Kenya Kenya at a Glance: 2001-02

COUNTRY REPORT

Kenya Kenya at a glance: 2001-02

OVERVIEW Political instability has been the hallmark of President Daniel arap Moi’s government. The situation is not expected to improve greatly during the forecast period, when electoral pressures will intensify internal conflicts in the ruling Kenya African National Union (KANU) as well as in the opposition parties. Economic reform, supported—in the final months of 2001—by the IMF and World Bank, will remain a priority in 2001-02. The steady growth of earnings from exports and tourism will help to reduce the overall current-account deficit in 2001-02. Key changes from last month Political outlook • Relations between donors and Mr Moi are expected to remain extremely strained in the short-term, owing to the president’s wavering commitment to public-sector reform and governance issues. • Any attempt by the president to stand for another term by amending the constitution is expected to draw a stern rebuke from donors, and likely to complicate negotiations on debt restructuring and aid inflows. Economic policy outlook • An IMF team is due to visit Kenya in May to review the government’s achievements in curbing corruption and promoting privatisation. However, IMF lending is not likely to resume until late in 2001. This will undermine investor confidence, forcing up interest rates and threatening economic recovery. • Another tight budget for 2001/02 is expected to be announced in June, following the withdrawal of donor support and weker economic activity this year. Economic forecast • Economic growth prospects for the country remain essentially unchanged from last month: real GDP is forecast to grow by a modest 2.5% in 2001 and a higher 4.1% in 2002.

May 2001

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 EIU delivers its information in four ways: through our digital portfolio, where our 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.

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ISSN 0269-4239

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 23 Agriculture 24 Financial and other services 25 Energy and infrastructure

26 Foreign trade and payments

List of tables

9 International assumptions summary 11 Forecast summary 21 Gross domestic product 22 Budget, Jul-Feb 22 Monetary indicators 24 Food imports

List of figures

12 Gross domestic product 12 Kenya shilling real exchange rates

Kenya 3

Summary

May 2001

Outlook for 2001-02 President Moi’s last term in office under the existing constitution will be dominated by the country’s growing economic problems. The battle for succession within KANU will also be a major destabilising factor, as the party’s structure is very fragile and will continue to fragment in unpredictable ways. Economic reforms aimed at restoring donor support will continue to shape policy, but relations between donors and Mr Moi are expected to remain extremely strained in the short-term, owing to the president’s wavering commitment to public-sector reform and governance issues. Also, any attempt by the president to stand for another term by amending the constitution is expected to draw a stern rebuke from donors, and highly likely to complicate negotiations on debt restructuring and aid inflows. It is now assumed that the release of the IMF’s second tranche under the PRGF agreement will take place in the final months of 2001. The EIU has revised its forecast for real GDP growth downwards to 2.5% in 2001 and 4.1% in 2002, following the IMF’s decision in March to withhold its second payment under the current PRGF agreement. We have also revised our current-account forecasts for Kenya, largely because lower net transfers inflows are now expected—particularly this year—following the IMF’s decision to withhold funds.

The political scene The departure of Richard Leakey as head of the civil service, and the subsequent replacement of prominent members of his “dream team”, including the central bank governor, Micah Cheserem, has cast doubt over the government’s commitment to the reform process. KANU hardliners have continued to resist a number of the Kenya Review Commission’s proposals, including the Constitution of Kenya (Amendment) Bill 2001.

Economic policy The stalemate between the IMF and the government has forced to authorities to cut back on spending during the current fiscal year of 2000/01. In mid- March the IMF chose once more to withhold lending to Kenya, and expressed its dissatisfaction on several matters, including the stalled privatisation programme.

The domestic economy The forecast for real GDP growth in 2001 has been lowered, while recent official data confirm that inflation is set to dip in 2001. The planned sale of the government’s stake in KCB to a strategic investor has now been suspended.

Foreign trade and payments The East African leaders have unveiled a five-year development strategy for the community. Kenya is considering handling its relations with the EU through Comesa rather than the EAC.

Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: May 14th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Political structure

Official name Republic of Kenya

Form of state Unitary republic

Legal system Based on English common law and the 1963 constitution; a new constitution is expected to be in place by December 2001

National legislature Unicameral National Assembly of 210 elected members, 12 nominated members, the attorney-general and the speaker; a multiparty system was introduced in December 1991

National elections December 1997 (presidential and legislative); next elections due by end-2002

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 ruling Kenya African National Union (KANU); last major reshuffle in September 1999, when the number of ministries was reduced from 27 to 15

Political parties in parliament KANU (118 seats); Democratic Party (DP, 39 seats); National Development Party (NDP, 22 seats); Forum for the Restoration of Democracy (Ford-Kenya; 18 seats); Social Democratic Party (SDP, 14 seats); Safina (5 seats); Ford-People (3 seats); Ford-Asili (1 seat); Kenya Social Congress (KSC, 1 seat); Shirikisho (1 seat)

President & commander-in-chief Daniel arap Moi Vice-president George Saitoti

Key ministers Agriculture, livestock Chris Obure, & rural development Hussein Maalim Mohammed Education, science & technology Stephen Kalonzo Musyoka, Henry Kosgey Energy Francis Masakhalia Environment & natural resources Kipng’eno arap N’geny, Francis Nyenze, Jackson Kalweo Finance & planning Chrysanthus Okemo, Gideon Ndambuki Foreign affairs & international co-operation Bonaya Adhi Godana Health Sam Ongeri Home affairs, heritage & sport Noah Katana Ngala Information, transport & communications Musalia Mudavadi Labour and human resource development Isaac Ruto, Joseph Ngutu Lands & settlement Joseph Nyagah Local government Joseph Kamotho Office of the president Marsden Madoka, Julius Sunkuli, Shariff Nassir, William ole Ntimama Roads & public works Andrew Morogo Tourism, trade & industry Nicholas Biwott Attorney-general Amos Wako

Head of the civil service Sally Kosgei Central Bank governor Nahashon Nyagah

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Kenya 5

Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (KSh bn) 528.0 623.4 692.1 748.9 756.7 GDP (US$ bn) 9.2 10.6 11.5 10.6 9.9 Real GDP growth (%) 4.1 2.1 1.8 1.4 0.4b Consumer price inflation (av; %) 8.8 12.0 5.8 2.6 5.8c Population (m) 26.7 27.3 28.0 28.7 29.4 Exports of goods fob (US$ m) 2,083.3 2,062.6 2,013.1 1,740.5 1,740.3b Imports of goods fob (US$ m) 2,598.2 2,948.4 3,028.7 2,569.7 3,026.4b Current-account balance (US$ m) –73.5 –377.2 –362.9 11.2 –204.0b Foreign-exchange reserves excl gold (US$ m) 746.5 787.9 783.1 791.6 897.7c Total external debt (US$ bn) 6.9 6.6 6.9 6.6 6.0 Debt-service ratio, paid (%) 27.8 22.3 21.1 26.7 29.6 Exchange rate (av) KSh:US$ 57.11 58.73 60.37 70.33 76.18c

May 11th 2001 KSh78.4:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Agriculture, forestry & fishing 24.5 Private consumption 71.6 Manufacturing 13.2 Government consumption 16.9 Trade, restaurants & hotels 12.5 Gross domestic investment 15.1 Transport, storage & communications 6.0 Stockbuilding 0.1 Government services 14.5 Exports of goods & services 25.0 Others (net) 29.3 Imports of goods & services –28.7 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1999 US$ m Principal imports cif 1999 US$ m Tea 431 Industrial machinery 426 Horticultural products 178 Refined petroleum products 255 Coffee 165 Crude petroleum 233 Petroleum products 80 Motor vehicles & chassis 215 Fish products 25 Iron & steel 100 Cement 18 Resins & plastics 94

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total UK 13.5 UK 12.0 Tanzania 12.5 United Arab Emirates 9.8 Uganda 12.0 Japan 6.5 Germany 5.5 India 4.4 a EIU estimates. b Provisional estimates. c Actual.

Quarterly indicators

1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (KSh m) Revenue & grants 46,714 57,427 42,516 46,351 49,365 50,172 n/a n/a Expenditure & net lending 46,249 53,868 42,721 45,410 58,636 33,063 n/a n/a Balance 465 3,559 –205 941 –9,271 17,109 n/a n/a Prices Consumer prices, Nairobi (1995=100) 128.9 133.2 133.7 133.7 135.8 139.3 142.1 143.4 % change, year on year –1.5 0.9 3.7 7.6 5.4 4.6 6.3 7.3 Financial indicators Exchange rate KSh:US$ (av) 62.78 69.36 74.40 74.77 72.78 75.96 77.02 78.95 KSh:US$ (end-period) 64.91 72.91 77.07 72.93 74.87 77.95 78.99 78.04 Interest rates (%) Deposit (av) 10.87 8.34 8.32 10.67 10.88 8.68 6.51 6.32 Discount (end-period) 15.24 19.40 22.74 26.46 17.90 16.01 16.59 19.47 Lending (av) 22.62 20.82 21.83 24.25 24.77 23.32 21.40 19.87 Treasury bill (av) 10.27 10.75 15.50 18.98 14.36 11.09 9.94 12.81 M1 (end-period; KSh bn) 103.29 104.24 103.15 109.51 109.85 107.70 112.19 118.97 % change, year on year 21.1 23.3 18.9 16.4 6.3 3.3 8.8 8.6 M2 (end-period; KSh bn) 321.53 322.98 319.70 328.29 325.44 324.39 334.51 343.02 % change, year on year 9.6 9.9 6.4 6.0 1.2 0.4 4.6 4.5 Stockmarket NSE 20 (1996=100) 2,815 2,765 2,428 2,303 2,233 2,003 2,004 1,913 Sectoral trends Production (annual totals; ‘000 tonnes) Tea ( 251 ) ( 2 3 9 a ) Coffee: unroasted ( 95 ) ( 67a ) Foreign trade (KSh m) Exports fob 31,532 31,915 29,537 29,083 31,724 33,000 31,594 n/a Imports cif –48,760 –48,507 –48,772 –52,275 –55,099 –56,418 –69,108 n/a Trade balance –17,228 –16,592 –19,235 –23,192 –23,375 23,418 –37,514 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 697.3 657.8 687.2 791.6 820.5 808.6 856.6 897.7 a Estimate. Sources: FAO; IMF, International Financial Statistics; Central Bank of Kenya, Monthly Economic Review.

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Outlook for 2001-02

Political outlook

Domestic politics President Daniel arap Moi’s last term in office under the existing constitution will be dominated by Kenya’s growing economic problems and by the struggle for succession within his party, the Kenya African National Union (KANU). Recent events in the country suggest that the debate over who will succeed the president will intensify in the coming months. In addition, the possibility that KANU and the National Democratic Party (NDP) might merge, thereby setting the stage for a coalition-type government in which some NDP members would be appointed to cabinet positions, now seem to be waning, ostensibly because to merge in such a way would weaken the ruling party—a perception which is shared widely by KANU hardliners.

As the debate over the succession to President Moi broadens, there is growing concern that he does not intend to relinquish the presidency after completing his last constitutional term in office in 2002. The controversy is deepening, and several cabinet ministers and KANU sycophants have called for an extension of President Moi’s term, and a motion—currently before parliament—demands the repeal of the constitutional clause that limits the president to two terms of office. Most observers see the motion as a test of the water, since a two-thirds majority in parliament is required to amend the constitution.

In the meantime, the departure in April of Richard Leakey, the head of the civil service, and four key members of his economic recovery team, including Micah Cheserem, the central bank governor, puts the civil service firmly in the hands of the ruling elite once more. The replacements of Dr Leakey and Mr Cheserem have given repeated assurances that they are committed to public-sector reform and prudent economic policies. Yet fears persist that the ouster of leading reformers from key positions indicates that President Moi’s agenda will not be dictated by the need for structural reforms and economic recovery, but rather by the 2002 general election and the succession battle.

Constitutional reform is also expected to remain at the forefront of political debate in Kenya. Although the appointment of Professor Yash Pal Ghai as head of the Constitution of Kenya Review Commission has been welcomed widely, by political and business interests alike, the constitutional review commission is already facing difficulties, with the stiff resistance of KANU hardliners to the Amendment Bill in the House Committee, and the president’s scathing disapproval of the 12 Ufungamano commissioners. The EIU expects progress to be slow, if any, as KANU hardliners within government will continue to block any constitutional reforms that might weaken their party’s dominant position at the next election.

International relations Kenya’s foreign policy will continue to be dominated by regional issues, including efforts to promote greater regional integration through the recently launched East African Community, and the problem of political instability in

the Horn of Africa, which is causing bandit activity and an influx of refugees in north-eastern Kenya. Progress in resolving both issues will be slow.

Economic policy outlook

Policy trends The need to restore IMF support is expected to dominate government economic policy in the coming months. As expected, Kenya’s relations with the IMF have deteriorated badly, only months after the signing of a long- awaited three-year poverty reduction and growth facility (PRGF) at the end of July 2000. The second of three IMF-World Bank tranches, due to be released in December, has been delayed, and the whole programme is in danger of falling apart unless the government takes serious action on governance issues and demonstrates its commitment to economic reform.

Donors’ immediate concerns include the Donde bill, which sought to control interest rates, the stalled privatisation process, and the government’s failure to pass two anti-corruption bills. The World Bank and the IMF both visited Kenya on March 15th 2001, apparently for a routine review of the progress made in attaining critical performance criteria. The visit had no significant outcome. However, the IMF team is due to visit Kenya in May, shortly before the budget for the 2001/02 fiscal year (July-June) is announced, to review the government’s achievements in curbing graft and promoting privatisation.

The EIU considers the resumption of IMF lending to be critical to Kenya’s economic prospects. Our baseline scenario assumes that the government recognises the importance of retaining multilateral approval for its economic policies, and broadly follows its PRGF commitments in the second half of 2001, thereby prompting a resumption of donor support in the final months of the year. A prolonged breakdown of relations with the Fund could threaten the debt-rescheduling deal reached with the Paris Club in November 2000, and may also deter other multilateral and bilateral lenders. As yet, US$300m from the World Bank, the African Development Bank and the United Kingdom, and US$284m in budget support—including US$100m from the World Bank— remain to be disbursed by the end of the fiscal year in June 2001. In such circumstances, financing the budget deficit is likely to become more problematic, as local institutions will demand high yields in return for their support. Higher interest rates would raise the cost of borrowing and curb GDP growth, with a consequent deterioration in the public debt/GDP ratio and fiscal solvency.

Fiscal policy Measures aimed at reducing the fiscal deficit, an IMF requirement, will continue in 2001-02. We expect the government to carry on making progress, though some slippage may be expected in view of the lower economic growth now forecast for 2001, election-related spending, high domestic debt obligations and an enormous public-sector wage bill, which currently accounts for over 30% of spending. The government has revised its 2000/01 budget to take account of the ending of donor inflows; most notably, some of the projects scheduled to be implemented in the current fiscal year have now been postponed to 2001/02, when it is hoped that relations with the IMF will have

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Kenya 9

improved. However, the budget assumptions for 2001/02 are expected to remain conservative, tending to underestimate revenue and spending. Some progress has been made in reforming the public sector, but achieving a real reduction in the size of government departments—cutting 60,000 (out of 250,000) civil service jobs in the next three years—will be slow. It is assumed, however, that capital spending will be kept to a minimum, with infrastructure development financed as far as is possible by multilateral funds. Moreover, the restructuring and privatisation of state assets will take place over several years. This balancing act may become less precarious if donor support can be maintained, enabling growth to take place in other sectors. As a result, total revenue is forecast to continue to fall short of official targets, and we now expect the fiscal deficit to increase from 2% of GDP in 2001/02 to 3.5% of GDP in 2002/03.

Monetary policy We expect some minor shifts in monetary policy, following the appointment of a new Central Bank governor, but overall it will remain geared towards maintaining the relative strength of the currency and keeping inflation in check. Falling US interest rates will be matched by a slight fall in domestic interest rates, but heavy government borrowing in the domestic capital market (to finance the fiscal deficit) will keep interest rates high. The monetary authorities will need to maintain a cautious stance on any interest rate reductions if they are to avoid boosting inflationary pressures or contributing to exchange-rate nervousness.

Economic forecast

International assumptions Global growth is expected to slow in 2001 and 2002, though it is unlikely to stall. The exceptionally strong growth rate of 4.9% in 2000 will inevitably moderate, but the forecast rates of 2.9% in 2001 and 3.8% in 2002 are similar to the strong growth which occurred in the years just before the Asian crisis. Price forecasts for Kenya’s main commodity exports will be mixed during the outlook period; the price of Arabica coffee is forecast to decline from 87.1 US cents/lb in 2000 to 58 US cents/lb in 2002, while tea prices are forecast to fall by 3.7% in 2001 and by 1.2% in 2002. Oil prices are expected to stay above US$23/barrel throughout 2001 and 2002, offering only a marginal easing in the energy import bill.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.9 3.8 OECD 3.1 4.0 1.7 2.5 EU 2.5 3.3 2.5 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 124.3 123.0 US$:¤ 1.07 0.92 0.97 1.08 US$:SDR 1.37 1.32 1.30 1.36 continued

1999 2000 2001 2002 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.40 5.20 Commodity prices Oil (Brent; US$/b) 17.9 28.4 24.1 24.0 Gold (US$/troy oz) 278.8 279.3 258.8 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 8.0 14.8 Industrial raw materials (% change in US$ terms) –4.6 13.4 2.6 5.1 Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates. Economic growth We have revised our forecast for Kenya’s growth prospects in 2001 sharply downwards, following the IMF’s decision in March to withhold its second payment under the current PRGF agreement. Although the sum the IMF was to have disbursed was not large, the stand-off is likely to halt other donor inflows for most of this year, forcing the government to cut development expenditure. The Fund’s decision will also have other effects. The business community will become even more cautious about spending, and project aid disbursements will be reduced dramatically, further delaying the start of the long-awaited overhaul of Kenya’s physical infrastructure. Interest rates will also be kept high by the government’s need to borrow to finance the budget, and this will prevent a more robust economic recovery in the near term. Delays in the payment of public-sector wages are expected to affect consumer confidence and reduce private consumption. On a more promising note, assuming the resumption of donor support in the final months of the year and continuing growth in the tourist industry—and with the return of the rains and the end of power rationing—the economy is expected to begin to recover gently in 2001 and to accelerate next year. Private-sector activity and investment should also receive a boost, as the government makes progress on its long-delayed privatisation programme. Combined, these factors will push real GDP growth to 2.5% in 2001 and 4.1% in 2002, levels which are much closer to historical norms, but lower than our earlier growth forecast of 4.5% per year in 2001-02.

Inflation According to the Central Bank of Kenya, average annual inflation was 5.8% in 2000, compared with 2.6% in 1999. This rise in inflation was driven primarily by the effect of the drought on food prices and by rising petroleum prices. The government’s target of 5% underlying inflation is likely to be achieved by mid- 2001 if monetary policy remains on track and there is no major depreciation of the currency, though headline inflation will be more difficult to bring down. However, the real test for the monetary authorities will come when the economy starts to recover, and supply constraints—such as the country’s poor transport infrastructure—exert renewed upward pressure on prices. As a result, we expect inflation to fall only slightly, averaging 5.5% in 2001 and 5% in 2002.

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Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 1.4 0.4d 2.5 4.1 Industrial production growth 1.0 0.5 3.0 5.5 Gross agricultural growth 1.2 –3.0d 5.5 6.0 Consumer price inflation Average 2.6 5.8a 5.5 5.0 Year-end 3.0 6.0a 5.8 4.5 Short-term interbank rate 22.4 22.3 a 22.0 22.0 Government balance (% of GDP) –1.3 0.6 –2.0 –3.5 Exports of goods fob (US$ bn) 1.7 1.7d 1.9 2.0 Imports of goods fob (US$ bn) 2.6 3.0d 3.2 3.4 Current-account balance (US$ bn) 0.0 –0.2d –0.2 –0.1 % of GDP 0.1 –2.1 –1.8 –1.3 External debt (year-end; US$ bn) 6.6 6.0 5.7 5.9 Exchange rates KSh:US$ (av) 70.33 76.18a 85.00 90.00 KSh:¥100 (av) 61.74 70.69a 64.37 68.29 KSh:¤ (year-end) 73.27 73.27a 85.69 92.45 KSh:SDR (year-end) 100.1 101.7 a 109.9 117.1

a Actual. b EIU estimates. c EIU forecasts. d Official estimate.

Exchange rates The expected resumption of IMF lending to Kenya in the final months of 2001, and the consequent increase in aid, will help the monetary authorities to reduce interest rates without any major fall in the value of the shilling. During the forecast period we still expect the shilling to depreciate gently, to average KSh85:US$1 in 2001 and KSh90:US$1 in 2002. However, the country’s relations with the IMF will remain tense, and, if the current agreement is suspended for the remainder of this year—which is possible—with interest rates lowered, the value of the shilling may fall significantly.

External sector We have also revised our current-account forecasts for Kenya, largely because lower net transfers inflows are now anticipated—particularly during this year— following the IMF’s decision to withhold funds. Growth of the country’s main exports will also be disappointing, as a result of continuing weak commodity prices for coffee and tea, though this will be offset partly by the growth of less traditional exports, slower import growth and rising tourism receipts in 2001-02. The current-account deficit is therefore expected to fall from an estimated 2.1% of GDP in 2000 to 1.3% of GDP in 2002.

Total exports are expected to grow marginally, from an estimated US$1.74bn in 2000 to US$1.86bn in 2001 and US$2bn in 2002, with a modest upturn in export volumes and the prices of more traditional exports. Imports are also expected to accelerate during the forecast period, reflecting the recovery of economic activity, and the trade deficit will increase moderately. Net transfers are now forecast to edge up from US$710m in 2001 to US$760m in 2002, in line with the resumption of donor support. Tourism receipts are also forecast to continue to rise in 2001-02, but rising invisible outflows—largely due to

higher transport costs—and the growing trade deficit will keep the overall current-account in deficit, albeit a lower one, in 2001-02.

The political scene

Controversy deepens over The struggle over the political leadership and the constitutional review process political succession will continue to dominate Kenya’s domestic politics for the remainder of this year and into 2002. President Moi completes his last term in office (according to the current constitution) at the end of 2002. Yet, no clear frontrunner has emerged in the race to succeed him. The political fortunes of the vice- president, George Saitoti, who recently suffered a number of political setbacks as President Moi’s most likely successor, now appear to be on the rebound. However, the on- off crusade against Mr Saitoti by his fellow KANU politicians is an indication that there are powerful forces within government that are not comfortable with his succeeding President Moi. Whether there has been a lasting change of heart by the power-brokers and his old allies, who appeared to have abandoned him to support other prospective presidential candidates including the information and transport minister, Musalia Mudavadi, the minister of state, Julius Sunkuli, and the finance minister, Chris Okemo, remains to be seen.

Mr Moi has ambitions to Moreover, there is growing concern that Mr Moi appears to be keeping his stay in power after 2002 options open by avoiding to state categorically whether he intends to retire at the end of his current term of office. It seems likely that Mr Moi harbours ambitions to continue ruling Kenya beyond 2003. The confusion has been compounded by the vague and conflicting statements the president has made about his retirement; at different times he has said that he has no intention of leaving the country in chaos, has said that there is no suitable and competent person to succeed him, and has made it clear that he is not grooming anyone to succeed him. The controversy is deepening with frequent calls by a number of cabinet ministers and KANU sycophants for an extension of Mr Moi’s term.

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The prospect of Mr Moi remaining in office is certainly attractive to the president’s inner circle. These sentiments are reinforced by a recent motion— currently before parliament—urging the repeal of the clause in the constitution that limits the president to two terms of office. The ruling party, KANU, through a member of parliament, David Kombe, has given notice of a motion to amend Section 9(2) of the constitution to remove the two terms clause to make the president eligible for another five-year term: section 9(2) of the constitution states that “no person shall be elected to hold office as president for more than two terms”. This clause was written into the constitution in 1992 prior to the first multiparty elections.

The motion is likely to be supported by the majority of KANU MPs, but to be passed requires the support of the pro-government National Development Party (NDP). The NDP leader, Raila Odinga, has described attempts to extend President Moi’s term of office beyond 2002 as inconsequential and time- wasting, and will not support the motion. Even if Mr Odinga gave his support, KANU and the NDP together do not command sufficient seats in parliament to push through a constitutional amendment. The two parties have 139 seats in the National Assembly—nine seats short of the required two-thirds majority. Moreover, this is before subtracting the rebels and other progressive MPs in the ranks of both parties (especially the NDP), who would not vote in favour of an amendment to extend Mr Moi’s presidency.

The future of KANU-NDP Moreover, a merger between KANU and the NDP, intended to secure the partnership questionable president a comfortable working majority in parliament and room for manoeuvre, is now highly unlikely to take place. Mr Odinga’s decision to co- operate with KANU in early 1998 came as a relief to the KANU government, which, as a result of internal revolt, lacked a majority in parliament to enable it to push through its policies and defeat popular motions sponsored by the opposition. There is a growing feeling that Mr Odinga may be the next victim of Mr Moi’s “use-and-dump” tactics, now that the KANU-NDP partnership has outlived its usefulness. Much of the enthusiasm for the “partnership” in Nyanza province, where the NDP draws much of its support, is rapidly waning and differences frequently arise between Mr Odinga and key cabinet ministers over the direction of the constitutional review process. In particular, Mr Odinga is strongly opposed to a proposal, supported by KANU, to radically reduce the powers of the commission chairman, Professor Yash Pal Ghai. It is probably only a matter of time before the “partnership” comes to an end.

A snap election is still If President Moi’s aim is to extend his stay in power, he may resort to other possible constitutional means. One option, which is being increasingly discussed, is for Mr Moi to dissolve parliament before the end of its constitutional five years, and call a snap election to allow him a fresh mandate to extend his tenure in office: section 59(2) of the constitution states that “ the president may at any time dissolve parliament”. The possibility of this happening is given credence by the fact that the election registration was completed in March 2001, despite a public outcry to give it more time. Another, and perhaps more likely, option is that the president will extend the life of the current parliament on the pretext of allowing the constitutional review commission to carry out its work

more thoroughly. Any of these options is likely to result in a further deterioration of the economy, increased uncertainty and perhaps civil strife. Also, relations between the donor community and Mr Moi remain extremely strained, owing to the president’s wavering commitment to public-sector reform and governance issues during his nine years in office. Any attempt by Mr Moi to stand for another term by amending the constitution is likely to draw a stern rebuke from donors, and would complicate the country’s negotiations on debt restructuring and resumption of aid.

In these circumstances, Mr Moi’s strategy in the struggle over political leadership will be driven by the need, first, to push the KANU-NDP merger to its logical conclusion; second, to influence the direction and outcome of the constitutional review process to provide for a coalition government, probably with a prime minister (to reward the NDP); and, third, appoint his successor from the Luhya community (the front-runners are Mr Mudavadi and Mr Okemo), thereby securing the Luo, Luhya and Kalenjin votes. This is a strategy Mr Moi believes will ensure KANU’s ability “to win elections for the next 100 years”. In the meantime, the uncertainty surrounding the succession continues to undermine confidence among both local and foreign investors.

Hardliners attack Review Constitutional reform has also remained at the forefront of political debate in Commission’s powers Kenya in recent times. However, progress in embarking on the actual constitutional review process has been slow, despite the endorsement by the Ufungamano stakeholders forum of its merger with the Parliamentary Select Committee for Constitutional Review in the Constitution of Kenya Review Commission (February 2001, page 14). Professor Yash Pal Ghai’s merged constitutional review commission is already running into trouble on a number of fronts. First, approval of the amendment bills has been resisted by KANU hardliners in the parliamentary committee; second, the president has disapproved of the 12 commissioners selected by Ufungamano; third, KANU has proposed amendments (see below) to the Commission’s proposed two bills before parliament: the Constitution of Kenya (Amendment) Bill 2001, which authorises the Ghai commission to conduct the actual review of the constitution, and the Constitution of Kenya Review (Amendment) Bill, which will enable the merger of the parliamentary select committee and Ufungamano to take place. KANU hardliners have proposed the following amendments to the bills.

• Relevant provisions should be amended to allow the Commission to control and facilitate civic education, whereas the Bill agreed upon jointly by the parliamentary select committee and the Ufungamano states that the Ghai- led commission would license non-governmental organisations to carry out civic education.

• The Constitution of Kenya Review Act should be altered to make the commissioners, and not its chairman, answerable for all the commission’s actions, including the appointment of a chairman if Professor Ghai and all his three vice-chairmen are absent—in effect curtailing the powers and independence of the chairman.

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• The Parliamentary Select Committee for Constitutional Review has to appoint members of the commission.

• The removal of a clause in the bill, which requires that NGOs should vet the final draft of the constitution before it is taken to parliament.

• The national referendum in the new constitution is to be held after parliament has enacted the new constitution and not before. KANU also wants to reduce the representation of NGOs at the national conference, which is to debate the draft, to 15%—down from the 25% agreed during the merger talks.

KANU may face stiff Although amendments to the Constitution of Kenya Review Act require a opposition simple majority, recent events in parliament suggest that KANU may face stiff opposition when they are presented to the house. The key opposition parties, the Democratic Party (DP), the Social Democratic Party (SDP) and the National Development Party (NDP), met on April 24th to seek a common front as debate on the Bills commenced in parliament. The meeting was aimed at reducing the possibility of a confrontation which might derail the constitutional review process. During the meeting concern was shown by some members of the opposition over the method of filling vacancies on the commission. However, the opposition MPs refused to entertain KANU hardliners’ demands for the national referendum to be held after the constitution had been passed by parliament. At present the provision for referendums does not exist in the Constitution.

The proposed amendments are widely viewed as a plot by KANU hardliners to manipulate the bills. Consequently a split has also emerged within Professor Ghai’s commission after 10 of his 15 commissioners visited State House without informing him about it. The visit to State House sparked controversy because five of the commissioners were excluded from the visit, probably on the grounds of being suspected by KANU hardliners of being sympathisers of Ufungamano. A number of elements within Ufungamano are, however, still opposed to the merger on the grounds that there are many flaws to be corrected in the draft bill. According to the dissenting voices in Ufungamano, further amendments should have been made to ensure that there were no loopholes that the KANU government could take advantage of. Some critics see a similarity between the merger and the 1997 Inter-Party Parliamentary Group pact, which the government has since flouted.

Ufungamano appoints its One of the conditions of the merger was that Ufungamano would appoint an 12 commissioners extra 12 commissioners to join an expanded 27-member Review Commission. At the end of April, 12 representatives—dominated by lawyers and former university lecturers and including five women—had been nominated by Ufungamano to the Commission. The commissioners were selected by the Ufungamano Steering Council, which is expected to be disbanded once the Review Commission starts its work in May.

Constitutional of Kenya Review Commission

Chairman: Professor Yash Pal Ghai

Commissioners appointed by the parliamentary select committee: Dr Ahmed Idha Salim; Mr Keriako Tobiko; Mr John Mutakha Kungu; Professor Henry Okoth-Ogendo; Ms Phoebe Asiyo; Bishop Njoroge Kariuki; Mr Githu Muigai; Mr Domiano Ratanya; Ahmed Issack Hassan; Ms Alice Jepkoech Yano; Mr Kipsang Sitonik; Mr Zablon Fenner Ayonga; Mr Paul Musili Wambua; Ms Kavetsa Adagala; Mr Mohammed Abdalla Swazuri

Commissioners appointed by Ufungamano: Dr Oki Ooko Ombaka; Ms Abida Ali-Aroni; Dr Wanjiku Kabira; Ms Nancy Baraza; Ms Amina S. Kassim; Ms Salome Muigai; Dr Charles Maranga; Mr Riunga Raiji; Mr Ibrahim L Asmani; Mr Isaac Renaola; Mr Abubakar Zeni; Mr Samuel Ng’eny

Dr Leakey and his team The departure of Richard Leakey as the head of the civil service, and the have been dropped subsequent replacement of prominent members of the economic reform/recovery team, including Martin Oduor-Otieno, a permanent secretary at the Ministry of Finance, Micah Cheserem, the central bank governor, Titus Naikuni, the permanent secretary of the Ministry of Transport and Communication, and Kitili Mbathi, the investment secretary, have cast doubt on the government’s commitment to reform and to enacting the proposed civil service code of ethics and civil service reforms in accordance with the poverty reduction strategy programme (PRSP).

In a radical move which took political observers completely by surprise, President Moi, in August 1999, announced the appointment of Richard Leakey as head of the civil service and secretary to the cabinet. Despite his strong personal antipathy towards Dr Leakey, Mr Moi made the appointment bowing to pressure from the donor community to act against the government’s endemic inefficiency and corruption and help steer the country towards economic recovery. Dr Leakey’s new team came to be called the “dream team” or the “economic recovery” team, and his mandate included the removal of inefficient and corrupt officials and reduction of the 500,000 strong public- sector workforce. There can be no doubt that Dr Leakey’s team lacked the political backing to prevail over the many powerful vested interests who felt threatened by public-sector reforms and the disciplinary measures implemented by the team.

The dropping of the dream team was hardly surprising. In the months before to their departure, there was a campaign led by some politicians, including the finance minister, to question their performance in the face of declining economic growth. Dr Leakey, in particular, suffered a serious setback when parliament halted the sacking of 25,783 civil servants and his sacking of a senior parastatal chief was ignored. Although the dream team’s performance had waned towards the end of 2000, it has been credited with reducing recurrent spending in the budget by half during the first two months of the year to KSh65bn (US$833m); the resumption of donor support at the end of

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Kenya 17

July 2000; and considerable progress towards changing the culture of inefficiency within government ministries—despite the low economic growth during their tenure, which is largely attributable to the drought and power rationing crisis, which ravaged the country in 2000.

Dr Kosgei takes over Sally Kosgei—a confidante of Mr Moi and former permanent secretary at the Ministry of Foreign Affairs—has replaced Dr Leakey as head of the civil service and secretary to the cabinet, and Esther Koimett, Nicholas Biwott’s daughter and previously deputy investment secretary, is the new investment secretary. Although Dr Kosgei’s new economic team have reconfirmed their commitment to public-sector reforms and prudent economic policies, progress, if any, is expected to be slow.

The UN secretary-general The United Nations secretary-general, Kofi Annan, visited Nairobi in April for a visits Kenya three-day official visit to chair a summit on poverty eradication and development in Africa. This was the first regular session in 2001 of the UN Administrative Committee on Co-ordination. The Administrative Committee on Co-ordination was established in 1946 to promote co-operation among the UN organisations on policy and management issues. The meeting brought together all the UN specialised agencies’ chief executives. Their discussions focused on economic collaboration between the members; reducing poverty by half by 2015; and strengthening UN support for sustainable development in Africa. Mr Annan also held discussions with President Moi about African regional issues. Mr Annan emphasised the significance of Nairobi as a location for UN operations and noted that, as Kenya is the only headquarters of the UN that is located in the developing world, its views are taken very seriously. President Moi said that Kenya would support Kofi Annan’s candidature for a second term as United Nations secretary-general.

Economic policy

The stalemate with the IMF The need to restore IMF support and other donor funds will continue to and World Bank continues dominate the government’s economic policy in the coming months. The impasse between the IMF and World Bank, on the one hand, and the Kenyan government, on the other, continues, despite the talks between the World Bank president, James Wolfensohn, and the IMF managing director, Host Köhler, and President Daniel arap Moi on February 25th in Nairobi. Following the meeting, President Moi reportedly undertook to take charge personally of the negotiations with the two donor institutions and to fulfil the conditions, whose breach had led to the suspension of aid. In mid-March the IMF chose once more to withhold lending to Kenya. The Fund noted that insufficient progress had been made on all the main contentious issues:

• the enactment of an “appropriate” version of the anti-corruption and economic crimes legislation;

• the re-establishment of an independent anti-corruption authority;

• the adoption of a code of conduct and ethics for civil servants; and • the stalled privatisation programme, particularly the sale of Telkom Kenya.

Most of the outstanding issues, except the privatisation of Telkom Kenya, relate to legislation on economic governance, and thus have be dealt with by parliament. It now depends on Mr Moi to move quickly and marshal enough support to see the pending bills through parliament, in order to restore relations with the IMF and World Bank.

Movement on the IMF Following a meeting between the IMF’s deputy managing director, Stanley conditions has been noted Fischer, and President Moi in April, the momentum for implementing the agreed conditions has increased. For instance, since a cabinet meeting in April approved the re-establishment of the Kenya Anti-corruption Authority as an autonomous body operating under the constitution, the attorney-general has prepared a constitutional amendment, which has been placed before parliament, to enhance KACA’s independence and powers. (The much-vaunted Kenya Anti-Corruption Authority (KACA) was declared unconstitutional in December 2000, causing a number of prosecutions against high-ranking officials for corruption to be shelved.) The government had, however, been less inclined to amend the constitution to accommodate KACA, arguing that it would prefer KACA to operate as a specialised unit, functioning with powers delegated by the Office of the Attorney-General. The cabinet decision, therefore, represents a major concession by the government to the demands of the IMF. The decision on KACA is being interpreted as a signal to the donor community that the government remain committed to economic reform.

An IMF mission is due to An IMF team is due to visit Kenya in May to review the government’s progress visit in May in meeting the conditions for the restoration of structural lending to Kenya. The EIU considers the resumption of IMF lending to be critical to Kenya’s economic prospects. Our baseline scenario assumes that the government recognises the importance of retaining multilateral approval of its economic policies, and broadly follows the lines of the commitments it made to secure a poverty reduction and growth facility from the IMF in the second half of 2000, thereby prompting a resumption of donor support in the final months of the year. A prolonged breakdown of relations with the Fund would threaten the debt-rescheduling deal reached with the Paris Club in November 2000, and may also deter other multilateral and bilateral lenders. Under such circumstances, financing the budget deficit is likely to become more problematic, with local institutions demanding high yields in return for their support. Higher interest rates would raise the cost of borrowing and curb GDP growth, with a consequent deterioration in the public debt/GDP ratio and fiscal solvency.

Further delay in addressing reform issues is likely to cause severe budgetary problems for the Kenyan government. Should agreement be reached on restoration of the IMF programme, the two pending tranches, totalling KSh18bn, will be released immediately. Also at stake are the funds committed by other lenders, including US$100m from the World Bank for civil service reform. Although the budget for the fiscal year 2001/02 (July-June) is expected

to be announced in June, and the government is likely to move swiftly on IMF conditions, it is not certain that the programme with the Fund can be quickly restored. The abrupt early retirement of the governor of the Central Bank of Kenya, Micah Cheserem, is likely to be viewed in a poor light by the IMF, particularly as the IMF team left the country on the same day that Mr Cheserem was sent on compulsory leave pending retirement and had received no indication that this was coming.

Micah Cheserem is replaced On April 4th Mr Cheserem was relieved of his duties as governor of the Central at the Central Bank Bank and replaced by the former chief executive of the Retirements Benefit Authority, Nahashon Ngige Nyagah. Mr Nahashon Nyagah, a career central banker and the son of a former minister, Jeremiah Nyagah (also brother to the lands and settlement minister, Joseph Nyagah, and the opposition MP, Norman Nyagah) inherits a number of key problems facing the Central Bank, in particular how to deal with the weak financial institutions currently suffering from non-performing loans. Non-performing loans are estimated at KSh116.8bn, or 39.2% of gross loans advanced by financial institutions, at the end of December 2000. The formulation of a balanced budget and helping the government’s attempts to restore relations with the IMF and the World Bank are another area that will test the abilities of the new governor.

When Mr Cheserem took over as Kenya’s fifth central bank governor in 1993 from Eric Kotut, the institution had virtually collapsed in the wake of the Goldenberg scandal. Mr Cheserem is credited with restoring discipline, his greatest achievement being that he restored the reputation of the central bank, which declined badly under Mr Kotut. Mr Cheserem also presided over historic monetary policy changes, notably the repeal of the Exchange Control Act, which floated the Kenya shilling and allowed the repatriation of dividends by foreigners. He also helped to bring inflation down to single digits, an achievement that was the hallmark of his economic policy.

The 2001/02 budget will Tight fiscal policy, aimed at reducing the budget deficit, will remain the be tight fundamental priority in 2001/02. The 2000/01 budget was premised on the receipt of donors funds which have not materialised. In the 2000/01 budget, KSh7.5bn (US$125m) was expected in programme grants and KSh14.4bn in programme loans. The government’s financing shortfall has also been attributed to the stalled privatisation of Telkom Kenya. The government has decided to fund part of its budget deficit, which is estimated at KSh27bn, from the Consolidated Fund, and the finance minister, Chris Okemo, has sought parliamentary approval to withdraw KSh11.4bn from the Consolidated Fund. It is unclear how he intends to bridge the remaining balance of KSh15.6bn.

On the expenditure front, the government appears to have considerably reduced the number of key development projects, while several other projects have been postponed to the next budget. Despite the 50% cutback in government expenditure, to KSh65bn, announced in January, there are indications that the government has accumulated arrears to civil servants estimated at KSh26bn—the civil service wage bill amounts to some KSh6bn per month and civil service redundancies were halted by parliament pending a policy paper on the issue. The budgetary cuts have not, however, significantly

affected the allocation of KSh20bn for poverty reduction projects. It is clear that progress in reducing the civil service will be extremely slow. Also, given the difficult economic conditions, total revenue for the current fiscal year is estimated to fall short of official targets and the EIU expects a fiscal surplus of 0.6% of GDP in 2000/01 and a deficit of 2% of GDP in 2001/02.

Kenya is to import generic Kenya is likely to be one of the first African countries, after South Africa, to AIDS drugs legislate for allowing imports of cheaper generic AIDS drugs. The health minister, Sam Ongeri, announced on March 6th that legislation would be introduced to allow the country to import cheaper generic AIDS drugs. The World Trade Organisation rule, which allows countries to engage in “parallel importation” in emergency situations, is likely to be invoked in justifying the decision. The move comes in the wake of a failed court action by the world’s biggest drug firms to stop South Africa from importing cheaper generic AIDS drugs. In a related development the Kenya Medical Association is planning to hold talks with the manufacturers of the expensive AIDS drugs to persuade them lower their prices. The pharmaceutical manufacturers support the strict application of the World Trade Organisation’s Trips agreement (Trade Related Aspects of Intellectual Property Rights), which has come under considerable public criticism since Oxfam International, a UK-based humanitarian organisation proposed its revision in February 2001. Oxfam International argues that the TRIPS accord impedes the universal application of health policies and restricts the access of poor populations to crucial medication.

HIV/AIDS: increasing social and economic problems

According to the United Nations the number of people suffering from HIV/AIDS in Kenya has reached 2m (about 7% of a total population of 28m). The rapid spread of HIV/AIDS is creating grave social and economic problems in Kenya. The continued rise in HIV infection will put an already stretched healthcare system under severe strain. Nearly 50% of all hospital beds are occupied by AIDS patients. Also, the high cost of AIDS care and the loss of earnings for patients’ families is reducing their access to basic needs such as healthcare and education. The government is already struggling with increasing demand for healthcare expenditure and the need to support a growing number of orphans.

The Kenyan government and international donor agencies have pledged KSh14bn (US$200m) to help fight the spread of HIV infection in Kenya in the next five years. The National AIDS Control Council (NACC), a state corporation established in November 2000, is to provide the policy and strategic framework for mobilising and co-ordinating resources for HIV/AIDS prevention and for the provision of care and support to affected people.

The domestic economy

Economic trends

Forecasts of GDP growth Economic activity will remain low in most of the key sectors of the economy, have been lowered and the government’s real GDP growth forecast of 4.5% in 2001 is now unlikely to be realised as it was based on a policy assumption of full resumption of aid. The Central Bank of Kenya’s Monthly Economic Review estimates that real GDP contracted by 0.3% in the 12 months ending December 2000, compared with population growth of 2.4%, resulting in a decrease in income per head. The slowdown in economic activity was mainly due to the unfavourable weather conditions during the year and unfavourable market prices. The poor performance was reflected in nearly all of Kenya’s major exports. Agriculture contracted by 0.4% owing to the severe drought, while the manufacturing sector contracted by an estimated 0.3% mainly as a result of power rationing. Tea production fell by 5% to 236,286 tonnes in 2000, from 248,820 tonnes in 1999, reducing export receipts from US$472m to US$463 million in the year. Coffee production improved by 52.5% to 98,030 tonnes in the year 2000 from 64,293 tonnes in 1999.

Gross domestic product (% real change, year on year) 1998 1999a 2000a Agriculture 1.6 1.2 –0.4 Manufacturing 1.3 1.0 –0.3 Trade, restaurants & hotels 2.3 2.0 2.4 Financial services 3.2 2.0 1.4 Government services 0.8 0.7 0.4 Other sectors 2.4 2.0 –5.2 GDP 1.8 1.4 0.3

a Official estimates. Source: Central Bank of Kenya, Monthly Economic Review, April 2001.

The budget deficit doubles According to the April issue of the Central Bank of Kenya’s Monthly Economic in July-February 2000/01 Review, the government budget in the first eight months of the 2000/01 fiscal year (July-June) produced a deficit of KSh8.8bn (US$115m; 1% of GDP) on a commitments basis. In the first eight months of the 1999/2000 fiscal year there was a deficit of KSh4.2bn (0.5% of GDP). On a cash basis, fiscal operations resulted in a deficit of KSh2.3bn.

Government expenditure and net lending increased to KSh140.6bn in the first eight months of 2000/01 fiscal year, from KSh122.1bn in the same period of 1999/2000. Expenditure was, however, KSh13.4bn below target, which is a reflection of expenditure cuts implemented by the government following the uncertainty over foreign aid disbursements. The burden of the government’s expenditure freeze has fallen on development expenditure. Development expenditure in the first eight months of 2000/01 totalled KSh14.5bn or 10.3% of total government expenditure. At this level, development expenditure was

KSh5.6bn lower than in the same period of 1999/2000 as the government temporarily suspended non-priority expenditure while awaiting the resumption of funding by donors.

Total revenue amounted to the official target of KSh131.9bn in the first eight months of 2000/01, thanks to the increase in the rate of value-added tax during the year and improved tax administration. In view of the persistent aid impasse, the government faces a major challenge in meeting the targets set in its macroeconomic framework. Furthermore, because of the slow progress in realising the budgeted US$100m from the privatisation of Telkom Kenya, the government’s fiscal deficit for the year is expected to deteriorate. The sale of Telkom Kenya to Mount Kenya Consortium was cancelled in a controversy leading to the sacking of Martin Oduor-Otieno, a permanent secretary at the Ministry of Finance, and the investment secretary, Kitili Mbathi, in April.

Budget, Jul-Feb (KSh bn) 1999/2000 2000/01 Outturn Budget Outturn Total revenue & grants 117.9 131.9 131.9 Total expenditure & lending 122.1 154.0 140.7 Recurrent expenditure 102.0 130.8 125.8 Development expenditure 20.1 23.2 14.9 Budget balance (commitments basis) –4.2 –22.1 –8.8 % of GDP –0.5 –2.5 –1.0 Source: Central Bank of Kenya, Monthly Economic Review, April 2001.

Monetary indicators (% unless otherwise indicated) 2000 2001 Average Jan Feb Mar 91-day T-bill rate 12.9 14.8 15.3 15.0 Overdraft ratea 19.7 20.2 20.5 n/a Money supplyb (M3) 0.8 0.0 –0.3 n/a Monthly underlying inflation 10.7c 10.1 10.5 7.1 Average annual inflation 9.2c 9.4 9.6 9.5

a Commercial bank average. b % change, year on year. c December. Source: Central Bank of Kenya, Monthly Economic Review, April 2001.

Inflation is expected to dip Inflationary pressure is expected to ease further in the coming months owing to the increase in the supply of food as agriculture recovers from the drought of 2000. Continuing tight monetary policy, supported by prudent fiscal policy, will lower underlying year-on-year inflation to within the 5% target by June 2001. This is on the assumption that the current stand-off with the IMF does not provoke a significant depreciation of the Kenya shilling. Recent official data confirm that growth in the money supply is on target: expansion of M3 is well below the government’s target of 7.8% in 2000/01. The fiscal measures contained in the 2000/01 budget, especially the reduction of duty on several industrial raw materials and inputs and the suspension of import duty on

maize, will also ease the inflationary pressure. A crucial issue will be whether the change of the Central Bank governor will affect monetary policy. The former governor, Micah Cheserem, was known for his anti-inflationary stance.

Agriculture

The sugar industry is hit by The future of Kenya’s sugar industry is threatened by cheap imports from regional imports neighbouring countries, following the removal of regional trade barriers in 2000. The Common Market for Eastern and Southern Africa (Comesa) free trade area is expected to expand to at least 14 countries this year, when five more members are expected to agree to remove all duties on intra-regional trade. Previously, Kenya levied 18% VAT and a 7% sugar development levy on all sugar imports from Comesa members. Imports from outside Comesa continue to attract an additional 100% in duty. The Kenyan sugar industry had called on the government to imposes duty of around 30-40% on Comesa imports, if not many domestic sugar firms would be forced to shut down. Two large sugar factories, at Muhoroni and Miwani, have now in receivership, while the rest are reported to be operating below capacity. The receivers now have to produce a plan for financial restructuring aimed at reviving the factories. Even without the current sugar glut, the problems affecting the sugar firms are partly due to poor management and lack of proper supervision by the Kenya Sugar Authority. The receiver managers have been given 90-120 days to submit their report to the government. The government has stated that in the short term it will not be able to meet the costs of workers, farmers and transporters.

Some analysts have argued that the government has moved too fast in exposing its fragile sugar industry to competition from its Comesa partners. Officials say that 29,000 tonnes have been imported into the country since January 2001, while the country’s monthly consumption is about 40,000 tonnes. The bulk of sugar imports originate from Zimbabwe, Sudan, Malawi, Mozambique and South Africa. In 1998 domestic sugar producers faced a severe crisis, following the flooding of cheap sugar imports (estimated at 37,000 tonnes) into the country. The glut was the result both of lower world sugar prices and of a massive evasion of import duties—large quantities of imported sugar declared as transit goods into developing countries were dumped on the domestic market, thereby yielding huge profits for politically connected sugar barons. The Kenya Revenue Authority (KRA) and the then minister for finance, Simeon Nyachae, attempted to deal with the crisis by targeting tax evasion and banning cheap imports of sugar.

Pyrethrum farmers push In early March, Kenyan pyrethrum farmers called on the government to for liberalisation liberalise the sector by abolishing the state-owned marketing board and allow them to sell their produce to local insecticide manufacturers and other end- users, arguing that it would enhance efficiency and competition. The farmers also called for the amendment of the Pyrethrum Act to allow potential investors into Kenya’s fourth largest foreign-exchange earner after tea, coffee and tourism. Currently, producers sell their crops to the Kenya Pyrethrum Board (KPB), which they claim is paying them below world market rates. The growers also suffer losses because of the labour-intensive nature of the crop and

lack of credit facilities from the board. The leading producer in the country, Keringet, produced only 6,175 tonnes of dry pyrethrum in 1998/99, well below its target of 21,000 tonnes, owing to lack of financial support from the KPB.

Kenya appears likely to experience a famine, following an admission by the Kenya exhausts its strategic minister for agriculture, Chris Obure, that Kenya had exhausted its food food reserves reserves and has a shortfall of 14m bags of maize. The minister declared that the country was relying on commercial imports and food aid to feed its people and rebuild its strategic reserves. More than 3.5m Kenyans in 45 districts are threatened with starvation unless urgent measures are taken. According to the World Food Programme (WFP), two out of every five Kenyans (41%) do not have enough food. Kenya needs US$12.5m to counter an expected shortfall of 23,762 tonnes of food in 2001. The present rains do not adequately solve Kenya’s food problem. The WFP has indicated that the situation in Kenya is comparable to that in Somalia, Eritrea, Ethiopia, Rwanda, and Burundi—all countries whose social, cultural and economic structures have been devastated by war and drought. According to the spokesperson for the Nairobi based, World Food Programme, Lindsey Davies, the recent rains in Nairobi and some parts of the country have not had much of an impact in the famine-stricken districts, and the country’s import needs for basic foods such as wheat, rice, maize and sugar are expected to increase this year.

Food imports (US$ m) 1996 1997 1998 1999 2000a Wheat 119.76 72.95 79.90 84.65 97.46 Rice 14.43 16.86 15.10 15.47 22.58 Maize 1.81 218.52 78.36 12.31 60.09 Sugar 31.93 24.51 71.36 21.03 34.07 Total 167.93 332.84 244.72 133.46 214.20

a Official estimates. Source: Customs and Excise Department.

Financial and other services

The NSE seeks to popularise In March the Nairobi Stock Exchange started a campaign to popularise fixed- fixed-income debt securities income debt securities. Even though the performance of the equity market has been declining, the period since January 2001 has seen increased activity in the corporate bond market. The chief executive of the Nairobi Stock Exchange revealed that the stock exchange expects to list a number of big corporate bond issues. At least nine major debt issues are expected to be listed in 2001. Safaricom, one of Kenya’s leading mobile telephone service providers, has indicated that it will be tapping the corporate bond market to raise KSh4bn. Given the deteriorating performance of the Kenyan economy and the fact the NSE 20 index has gone down by over 60% in the last five years, the shift to debt securities appears inevitable. There are, however, a number of obstacles in building up the debt securities market. First, most companies are reluctant to issue bonds because of interest rate risks. Given the absence of a long-term

government bond such as a 10-year bond, there are no clear indications about the direction of the market. Second, in order for the debt securities market to thrive, the level of liquidity at the Nairobi Stock Exchange has to improve considerably. Third, there are regulatory obstacles: the Central Bank of Kenya has continued to restrict the structuring and distribution of securities, thereby limiting the development of a capital market.

On a more positive note, an investment company, the Industrial and Commercial Development Corporation Investment (ICDCI), is scheduled to be listed on the stockmarket later in the year. This will come as a welcome development since the NSE has averaged only one new listing per year in the last three years.

The KCB sale is put on hold The planned sale of the government’s stake in Kenya Commercial Bank (KCB) as profits rebound to a strategic investor has now been suspended. The sale of the 35% stake in KCB was reportedly put on hold to assess the impact of an ongoing restructuring exercise spearheaded by the managing director, Gareth George. It is, however, uncertain how long the deal will remain on hold. KCB’s interim results for the first six months of the current financial year show a marginal profit of KSh100m (US$132m), compared with pre-tax losses of KSh795m in 2000 and KSh2.2bn in 1999.

Non-performing loans According to the Central Bank of Kenya’s Monthly Economic Review for April continue to rise 2001, the non-performing advances increased to KSh114.2bn (US$1.5bn) or 38.1% of gross loans by end-February 2001, compared with KSh100.3bn or 37% of gross loans at end-February 2000. The provisions for bad and doubtful loans increased to KSh68bn during the period, from KSh46bn at end-February 2000. The banking industry was holding estimated securities of KSh35.3bn, leaving an uncovered exposure of KSh10.9bn, for which additional provisions may be necessary. Given the quality of loan securities held by the banking industry and the slow pace of several unresolved cases before the commercial courts, the provisions may be too conservative. Concerned about the rising level of bad debts, in early March the Kenya Bankers’ Association proposed the formation of a government agency that to buy out the banks’ bad debts. Such a venture would involve the setting up of a securitisation industry to allow asset- based securities to be floated on the NSE.

Energy and infrastructure

The World Bank halts Kenya’s power sector has been thrown into a new crisis, following the World KPLC’s funding Bank’s decision to suspend financial assistance for the Emergency Power Supply Project in early April. The World Bank’s vice-president for the Africa region said that the decision had been taken because of the failure of the Kenya Power and Lighting Company (KPLC) to implement the restructuring programme agreed with the World Bank in November 2000. This implies that KPLC is now prohibited from accessing the credit line of US$50m which it has been drawing on to meet electricity costs. If the crisis is not resolved, the country could face another spate of power rationing in the near future. The World Bank has given the government a two-month deadline ending on

May 31st to fulfil the three conditions it had backtracked on before lending can be resumed. The three conditions are:

• satisfactory progress in organisational and management restructuring; • the appointment of consultants for the financial management study (a financial consultant was expected to be appointed by February 20th, to be followed by the appointment of a management consultant by the end of November 2001, to map out the company’s restructuring plan); and

• issuing the request for proposals for power sector restructuring and a pre- privatisation study (a power consultant was supposed to have been appointed by January 31st 2001 to advise on KPLC’s pre-privatisation plans).

The World Bank will consider progress on organisational and management restructuring to be satisfactory only after the number of divisions and managers at corporate headquarters have been reduced from 15 to 7, as suggested by the PriceWaterhouseCoopers study of 1999. KPLC’s divisional managers as well as the regional managers will have to be selected on the basis of recommendations of the Restructuring Taskforce in a competitive and democratic process. Funding will only be released after the initial list of 600 management lay-offs has been drawn up and the redundancy costs computed. Hanging in the balance is KSh19bn that KenGen was expected to receive from bilateral donors for the development of Olkaria II geothermal plant, which was to be completed in 2002 and Sondu Miiriu II dam, which was expected to be completed by 2003.

Foreign trade and payments

Kenya may prefer Comesa Kenya is considering choosing the Common Market for Eastern and Southern to the EAC Africa (Comesa) over the East African Community (EAC) for handling its future relations with the European Union. Dicky Evans, the chairman of the Kenyan Trade Relations Steering Committee, has indicated that the committee made the recommendation to the Ministry of Trade after careful research by the Kenya Institute of Public Policy Research and Analysis.

Under the Cotonou Agreement signed in February 2000, which supersedes the Lomé Agreement, the African, Caribbean and Pacific countries that are classified as non-less-developed are expected to join regional economic partnership agreements (REPAs) before entering into reciprocal trade and economic partnership with the EU. Kenya is not one of the countries categorised as less developed, and has until 2007 before it loses its non- reciprocal trade preference. The less-developed countries have up to 2020 before their non-reciprocal status ends. Kenya is expected to present its choice of REPA to the EU early next year. Kenya’s choice will be substantially influenced by the economic muscle of Comesa. Kenya’s dominance of the East African Community and its status as a less-developed country work against the community. In a related development, Kenya waived duty on goods from eight Comesa countries: Egypt, Djibouti, Madagascar, Mauritius, Malawi, Sudan,

Zambia and Zimbabwe. Burundi, the Democratic Republic of Congo, Eritrea, Namibia, Rwanda, Swaziland and Uganda will receive partial duty reductions ranging from 10% to 40%. The elimination of duty on goods from Egypt, Zimbabwe, and Sudan has been a matter of intense debate because of their advantage over Kenya in sugar production.

The EAC launches its five- The three East African heads of state met in Arusha in April for the launch of year development strategy the second East African Community Development Strategy for the years 2001-05. The launch of the strategy paper has already been postponed twice. The policy paper stresses economic and political co-operation between the three East African states—Kenya, Uganda and Tanzania—which is expected to move towards the establishment of a monetary union and eventually a political union. The plan will guide the integration process over the next five years. Its elements include a regional parliament, a regional court, and a customs union. The summit unveiled budget for the EAC of US$3.5m in 2001/02. The strategy plan focuses on trade liberalisation, investment and industrial development and monetary and financial affairs. A protocol has been prepared on standardisation, quality assurance and testing. The three heads of state supported the appointment of a new EAC secretary-general, Nawe Amanya, a Ugandan, following the expiry of the five-year term of Francis Muthaura, who is now Kenya’s permanent secretary for information, transport and communication. Mr Amanya’s deputies are Kipyego Cheluget from Kenya and Fulgence Kazaura from Tanzania.