffee prices show little sign of improving in the short term, and farmers are once again pulling up coffee bushes and switching to other crops.
Cash crop production (% change, year on year) 2002 2003 2001 Year Jan-Jul Jan-Jul Tea 24.7 -2.6 -5.7 -4.5 Horticulture -4.0 22.6 12.5 24.5 Coffee -44.3 -14.5 -24.8 51.5 Sugarcane -9.9 26.9 32.9 -14.8 Pyrethrum 5.1 -20.6 -20.4 -6.4
Sources: Central Bureau of Statistics; Kenya Sugar Authority; Sisal Board of Kenya; Pyrethrum Board of Kenya.
Tea output has fallen Output of tea, Kenya’s most valuable export, slumped by 4.5% in the first seven months of 2003, compared to a year earlier, because of drier than usual conditions in growing areas. The Central Bank still anticipates a small, 3%, rise in tea production for 2003 as a whole but may be disappointed given the poor prognosis for late-season rainfall. Sugar registered the most disappointing performance, tumbling 14.8% in January-July 2003, because of continued problems in the industry (August 2003, page 30), while pyrethrum output fell by 6.4% as payments to farmers were delayed.
Bid for greater valued-added in tea exports
The Kenya Tea Development Agency (KTDA), which accounts for two-thirds of the country’s output, is spending KSh25m (US$326,800) building testing rooms and blenders in Mombasa in an attempt to add value in-country. Most Kenyan tea is currently sold unblended and in bulk to the main national consumers, Pakistan and Britain, where it is subsequently mixed with other blends. The KTDA, however, is seeking to penetrate the US speciality tea market, where prices per kilo are ten times higher than those earned from conventional buyers. It is already forging links with Tazo, the tea operation of US beverages company, Starbucks, while the authorities are promising to grant tea factories export-processing-zone status to boost their international competitiveness.
Industry
The government acts to bring The Kibaki government aims to bring down the high cost of electricity—a down electricity prices serious 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 power generators to cut tariffs paid by KPLC. Turning the sector around will take time,
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 29
however, given years of neglect, mismanagement and corruption under the regime of former president, Daniel arap Moi. Many of KPLC’s problems stem from the poorly planned liberalisation of 1998, which handed responsibility for power generation to the state-run Kenya Electricity Generating Company (KenGen) and allowed independent power producers to enter the market. This did not, as hoped, lead to greater efficiency but instead encouraged further mismanagement because of the failure to establish a competent and impartial regulatory authority. Deliveries of hydroelectricity from KenGen fell sharply in 2000 because of drought and KPLC signed long-term supply contracts with independent power producers (which rely on thermal capacity). However, agreed tariffs were up to four times higher than those levied by KenGen, which continues to undermine KPLC’s finances. According to KPLC’s most recent accounts, losses climbed by 54.2% to KSh2.9bn in the year to June 2003. The deterioration stems from several factors including: increased provisions for pension fund deficits; higher transmission and distribution costs; and the escalating cost of debt repayments.
A move is made to make KPLC As part of the drive to make KPLC a profitable concern, the government more profitable recently converted the debts of KSh12.2bn (US$160m) owed to KenGen into new equity in KPLC, which should reduce annual interest payments by KSh850m. The government also plans to negotiate a 25.4% reduction in KenGen’s bulk tariff to KSh1.76/kwh, thereby saving KPLC a further KSh2.3bn per year, and will also seek a better deal from independent suppliers. If these moves are successful, KPLC will be able to cut prices to end-users, although the various tax surcharges that make up 30% of total electricity charges have so far been left untouched. Current government proposals for revitalising the power sector do not envisage any change in KPLC’s status, but parliament’s Finance Committee has put forward an alternative strategy based on ending KPLC’s monopoly over distribution and sales. According to the committee, potential players such as sugar 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 is accompanied by the establishment of a competent regulatory authority.
Finance
Barclays Bank plans to issue a Barclays Bank broke new ground in October 2003 with the announcement that long-term corporate bond it plans to raise KSh3bn from the local financial markets by issuing long-term corporate bonds. Markets are likely to be receptive, given excess liquidity in the banking system and the reduced availability of government securities, while Barclays will benefit from currently low interest rates. The bank is also seeking approval from the Capital Markets Authority to list the securities on the Nairobi Stock Exchange. Barclays will use the funds to expand its thriving asset-financing business and develop other long-term lending products aimed at the corporate sector, including mortgages. The exact structure and features of the bond have still to be settled, in discussion with other market players, but Barclays is likely to seek a rating to support the bond in the absence of a
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 30 Kenya
sovereign guarantee. Barclays’ move caught other banks by surprise but several may follow suit if the issue proves successful.
An auto loan scheme is Standard Chartered Bank has launched Auto Loan, a scheme chiefly designed launched to enable small and medium-sized enterprises to buy company vehicles, including vans, pick-ups and light trucks. The loan is available to employees earning at least KSh60,000 (US$765) a month or to businesses with positive cash flow. The bank will finance up to 70% of the vehicle’s purchase price, and the sole security required is the motor vehicle purchased.
Transport and communications
Kenya Airways begins a bold Kenya Airways (KA) under the management of its new managing director, Titus restructuring plan Naikuni, has embarked on a comprehensive restructuring programme, to be spread over 18 months, with the aim of cutting costs, enhancing revenue and boosting profits. KA was privatised in the 1990s although the government retains a 23% stake. The airline has experienced tough operating conditions in 2003, mainly because of exogenous factors—such as the US-led war on Iraq, the heightened threat of terrorism in the Horn of Africa, and the outbreak of the SARS virus in East Asia—but also because of domestic factors, including the re- emergence of competition on the lucrative Dubai and Mumbai routes, and mismanagement within Flamingo Airlines, KA’s no-frills subsidiary. As a result, post-tax profits in the six months to September 2003 fell by 7% to KSh356m (US$4.7m) compared to the same period in 2002, but the figure would have been far worse were it not for stringent cost cutting. Operating costs rose by 2.9% year-on-year to KSh10.9bn, as fuel prices climbed by 14%, but overheads were slashed by 10% to KSh2.3bn. Revenue edged up by 1.5% to KSh14bn and operating profit jumped by 22.4% to KSh792m, but finance costs leapt up by 53% to KSh280m because of borrowing to fund fleet expansion. KA’s restructuring plan calls for the loss of between 400-900 jobs from the 3,400-strong workforce by the end of 2003. As a first step, five senior managers left the firm in October, although precisely how many other jobs will be lost has yet to be finalised. Furthermore, strategy and corporate communications will be absorbed into the commercial department and legal affairs will be taken over by the finance section. Flamingo Airlines has already been reintegrated into the parent company, while freight-based subsidiaries— Kencargo, Kenya Airfreight Handling, and African Cargo Handling—are to merge. Other initiatives expected over the next 18 months include: securing a crossborder listing on the Dar-es-Salaam Stock Exchange; penetrating further into East Asian markets; and starting direct flights to the US. KA also hopes to expand its presence in Africa by increasing the frequency of flights to Nigeria, Ghana and Côte d’Ivoire.
The award of a third mobile The award of Kenya’s third mobile phone licence is proving to be anything but phone licence faces problems smooth, which is hardly surprising given the chequered history of earlier privatisation initiatives. The Communications Commission of Kenya (CCK) awarded the licence in October to the consortium fronted by Zimbabwe’s Econet Wireless International, in which the Kenya National Federation of Co-
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 31
operatives (KNFC) has an 81% share. However, Econet’s winning bid of KSh2.1bn (US$27.5m) was less than half the amount paid by KenCell and Safaricom for earlier licences and was also substantially below the government’s KSh3.7bn target figure. Several MPs (mainly, but not exclusively, from the Kenya African National Union) were incensed, insisting that the “rip- off” deal be revoked, and claiming that Econet is not a fit suitor because of its alleged financial problems. MPs also sought a detailed breakdown of the majority KNFC shareholding in the consortium because of fears that the hidden involvement of top political figures influenced the CCK’s decision. Of greater concern is the legal challenge launched by Kenya Telecommunications Investment Group (KTIG), whose bid of US$55m was never even considered because of its narrow failure to meet technical specifications. The award of the licence will remain in limbo pending a court ruling. CCK insists that the process was transparent and that it fulfilled tender requirements by selecting the highest bidder from those that cleared the technical hurdle. Only Econet and Mobile Systems International (Netherlands) crossed this threshold but the latter bid a paltry KSh858m. The CCK also cited the lack of a pre-determined reserve price, and said that Econet’s bid was realistic given that most high-earning Kenyans already subscribe to existing networks. However, this fails to explain why KTIG was willing to pay substantially more for the licence and appears to discount the possibility of users switching between networks in response to better deals. Unless the government has a hidden agenda, it will regret setting technical standards at such a high level. Whatever the outcome, the disputed licensing process may prove damaging to the government’s credibility.
The privatisation of Telkom The privatisation of Telkom Kenya, the fixed-line monopoly, has long been Kenya moves ahead slowly viewed by donors as a key structural benchmark, and the government’s handling of the issue will affect perceptions of its wider policy stance. The former Moi regime tendered a 49% stake in 2000 but claimed that all bids were too low, a decision that hastened the breakdown in relations with the IMF and World Bank. The new government is proceeding more cautiously and, in line with weak global telecoms markets, favours commercialisation and liberalisation before privatisation. The latest proposals, which could yet change, envisage the termination of Telkom Kenya’s legal monopoly and the licensing of a second national operator (SNO) by June 2004. This may be followed by a two-stage privatisation, with the sale of equity to a strategic partner (January 2005) being followed by a stock market flotation (June 2005), although the government remains undecided about the wisdom or otherwise of maintaining a majority stake. The CCK is likely to open the tender for a SNO within weeks, but the level of investor interest is hard to predict. Widespread dissatisfaction with the quality of service provided by Telkom Kenya from both corporate and private customers suggests there is room for competition. On the other hand, investment in mobile networks offers far greater rewards, at least in the shorter term. The most critical factors driving investor sentiment will be ease of access to existing infrastructure (which serves 328,000 subscribers) and the division of responsibility for future investment. If favourable terms are offered, investment
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 32 Kenya
in a SNO may be more lucrative than buying into Telkom Kenya. At the same time, the outcome of the SNO tender will influence the final plans for the privatisation of Telkom Kenya.
Foreign trade and payments
The current-account deficit Kenya’s current-account deficit widened to US$126m in the year to July 2003, as widens as imports soar the merchandise trade deficit grew faster than the invisible trade surplus. Exports rose by 13.8% 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 equipment posted the greatest proportional increase following the purchase of road vehicles and general industrial machinery. Rapid growth in both exports and imports mainly reflects the depreciation of the Kenya shilling against the euro (although not the dollar), rather than shifts in trade volume. Nevertheless, imports grew faster than exports and the trade deficit widened by 15.7% to US$1.4bn. At the same time, the invisible trade surplus climbed by 15% to US$1.27bn, as higher receipts from tourism and other non-factor services (such as royalties, licence fees and telecom earnings) compensated for the decline in current transfers. Private transfers remain on a downward path, although official transfers will become a significant factor in the balance of payments when donor support resumes. The overall balance remained in surplus in the year to July 2003, as the capital-account surplus more than covered the current-account shortfall. As a result, foreign-exchange reserves climbed to US$1.25bn in July 2003, equivalent to 3.7 months of imports.
Balance of payments (US$ m; years ending Jul) 2002 2003 % change Merchandise exports (fob) 2,007 2,283 13.8 Tea 424 429 1.2 Horticulture 243 299 23 Coffee 87 83 -4.6 Others 1,252 1,472 17.6 Merchandise imports (cif) 3,215 3,681 14.5 Equipment 674 904 34.1 Oil products 712 844 18.5 Chemicals 499 543 8.8 Manufactures 407 472 16 Trade balance -1,208 -1,398 -15.7 Invisible trade (net) 1,106 1,272 15 Tourism 267 341 27.7 Transfers 685 590 -13.9 Current-account balance -102 -126 -23.5
Source: Central Bank of Kenya, Monthly Economic Review, September 2003.
Official data suggest that tourism performed better than expected in the first half of 2003, but negative sentiment generated by the heightened threat of terrorism in East Africa has dampened activity in the second half of the year. Travel warnings issued by Western governments in May 2003, including the UK
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Kenya 33
and Germany (Kenya’s main markets), proved particularly damaging, and even though they were subsequently withdrawn, potential holidaymakers remain extremely wary. Tourism suffered a new setback in October 2003 with the suspension of charter flights 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 traffic to Kenya’s coastal belt. Tui’s withdrawal has led to the cancellation of 13,000 hotel bookings between October 2003 and April 2004 and may cut earnings from tourism by KSh770m (US$9.6m). Local tour companies have called on the government to cut charges for visas and landing rights in order to minimise the damage. Some have also criticised the government’s focus on East Asia, declaring that any funds available would be better spent on increasing the number of scheduled flights to traditional European markets, thereby cutting reliance on more fickle charter outfits.
Foreign direct investment Kenya remains an unattractive destination for inflows of foreign direct inflows remain at a low level investment (FDI) according to the 2003 World Investment Report by the UN Conference on Trade and Development (UNCTAD), although admittedly this is based on the situation prior to the election of the new National Rainbow Coalition government. In terms of both performance and potential, Kenya lags some way behind its East African Community partners, Tanzania and Uganda. FDI to Kenya reached a peak of US$127m in 2000, following investment in mobile phone networks, but fell to US$50m in both 2001 and 2002. This took the total 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 2002 Flow Flow Flow Stock Tanzania 463 327 240 2,351 Uganda 254 229 275 1,759 Kenya 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 1990 and 2001—to lie sandwiched between Sierra Leone and Burkina Faso— according to UNCTAD’s performance index, which compares share of global FDI to share of global GDP. On the more sophisticated potential index, which is based on a range of structural variables such as telephone density, commercial energy use and the number of students in tertiary education, Kenya slipped from 84th to 127th place over the same period, and was named amongst the 20 worst “laggers”. Foreign companies held back from investing in Kenya for a variety of reasons including high levels of corruption, the suspension of donor funding, and uncertainty in the run-up to the end-2002 election, while others have divested. FDI is highly likely to have remained muted in 2003, given delays in the resumption of donor support and the need to see just how committed the government is to economic and institutional reform, but the Economist
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 34 Kenya
Intelligence Unit expects FDI to move up in coming years, partly because of the prospective privatisation of state firms such as Telkom Kenya.
The Africa Growth and Opportunity Act attracts investors to Kenya
The World Bank has billed Kenya’s garment sector as a success story, largely because of investment related to the Africa Growth and Opportunity Act (AGOA), which totalled US$12.8m in 2001 and 2002. The garment sector’s performance compares favourably to the rest of the manufacturing sector, which has struggled to attract foreign direct investment. A recent study revealed that the textile sector contracted rapidly in the 1990s, but picked up strongly after the introduction of AGOA, with exports rising from US$10m in 1999 to US$127m in 2002 and an estimated US$200m in 2003. However, two clouds loom over the horizon.
• First, as from September 2004, AGOA beneficiaries cease to benefit from the concession allowing the sourcing of cloth from outside Africa. Most investment has been undertaken by Asian firms seeking to exploit cheap labour, but they import most of their raw materials. It is uncertain whether local mills will be able to take up the challenge of supplying cloth of sufficiently high quality.
• Second, the Multi-Fibre Agreement—under which the AGOA pact is administered—will end in 2005, in effect liberalising the global textile industry. The US government is currently lobbying for an extension of AGOA, but until the issue is settled new investment will be deterred.
The East African Community There has been progress in pushing ahead with the formal establishment of the moves closer to start-up EAC. Earlier this year, the three East African heads of state finally agreed on a maximum common external tariff, which has been fixed at 25%. The EAC will now have a three-band external tariff: there will be a zero tax on capital goods and raw materials; a 10% tax on semi-processed goods; and a 25% tax for finished products. The development was announced at the end of the second extraordinary summit of heads of state held in Nairobi on 20th June. Signing of the protocol to establish a customs union for Kenya, Tanzania and Uganda, which had been delayed because of lack of agreement on a common external tariff, has now been set for November 30th, or possibly later. However, although the heads of state agreed to end negotiations on the protocol and get it ready for signing by that date, there is still considerable work to do and meeting the new deadline is likely to prove difficult, although not impossible. In particular, there are some doubts within Kenya as to the wisdom of adopting the 10% tariff on intermediate and final goods, which could have an adverse impact on manufacturing. One possible outcome of this is for a fourth tariff band to be introduced covering intermediate products produced within the region.
Country Report November 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003