Kenya at a Glance: 2002-03

COUNTRY REPORT

Kenya

Kenya at a glance: 2002-03

OVERVIEW Kenya’s political instability will increase as the main parties prepare for the country’s presidential and parliamentary elections at end-2002. The imminent merger of the ruling party, Kenya African National Union (KANU), and the National Development Party (NDP) will secure the ruling party’s position at the elections. Uncertainty over who will succeed the president, Daniel arap Moi, will dominate domestic politics. The Economist Intelligence Unit expects that the government will continue to broadly follow the commitments it made to secure an IMF poverty reduction and growth facility. Real GDP is forecast to recover gently provided that donor funding is resumed. The overall current-account deficit is forecast to improve from 3% of GDP in 2002 to 2.6% of GDP in 2003, thanks to rising exports, net transfers and tourism receipts. Key changes from last month Political outlook • Recent developments indicate that KANU has launched a covert operation to reduce the influence of some of its key members. The campaign to dislodge the old guard and put the party on an election footing will continue to be championed by the party’s Young Turks. Opposition parties will continue to form alliances to increase their electoral prospects at the next general election. Economic policy outlook • We expect that in 2002-03 the government will continue broadly to follow the commitments it made to secure an IMF poverty reduction and growth facility. Economic forecast • In line with the recent official estimate of 0.8% real GDP growth in 2001, we have lowered our forecasts for growth in 2002 and 2003 to 1.4% and 2.8% respectively.

February 2002

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

Symbols in tables “n/a” means not available; “–” means not applicable

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

20 The domestic economy 20 Economic trends 21 Agriculture 24 Infrastructure

25 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 19 Corruption in Kenya 21 Government domestic debt structure 22 Coffee production 23 Tea exports 23 Flower exports

List of figures

12 Gross domestic product 12 Kenya shilling real exchange rates 21 Government domestic debt 22 Coffee prices

EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002

Kenya 3

Summary

February 2002

Outlook for 2002-03 Political instability will increase in Kenya as the parties prepare for the country’s presidential and parliamentary elections at end-2002. The imminent merger of the ruling party, Kenya African National Union (KANU), and the National Development Party (NDP) will secure the ruling party’s position at the elections. Uncertainty over who will succeed the president, Daniel arap Moi, will dominate domestic politics. We expect the government to continue broadly to follow the commitments it made to secure an IMF poverty reduction and growth facility. Real GDP is forecast to recover gently, provided donor funding is resumed. Private-sector activity and investment should also increase as the government makes progress with its long-delayed privatisation programme. The overall current-account deficit is forecast to improve from 3% of GDP in 2002 to 2.6% of GDP in 2003, thanks to rising exports, net transfers and tourism receipts.

The political scene Plans for the imminent merger of KANU-NDP, which is backed by the large Luo tribe, have been announced. In the complex equation of Kenya’s tribally based politics, the move has improved the government’s prospects of retaining power in the next elections. Opposition parties have been forming alliances to improve their electoral prospects.

Economic policy Mr Moi has recently appointed a team of international experts to find new ways to fight corruption in the government’s latest attempt to win back donor funds. The High Court’s decision to annul the controversial Donde act has been welcomed by the country’s banks and businesses.

The domestic economy Real GDP is estimated to have expanded by only 0.8% in 2001, confirming that the economy is recovering at a much slower rate than the Central Bank of Kenya had hoped. The government has continued to finance the budget deficit virtually entirely by borrowing on the domestic market. As international coffee prices remain at a record low, the European Commission has released a second payment of KSh500m (US$6.3m) to compensate coffee farmers. Tea and horticultural production were strong in 2001. The privatisation of Telkom Kenya has fallen behind schedule.

Foreign trade and payments The East African trade agreement has failed to make any progress, as both the Ugandan and Tanzanian governments have complained that Kenya’s strong economic position would harm their regional trading prospects. Kenya’s clothing exports have benefited strongly from the US’s Africa Growth and Opportunity Act.

Editors: Pratibha Thaker (editor); David Cowan (consulting editor) Editorial closing date: February 11th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 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; 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 (117 seats); Democratic Party (DP, 40 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 Bonaya Adhi Godana, & rural development Hussein Maalim Mohammed Energy Chrysanthus Okemo Environment & natural resources Kipng’eno arap N’geny, Jackson Kalweo, Joseph Kamotho Finance & planning Chris Obure Foreign affairs & international co-operation Marsden Madoka Public health Sam Ongeri Home affairs, heritage & sport Noah Katana Ngala Transport & communications Musalia Mudavadi Labour & human resource development Isaac Ruto, Joseph Ngutu Lands & settlement Joseph Nyagah Local government Uhuru Kenyatta Office of the president Julius Sunkuli, Shariff Nassir, William ole Ntimama, Joseph Nyaga Roads & public works William Morogo Rural development Cyrus Jirongo Tourism & information Kalonzo Musyoka Trade & industry Nicholas Biwott Attorney-general Amos Wako

Head of the civil service Sally Kosgei

Central Bank governor Nahashon Nyagah

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Economic structure

Annual indicators

1997 1998 1999 2000 2001a GDP at market prices (KSh bn) 623.4 692.1 748.9 788.9 796.4 GDP (US$ bn) 10.6 11.5 10.6 10.4 10.1 Real GDP growth (%) 2.1 1.6 1.3 –0.3 0.8 Consumer price inflation (av; %) 12.0 5.8 2.6 5.8 1.0 Population (m) 27.3 28.0 28.7 29.4 30.2 Exports of goods fob (US$ m) 2,062.6 2,017.0 1,748.6 1,773.4 1,764.5 Imports of goods fob (US$ m) 2,948.4 3,028.7 2,731.8 3,044.0 3,135.4 Current-account balance (US$ m) –456.7 –475.4 –97.7 –238.2 –252.0 Foreign-exchange reserves excl gold (US$ m) 787.9 783.1 791.6 897.7 955.0 Total external debt (US$ bn) 6.6 6.9 6.6 6.0 5.5 Debt-service ratio, paid (%) 22.3 21.2 26.4 29.5 19.3 Exchange rate KSh:US$ (av) 58.73 60.37 70.33 76.18 78.66b

February 11th 2002 KSh78.25:US$1

Origins of gross domestic product 2000c % of total Components of gross domestic product 2000c % of total Agriculture, forestry & fishing 24.0 Private consumption 70.7 Manufacturing 13.1 Government consumption 17.6 Trade, restaurants & hotels 12.7 Gross domestic investment 15.8 Transport, storage & communications 6.1 Stockbuilding 1.0 Government services 12.5 Exports of goods & services 25.0 Others (net) 31.6 Imports of goods & services –30.1 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 2000c US$ m Principal imports cif 2000c US$ m Tea 461 Industrial machinery 518 Horticultural products 278 Refined petroleum products 286 Coffee 154 Crude petroleum 551 Petroleum products 124 Motor vehicles & chassis 127 Fish products 39 Iron & steel 113 Cement 18 Resins & plastics 98

Main destinations of exports 2000 % of total Main origins of imports 2000 % 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 Actual. c Provisional estimates.

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Quarterly indicators

1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Central government finance (KSh m) Revenue & grants 46,254 49,363 50,118 47,341 52,637 53,774 67,639 n/a Expenditure & net lending 43,949 58,637 34,387 45,187 54,172 59,499 77,310 n/a Balance 2,305 –9,274 15,731 2,154 –1,535 –5,725 –9,671 n/a Prices Consumer prices, Nairobi (1995=100) 133.7 135.8 139.3 142.1 143.4 141.9 140.3 139.0 % change, year on year 7.6 5.4 4.6 6.3 7.3 4.5 0.7 –2.2 Financial indicators Exchange rate KSh:US$ (av) 74.77 72.78 75.96 77.02 78.95 78.20 78.22 78.96 KSh:US$ (end-period) 72.93 74.87 77.95 78.99 78.04 77.82 78.99 79.02 Interest rates (%) Deposit (av) 10.67 10.88 8.68 6.51 6.32 7.02 6.77 6.51 Discount (end-period) 26.46 17.90 16.01 16.59 19.47 20.42 18.43 18.14 Lending (av) 24.25 24.77 23.32 21.40 19.87 20.20 19.34 19.56 Treasury bill (av) 18.98 14.36 11.09 9.94 12.81 14.98 11.52 12.62 M1 (end-period; KSh bn) 109.51 109.85 107.70 112.19 118.97 117.47 112.46 120.36 % change, year on year 16.4 6.3 3.3 8.8 8.6 6.9 4.4 7.3 M2 (end-period; KSh bn) 328.29 325.44 324.39 334.51 343.02 341.62 333.14 344.94 % change, year on year 6.0 1.2 0.4 4.6 4.5 5.0 2.7 3.1 Stockmarket NSE 20 (1996=100) 2,303 2,233 2,003 2,004 1,913 1,831 1,657 1,401 % change, year on year –22.2 20.7 –27.6 –17.5 –16.9 –18.0 –17.3 –30.1 Sectoral trends Production (annual totals; ‘000 tonnes) Te a 2 5 1 ( 2 3 9 ) ( 2 3 9 a ) C o f f e e : u n r o a s t e d 9 5 ( 6 7 ) ( 7 5 a ) Foreign trade (KSh m) Exports fob 29,083 31,724 33,000 31,594 35,865 41,833 37,764 n/a Imports cif –52,275 –55,099 –56,418 –69,108 –55,988 –64,717 –51,623 n/a Trade balance –23,192 –23,375 23,418 –37,514 –20,123 –22,884 –13,859 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 791.6 820.5 808.6 856.6 897.7 928.4 954.9 1,054.5 a Estimate. Sources: FAO; IMF, International Financial Statistics; Central Bank of Kenya, Monthly Economic Review.

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Outlook for 2002-03

Political outlook

Domestic politics The elections due at the end of 2002 and the battle to succeed the president, Daniel arap Moi, will dominate Kenya’s political agenda over most of the forecast period. The imminent merger between the ruling Kenya African National Union (KANU) and the National Development Party (NDP) should secure the ruling party’s victory in the elections; and Mr Moi’s announcement on October 20th (Kenyatta Day) that he would hand over to a younger person “when the time is right” has removed some of the uncertainty surrounding his retirement; but there are still a number of unresolved issues. First, he did not specify when he would retire. He also made it clear that, after handing over the presidency, he would like to continue serving Kenya in other capacities, as well as retaining his position as the national chairman of KANU. Clearly he intends to remain an important player behind the scenes.

The most likely outcome is that Mr Moi’s current term in office, and that of parliament, will be extended by another year, because the constitutional review process will not have been completed by its deadline of September 2002. This extension of Mr Moi’s current term of office, and the fact that he has committed himself to stepping down, should give him time to choose his successor (which will give him greater influence from behind the scenes). There is little doubt that on Kenya’s political agenda in 2002 the succession will take precedence over structural reform and economic recovery. It is too early to predict with confidence who will succeed Mr Moi, although the front- runner is certainly Musalia Mudavadi—the former finance minister and now the minister for information, transport and communications. Developments over the next few months will give a clearer picture of the succession. The president is unlikely to make his choice of successor public for some time and will keep the leading contenders waiting as long as possible before engineering the succession within KANU.

The constitutional review The constitutional review process is currently under way, and will affect the presidential succession as the KANU-NDP parliamentary partnership is closely involved in the process. The constitution, which will be produced by the Constitution of Kenya Review Commission, led by Professor Yash Pal Ghai, is likely to be favourable to the KANU-NDP succession agenda. Although constitutional reform is expected to remain at the forefront of political debate in Kenya, progress is expected to be slow, and any moves towards political liberalisation will be minor and mainly cosmetic. The government is determined to retain tight political control even if the measures it takes provoke criticism abroad. Hardliners within the government will block any constitutional reforms that might threaten KANU’s position at the next elections. Meanwhile, the opposition, riven with personal rivalries, will continue to divide along tribal lines and fail to pose a serious threat to KANU and Mr Moi. The allegiance of state institutions, such as the army, is not expected to change.

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Ethnic violence There was an upsurge in inter-tribal violence before both the 1992 and the 1997 elections. This was widely thought to have been provoked by KANU party activists in an attempt to drive potential opposition voters out of marginal constituencies, but there are genuine ethnic tensions too. In September 2001, for instance, clashes between the Wardey and Pokomo communities in the east of the country resulted in a number of deaths. Further clashes are almost inevitable, and tension will increase as the elections, which must be held by end-2002, approach. Foreign business will not be targeted directly, but incidental damage is possible.

International relations Kenyan foreign policy will mainly be concerned with restoring relations with donors, hoping for a resumption of financial support. In the region, the government will make efforts to promote economic integration through the recently launched East African Community, and to address 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 both these areas will be slow.

Economic policy outlook

Policy trends The need to restore IMF support and other donor funds is critical. However, following the government’s recent failure to push through an anti-corruption bill—a prerequisite for the resumption of IMF-World Bank support—the impasse between the IMF and World Bank and the Kenyan government is not expected to be resolved in the near future. A World Bank and IMF mission to Kenya at the end of October 2001 again expressed dissatisfaction with the progress made towards attaining the performance criteria agreed in 2000, particularly over the main contentious issues, namely the two anti-corruption bills and the sale of Telkom Kenya. The IMF has also blamed the government for a stop-go approach to reforms, which demonstrates insufficient commitment to the programme. Since most of the outstanding issues, except the privatisation of Telkom Kenya, relate to legislation on economic governance and must therefore be dealt with by parliament, progress is expected to be slow. The Economist Intelligence Unit considers the resumption of IMF lending to be crucial to Kenya’s economic prospects. Our baseline scenario assumes that the government recognises the importance of retaining multilateral approval of its economic policies, that it will broadly follow the commitments it made to secure an IMF poverty reduction and growth facility (PRGF), and that donor support will resume this year.

Fiscal policy Tight fiscal policy, aimed at reducing the budget deficit, will remain an important priority for the remainder of the 2001/02 financial year (July-June). Total expenditure for the year is set at KSh246.9bn (US$3.11bn). In terms of spending, the 2001/02 budget focuses mainly on civil service reform—11,230 public-service workers are expected to be made redundant at a cost of KSh3bn—education and the HIV/AIDS awareness campaign. Recent data for the current fiscal year indicate that the government’s fairly tight fiscal policy has remained in force. During the first two months of 2001/02, the budget

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deficit was KSh1.5bn, representing 0.2% of GDP, compared with a deficit of 0.5% of GDP in July-August 2000, owing to improvements in both expenditure and revenue collection. However, the government is unlikely to meet its 2001/02 budget deficit target, particularly because economic growth and fiscal revenue are likely to fall well short of official projections, The fiscal position is made even more uncertain by the government’s reluctance to move forward with the sale of state assets, particularly Telkom Kenya. We forecast that revenue will be below official targets, and now expect the overall fiscal balance to return to a deficit of 2% of GDP in 2002/03, rising to 2.5% of GDP in 2003/04.

Monetary policy We expect monetary policy to 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 fairly high in the first half of 2002. The monetary authorities will need be cautious about interest rate reductions if they are to avoid boosting inflationary pressures or contributing to exchange- rate instability.

Economic forecast

International assumptions Not only is the world economy experiencing its most severe slowdown since the 1973-74 oil price shock, it also faces increased uncertainty following the terrorist attacks on the US on September 11th 2001. We now estimate that world economic growth slowed to an average rate of just 2.2% in 2001 and forecast that it will recover gently to a rate of 2.4% in 2002. Prospects for 2003 are brighter and world growth is expected to recover to 4.2%, owing to stronger performance in the US and EU. Kenya’s tourist industry, which experienced a marked upturn in 2001, will suffer most directly from the aftermath of the attacks on the US, particularly at the upper end of the market which draws its customers mainly from the US. The drop in demand for hotels, restaurants, cafés, bars and taxis will have a substantial effect on the rest of the economy. In addition, the imminent closure of some national airlines will have a negative effect on air transport to and from Kenya. For instance, if Sabena and Swissair discontinue their flights to Kenya, there will be a shortage of available seats and freight capacity to Europe.

Prospects for the prices of 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 52.6 US cents/lb in 2002 and 49.5 US cents/lb in 2003; tea prices are forecast to fall from US$1.6/kg in 2001 to US$1.4/kg in 2002 and US$1.3/kg in 2003. Oil prices are also expected to fall, from US$24.28/barrel in 2001 to US$18.26/b in 2002 and US$20.19/b in 2003. The reduced oil price will help to reduce Kenya’s energy import bill.

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International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.4 4.2 OECD 3.8 0.9 0.9 3.0 EU 3.3 1.5 1.3 2.5 Exchange rates (av) ¥:US$ 107.8 121.5 128.8 123.5 US$:¤ 0.924 0.896 0.960 1.015 SDR:US$ 0.758 0.785 0.771 0.751 Financial indicators ¤ 3-month interbank rate 4.48 4.28 3.13 4.60 US$ 3-month Libor 6.53 3.78 1.91 5.07 Commodity prices Oil (Brent; US$/b) 28.5 24.3 18.3 20.2 Gold (US$/troy oz) 279.3 268.8 255.0 250.0 Tea (US$/kg) 1.9 1.6 1.4 1.3 Coffee (arabica; US cents/lb) 87.1 61.7 52.6 49.5

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Economic growth Kenya’s GDP is estimated to have grown by a modest 0.8% in 2001, largely owing to a recovery in both agriculture and manufacturing; this is significantly lower that the government’s target of 2%. The growth rate is forecast to rise modestly in 2002, to 1.4%: the likelihood of weak growth in the first half of the year will be followed by some recovery in the second half. The benefits of the recovery will be felt in 2003, when the overall growth rate is forecast to reach 2.8%. However, this growth rate is still far too low to have any impact on the pressing issues of poverty and unemployment in Kenya, or to stop the decline in income per head. The growth rate is also low in comparison with both Kenya’s historical growth rate and the growth rates of the two other economies in the East African Community: in 2001 real GDP is forecast to expand by 5% in Tanzania and 5.4% in Uganda. The government’s contribution to growth over the forecast period will be minimal, in line with budgetary constraints. Private-sector activity and investment should, however, receive a gentle boost as the government makes progress with its long-delayed privatisation programme. The resumption of crucial external support in the final months of 2002 should boost consumer and business sentiment. The strengthening of the US and European economies in 2002-03 will also benefit tourism and stimulate export demand.

Inflation Inflation continued to fall steadily in 2001, averaging only an estimated 1% for the year, following inflation of 5.8% in 2000. Low inflation was mostly due to the slump in food prices, subdued domestic demand and continued tight monetary policy. 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. In 2002-03 higher domestic demand is likely to increase some inflationary pressures but, owing to subdued food and fuel prices, and because the Central Bank will continue to use inflation targets to preserve monetary stability, we expect consumer price inflation to average 2.5% in 2002 and 3% in 2003.

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Forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth –0.3 0.8 1.4 2.8 Industrial production growth –2.2 1.0 2.0 3.6 Gross agricultural production growth –2.4 1.6 2.0 2.5 Consumer price inflation Average 5.8 1.0 2.5 3.0 Year-end 6.0 0.8 2.8 3.0 Short-term interbank rate 22.3 23.0 20.0 18.0 Government balance (% of GDP) 0.4 –1.5 –2.0 –2.5 Exports of goods fob (US$ bn) 1.8 1.8 1.8 1.9 Imports of goods fob (US$ bn) 3.0 3.1 3.3 3.4 Current-account balance (US$ bn) –0.2 –0.3 –0.3 –0.3 % of GDP –2.3 –2.5 –3.0 –2.6 External debt (year-end; US$ bn) 6.0 5.5 5.7 5.8 Exchange rates KSh:US$ (av) 76.18 78.66 80.97 84.40 KSh:¥100 (av) 70.69 64.75 62.33 67.29 KSh:¤ (year-end) 72.61 69.61 82.85 84.86 KSh:SDR (year-end) 101.7 98.2 108.8 111.8

a Actual. b EIU estimates. c EIU forecasts.

Exchange rates Relations between Kenya and the IMF will remain tense, and it is assumed that their current agreement will remain suspended for (at least) the early part of 2002, in which case the Kenya shilling will continue to come under pressure. As financial inflows and export receipts pick up, pressure on the currency should ease. Thus the shilling is forecast to depreciate gently, averaging KSh80.97:US$1 in 2002 and KSh84.40:US$1 in 2003.

External sector Kenya’s overall current account returned to a small deficit of US$15m in the second quarter of 2001, following a surplus of US$33m in the first quarter. For the remainder of 2001 exports continued to suffer from weak commodity prices and are estimated to have shown a marginal fall to US$1.76bn for the year. Imports are estimated to have edged up slightly to US$3.14bn for the year, mainly because of stronger domestic demand. On the services account, tourism earnings are estimated to have suffered in the final months of 2001 following the attacks on the US in September and the subsequent downturn in the international tourist market. Overall, the current-account deficit is estimated to have risen marginally from 2.3% of GDP in 2000 to 2.5% of GDP in 2001. In 2002-03 exports are expected to grow marginally to just under US$1.9bn per year, because of a modest upturn in export volumes and in the prices of traditional exports. Imports are also expected to rise over the forecast period, owing to the recovery of economic activity. On the services account, tourism revenue will provide some relief, but the scope for substantial growth is not promising. Net transfers are forecast to edge up in 2002-03, mainly because of the resumption of donor support. Overall, the current-account deficit is forecast to widen to 3% of GDP in 2002 and narrow marginally to 2.6% of GDP in 2003.

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The political scene

A campaign is afoot to Recent developments indicate that the ruling party, the Kenya African National dislodge the old guard Union (KANU), has launched a covert operation to reduce the influence, at the party grassroots level, of the vice-president, George Saitoti, and his ally, the party’s secretary-general, Joseph Kamotho. The strategy, which is likely to undermine Mr Saitoti’s position as second-in-command to the president, Daniel arap Moi, also seeks to dislodge Mr Kamotho and replace him as party secretary-general with the leader of the National Development Party (NDP), Raila Odinga. The campaign to dislodge the old guard and put the party on an election footing is being championed by the Young Turks within KANU, including Julius Sunkuli, Uhuru Kenyatta, Isaac Ruto and Cyrus Jirongo, who see the partnership between KANU-NDP as the strategy that will return KANU to power in the next elections.

A confusing picture is The piecemeal party elections that KANU has been holding in Central and emerging Eastern provinces, indicate that both Mr Kamotho and Mr Saitoti continue to enjoy strong support in these provinces. Significantly, the Kajiado, Nakuru, and Kiambu branches have already drawn up new lists of delegates. During a visit to Kiambu, Mr Moi announced that former KANU ministers, Stanley Githunguri, Arthur Magugu, and a Limuru councillor, Ndungu Njenga, would represent the ruling party in these districts. This must have come as a surprise to observers because both Mr Magugu and Mr Ndungu have yet to renounce their opposition ties and rejoin KANU officially: Mr Ndungu, is currently a member of the Labour Party of Kenya, and Mr Githunguri is with Safina. The strategy is generating bitterness in some sections of KANU: one senior politician said “this is a sinister scheme aimed at confusing some people on the succession”.

The succession will remain When and how Mr Moi hands over to his successor on retiring will be heavily uncertain influenced by the civil service chiefs charged with managing Kenya’s historic transition. It is a mark of the complacency bred by one-party rule that the

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procedures to be followed on the death of a president were only drawn up after Jomo Kenyatta suffered a heart attack in 1967. Mr Moi’s handover will be the first time in Kenya’s history that a head of state whose term has ended will formally transfer the instruments of power to his successor.

President Moi’s desire has been to secure his legacy before he finally leaves office. His supposed priorities were to establish a thriving economy and close the ethnic divisions that have afflicted the country’s politics during the last decade of his tenure. But now the general election is due to be held at the end of the year and the country is experiencing a serious economic downturn and high unemployment rates, and KANU is still not clear on its electoral and succession strategy. Mr Moi’s strategy now is to stage-manage the process so that he can secure himself a comfortable retirement. The unlikelihood of an opposition victory, which might make him, his family and close associates vulnerable to harassment is certainly a key consideration in the succession strategy. Thus, his priorities are to ensure not just KANU’s continued hold on power, but also that whoever wins the party’s nomination as presidential candidate will look after his interests.

Mr Moi’s commitment to a merger with the National Development Party, sometimes even at the risk of alienating powerful forces in KANU, is based on the conviction that a KANU candidate cannot win the election without the backing of one or other of the opposition “big tribes”. Successive deadlines for the NDP to dissolve itself so the parties can merge have passed since October 2001, and Mr Moi has at times shown frustration at the slow pace of the merger, but he remains determined to put together a deal. However, he will not show his hand and name a preferred successor. His own plan at present is for a merged delegate conference of the party by April 2002, at which new officials and the party’s presidential candidate will be elected. By keeping his intentions under wraps, Mr Moi is ensuring that Mr Saitoti and his supporters hold back from organising a rival alliance. Mr Moi seems to have allowed the so-called KANU Young Turks great leeway in fronting his political agenda and undermining KANU headquarters by calling elections in selected party branches to stack the list of delegates against the camp identified with Mr Saitoti and Mr Kamotho. Having ruled out the option of directly holding on to power, Mr Moi seems to be banking on maintaining a tight hold on the KANU party machinery as his exit strategy.

KANU’s political players are Mr Odinga has publicly associated himself with Mr Saitoti’s main rival, Musalia shifting alliances Mudavadi, who is minister of transport and a member of the Luhya tribe. Around them is a multitribal team of young hopefuls, the Young Turks. These include Uhuru Kenyatta, the recently appointed minister for local government, whose father, Jomo Kenyatta, was founder and first president of independent Kenya, the internal security minister, Julius Sunkuli, who is a Maasai, Cyrus Jirongo, recently appointed a minister, and William Ruto, an influential assistant minister and a member of an ethnic group that is a close cousin to Mr Moi’s own Kalenjin group. Once Mr Moi exits the scene, KANU is not only unsure of outright victory, but is threatened with deep schisms of its own. It is also likely that whoever is selected to succeed Mr Moi will have to move quickly to assert his authority.

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President Moi’s most trusted lieutenants

Dismantling Jomo Kenyatta’s small Kikuyu elite, the so-called Kiambu Mafia, was one of the early challenges of President Moi’s administration, in which he enjoyed strong support and loyalty from a number of long-serving ministers.

Nicholas Biwott is credited with most of the major political manoeuvres of the Moi regime, including the ousting of the attorney-general Charles Njonjo in 1983, the dropping of Mwai Kibaki as vice-president in 1988, the short-lived tenure of Josephat Karanja as vice-president, and the speedy rise of the hitherto unknown, George Saitoti, from nominated MP in 1983 to vice-president in 1989. Mr Biwott left the government after being mentioned in the judicial commission of inquiry into the murder of the foreign minister, Robert Ouko, in 1990. He returned to the cabinet in 1997. Even as a backbencher, it was clear that he still wielded enormous power. In recent years he has appeared to be watching from the sidelines as the succession struggle in KANU plays itself out.

Joshua Kulei: Personal assistant to President Moi, Mr Kulei (JC—as he is popularly known) has been a key figure in almost all the happenings around the president. He played key background roles, mostly as a fundraiser, for Mr Moi’s successful election campaigns in 1992 and 1997. Lately, he has been preoccupied with the presidential succession strategies. Mr Kulei, 54, is one of the wealthiest men in Kenya, but there has always been a debate over his real stake in the host of companies he has been associated with. Mr Kulei has certainly come a long way since Mr Moi became president in 1978 and he was a prison warder. Successive comptrollers-cum-private secretaries at State House have come and gone, but Mr Kulei’s influence is undimmed. Given that he has no significant title or any known political ambitions, Mr Kulei is expected to leave State House when Mr Moi retires from official politics.

Hosea Kiplagat is acknowledged as the driving force behind the most visible of President Moi’s succession strategies—the so-called Young Turks initiative. Jointly with President Moi’s youngest son, Gideon, Mr Kiplagat is known to be one of the key figures behind the emergence of William Ruto, assistant minister in the Office of the President, the rapprochement between Mr Moi and the chairman of the defunct YK ‘92 lobby group, Cyrus Jirongo, and the latter’s appointment to the cabinet. More recently, he is reputed to have influenced the appointment of Uhuru Kenyatta to the cabinet. Surprisingly, Mr Kiplagat was known for most of the past decade as one of the leading supporters of Mr Saitoti, who stands to be the biggest casualty should the Young Turks’ campaign succeed.

Others: There are a number of politicians currently in KANU, who have built up their political careers independently of Mr Moi, but along the way their fates have become inexorably linked with his. They include Mr Saitoti and his chief rival, Mr Mudavadi. Others are KANU’s secretary-general, Joseph Kamotho, the cabinet minister, Shariff Nassir, and the entire crop of Young Turks, including the cabinet ministers, Julius Sunkuli, Uhuru Kenyatta, Kalonzo Musyoka, Joseph Nyagah and Cyrus Jirongo, and the assistant minister, William Ruto.

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The KANU-NDP merger may Plans for a merger between KANU and NDP have finally been drawn up after be imminent disagreements in previous meetings between the two parties. The deal abolishes the position of first national vice-chairman of KANU (currently held by Mr Saitoti). The position will be replaced by four vice-chairmen, reporting directly to the merged party’s national chairman. In the newly negotiated KANU-NDP merger agreement, Mr Odinga was nominated for the powerful position of secretary-general of the new party, and Mr Saitoti, Mr Mudavadi, Kalonzo Musyoka, Katana Ngala and Uhuru Kenyatta were nominated as candidates for the vice-chairmanship. If regional factors are to be taken into consideration, then a choice will have to be made between Mr Kenyatta and Mr Saitoti for the fourth position.

Throughout the negotiations between the two parties, the NDP has sought substantial positions on the national executive committee of the merged party. A position that the NDP leadership has been particularly keen on is that of first vice-chairman. The thinking behind this was that whoever held the position would be well placed to bid for the presidency when Mr Moi retires. The assumption of the NDP’s top leadership had been that their leader, Mr Odinga, would take the position in the merged party. The planned merger advances a political partnership cemented in early 2001 when KANU, the party in power since independence in 1963, formed Kenya’s first coalition government with the NDP, which is backed by the country’s large Luo tribe. In the complex equation of Kenya’s tribally based politics, the merger greatly improves the government’s prospects of retaining power after the 2002 elections.

Bodies are set up to steer At the end of 2001, Mr Moi and Mr Odinga announced the appointment of a the merger process four-man task-force—Jonah Bett, Rateng Ogengo, Joseph Kibati and Henry Mwanzi—to speed up the merger of the two parties. The task-force represented in effect the executive committees of the two parties and was mandated to draft the documents sealing the merger and to decide on the name of the new party and its organisational structures, subsequent to which a national joint KANU-NDP conference was expected to take place to elect the new party’s leadership. However, in mid-January 2002, a 17-member merger committee was appointed to oversee the merger, calling into question the role and purpose of the earlier four-man task-force. The 17-man committee, according to the KANU leadership, is to “finalise” or “fine-tune” the merger process. The 17-man team, which is dominated by powerful KANU politicians, including Henry Mwanzi, Jonah Bett, Rateng Oginga Ogego and Joseph Kibati, is to study, among other issues, the structure of the two parties and how to “harmonise” the two parties’ policy documents.

Initial reports indicate that the committee has been busy and, so far, has failed to agree on only one item on its agenda—the name of the merged party. Whereas the NDP wants the new party to be called “New KANU”, KANU wants the new party to remain “KANU” to forestall any problems that the party may have when the national conference to discuss the constitution is held later this year. The committee has submitted a draft constitution and manifesto to Mr Moi. At the time of going to print, details of the draft constitution and manifesto were not available.

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The opposition parties are Two opposition leaders, Simeon Nyachae and Paul Muite, have announced entering alliances that their parties, Ford People, and Safina, will have a common strategy at the next general election. Mr Nyachae, a former minister of finance, left KANU after he lost his cabinet post and has since charted his own political path. Mr Muite is a prominent lawyer and opposition MP, who came to prominence in the agitation for pluralistic democracy ten years ago. The two leaders have launched what they hope will develop into a formidable coalition. The two parties will campaign for a government of national unity, which they described as “a sensible transitional measure and the only democratic option to help build the confidence of Kenyans” and have released a 30-page National Action Plan which details their approach to the process of bringing political change. The coalition will consult professionals, farmers and the business community to discuss their proposals and “enhance its spirit”.

At the same time, the leaders of the Democratic Party (Mwai Kibaki), Ford Kenya (Michael Wamalwa) and the National Party of Kenya (Charity Ngilu) have announced the formation of the National Alliance for Change— previously known as the Opposition Alliance. They aim to counter the KANU- NDP merger ahead of the general election.

The review commission A new constitution is unlikely to be in place by December 2002, when the may not meet its deadline elections are to be held. The possibility that the Constitution of Kenya Review Commission will overshoot its deadline of September 2002 has forced its chief, Yash Pal Ghai, to extend his sabbatical leave beyond October 2002, when he was to return to his teaching job in Hong Kong. Even when the review commission does publish its report, it will require at least a month of public debate. If there are major disagreements, a referendum will have to be called, though this is not provided for in the schedule. Parliament will then have to ratify the draft. It will take four months for the Electoral Commission to act on boundary changes if the new constitution recommends them, which is very likely in view of the current wave of disputes over electoral boundaries. What this means is that even if the September deadline were met, the new constitution would not be promulgated before February 2003 at the earliest.

Kisumu and Mombasa In his New Year message to Kenyans from Mombasa, Mr Moi gave his consent receive city status for Mombasa to be classified as a city. Mombasa’s receipt of city status follows that of Kisumu (a Luo-Nyanza, NDP stronghold) in December 2001 when it celebrated its 100 years of existence. The elevation of Kisumu ahead of Mombasa, which is much older and bigger, dismayed many coast leaders who were disappointed that Kisumu appeared to have jumped the queue. The patron of the Kisumu centennial celebrations, Mr Odinga, has called on investors to look with favour on Kisumu. The award of city status to Kisumu is considered to be one of the benefits of the NDP’s co-operation with the government.

Kisumu’s development, from 1901 when the railway line reached there, through the 1920s when the first Indian dukawallahs established shops, has progressed without much of a plan. The town’s population rose to 11,000 in 1941 covering 15 sq km. When it was declared a municipality in 1960, it occupied 21 sq km and had a population of 24,000. It was only in 1993 that its

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boundaries were extended to cover 417 sq km, 157 of which are under water. Today, the town has 450,445 inhabitants, a population large enough for a city, though its economic life has not been particularly dynamic. To survive as a city worth the title, the Kisumu will need better communication and transport links, both national and international. For instance, the Kisumu molasses plant, the sugar industry and the cotton sector all suffer from lack of investment and poor infrastructure. The fishing industry is not as thriving as it used to be because of over-fishing, the spread of water hyacinth and general pollution.

Economic policy

Government is optimistic The minister of finance, Chris Obure, has on a number of occasions expressed about donor funding his satisfaction with the progress made in the talks with the IMF over economic and governance reforms, but it is still unclear when funding will resume. Though Mr Obure appears increasingly confident that an agreement can be reached with donors to allow the resumption of aid, the Economist Intelligence Unit remains sceptical. The reason for this is the government’s lack of progress to date in the three main areas where the IMF demands progress before it will resume its support for Kenya.

• The Anti-Corruption and Economic Crimes Bill has yet to be revised to meet standards acceptable to the IMF and international community. Although some progress has been achieved in this area—the president, Daniel arap Moi, has recently appointed a British company to advise the government in its anti- corruption strategy (see below)—progress will continue to be slow.

• The Code of Ethics for Public Servants Bill still has to be revised along similar lines and enacted by parliament.

• The privatisation of Telkom Kenya has now stalled, and there is no indication that it can be brought back on track in the near future.

Aid will not be linked to One factor, that may have encouraged the finance minister to expect a quick the fight against terrorism resumption in external funding, was the possibility that Kenya, rather like Pakistan, might expect some sort of reward for co-operating with the US’s fight against international terrorism. However, it remains unclear whether the international community shares this view. The UK’s parliamentary under- secretary responsible for Africa, Valerie Amos, who was visiting Nairobi, was reported in the local press as stating that the war against terrorism and donor aid to Kenya were entirely separate matters and should not be linked. Her comment quickly blew up into a major controversy, and Lady Amos was reprimanded by President Moi for apparently thinking that Kenya’s contribution to the fight against Osama bin Laden’s terrorist network was made in the hope that aid would be resumed; the president stated that Kenya’s support for the war against terrorism was a matter of principle and not given in the hope that the US and UK would organise a resumption of the aid suspended since 1991. As a result, Lady Amos was forced to clarify her

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statement. She claimed that her comment that terrorism and aid were not linked had come only in response to a question by a journalist and not from her own interpretation of Kenya’s position. In fact, Lady Amos has said that Britain will continue to support Kenya’s attempts to promote economic growth and reduce poverty and has reiterated that economic reform, and the conditions the Kenyan government has agreed with the IMF and World Bank, are central to efforts to promote economic growth and reduce poverty in Kenya. Mr Moi’s rebuke of Lady Amos comes only a month after he publicly admonished the outgoing British high commissioner, Sir Jeffrey James, for having supported the opposition. It is clear that relations between the Kenyan leadership and the UK government are strained and will continue to be until agreement is reached over the resumption of aid.

A detailed survey of As the government struggles to pass the Anti-Corruption and Economic Crimes corruption is published Bill, the Kenyan chapter of Transparency International has published the results of its report on corruption in Kenya. The Kenya Urban Bribery Index is based on surveys conducted in March and April 2001 in Nairobi and five other towns, Eldoret, Kisumu, Machakos, Mombasa and Nyeri. Ordinary Kenyans, who reported their daily encounters with corruption, were asked whom they had to bribe, how much the bribe was and for what purpose. Respondents were also asked how many times they needed to bribe officials in the public and private sectors before being served, and whether the service sought was delivered if bribes were not paid or the quality of service diminished with a refusal to pay. It must be stressed that the method of collecting data was not entirely satisfactory, and any conclusions drawn from it should be treated with great caution. Some of the main findings of the survey are as follows.

• The police top Kenya’s bribery league. According to the survey, most people seeking help from the police have to pay a bribe. In fact, only one out of 10 people who regularly deal with the police can expect to get proper service without paying. But the bribes are small, averaging KSh631 (US$8). The police are followed by the Ministry of Public Works and the Immigration Department.

• The Central Bank of Kenya (CBK) is ranked the least corrupt organisation, beating foreign embassies and even the private sector. Only 0.2% of the respondents said they had received demands for bribes when dealing with the CBK, compared with 5.6% who said they had been asked to bribe officials in the private sector and 22.4% who had to bribe the staff of international organisations and embassies to be served. CBK employees are among the best- paid public officers.

• Employees at the Ministry of Public Works demand the biggest bribes— averaging KSh37,500 (US$475) a deal, followed by officials of embassies and international organisations, who demand an average of KSh36,800. Local government officials take the smallest bribes, an average of only KSh110. Notable in the overall bribery list is the judiciary, which ranks sixth among the most bribery-prone institutions.

• The report estimates that if corruption could be eliminated in Kenya, the salaries of Kenyans would increase by around 30%. Another interesting finding

is that more money is spent on petty bribery than is stolen from public funds, a figure documented by the comptroller and auditor-general.

Corruption in Kenya

Index score Average size of bribe (KSh) Police 68.7 Ministry of Public Works 37,500 Ministry of Public Works 41.0 Embassies & international organisations 36,800 Immigration Department 36.1 Immigration Department 11,900 Ministry of Lands 34.8 Judiciary 10,300 Nairobi city council 33.0 Kenya Ports Authority 9,700 Judiciary 32.3 Ministry of Lands 7,500 Mombasa municipal council 32.1 Kenya Revenue Authority 6,600 Other local authorities 31.5 Kenya Commercial Bank 5,300 Provincial administration 29.5 Kenya Bureau of Standards 4,065 Prisons Department 29.4 Other state corporations 3,900 Kenya Ports Authority 29.3 Kenya Railways 3,900 Registrar of persons 28.4 National Social Security Fund 3,840 Source: Transparency International, Kenya chapter, Urban Bribery Index.

British advisers join the Although the proposed anti-corruption legislation has not been implemented, fight against corruption President Moi has recently engaged a London firm, Risk Advisory Group, to advise the government on fighting corruption in its latest attempt to win back donor funds. A team of international experts has been assembled, including a former commander of the London Metropolitan Police and Criminal Investigation Department, Graham Stockwell, a senior British lawyer, Stephen Kramer; and a former Commonwealth deputy secretary-general in charge of economic and social affairs, Sir Humphrey Maud. The team is expected to have other “accomplished” members who are experts in policing, criminology, corruption prevention, intelligence, accountancy and the prosecution of economic crimes. Mr Stockwell played a leading part in the formation and direction of Hong Kong’s Independent Commission against Corruption and Botswana’s Directorate against Economic Crime.

The team will advise on the creation of nationally and internationally credible machinery to combat corruption and measures for promoting integrity in the public sector. President Moi said that the action his government was taking was a statement of his total commitment to confronting corruption head on. The IMF’s resident representative in Kenya, Samuel Itam, welcomed the appointments, saying the new body could play a useful role, and was an indication of the government’s commitment to the fight against corruption.

The Donde act has another The ruling by the High Court on January 26th that the controversial Central setback Bank Amendment Act (2002), popularly called the Donde act, is null and void has been welcomed by both bankers and businessmen The Donde bill was introduced in parliament to limit the interest rate chargeable on loans to 4% above the Treasury-bill rate obtaining on the last Friday of the month; and to set interest rates on deposit accounts at a minimum of 70% of the same T-bill rate (November 2001 pages 37-38). Though the law was passed by parliament,

and received presidential assent in August 2001, it could not be enforced pending a legal case brought by the Kenya Bankers’ Association on behalf of the country’s commercial banks, which challenged a clause in the act allowing its retroactive implementation. The court’s ruling supported the bankers’ claim that because the act was retrospective it contravened section 77 (4) of the constitution, which states that no person can be guilty of an offence committed when a law was not in existence.

Not surprisingly, there has been considerable confusion since the judgement. The majority of those interviewed immediately after the court ruling seemed to assume that only the retroactive aspects of the Donde act had been rejected by the courts. However, a spokesmen for the Bankers’ Association said that financial institutions understood that the court had quashed the act. The finance minister made a similar interpretation of the ruling: “The whole thing has been thrown out. We need to go back to parliament and come up with a fresh bill to achieve the same end.” What does seem to be clear is that in the short term commercial banks can start to lend again since, even if new legislation is passed along similar lines to the original Donde act, it cannot be applied retrospectively. However, the cloud of interest rate regulation has yet to be fully lifted: lending rates could still be capped if the bill is resubmitted in a revised format or the retrospective sections of the bill are removed.

The domestic economy

Economic trends

Real GDP growth in 2001 According to the Central Bank of Kenya’s Monthly Economic Review, published remains sluggish in January 2002, real GDP is estimated to have grown by only 0.8% in the year to October 2001. This is a mere 0.1 percentage points above the 0.7% reported for the year to September 2001, and implies that the economy is recovering at a much slower rate than the Central Bank had initially hoped for. For the year, the estimated real GDP growth rate of 0.8% is certainly well below the Central Bank’s earlier prediction of a growth rate of 2% in 2001. However, there are some positive signs for the country’s economic performance in 2002. International fuel prices have fallen sharply since the middle of 2001; interest rates are stabilising; revenue collection has improved; and the Kenya shilling has stabilised.

Medium-term domestic The Central Bank, along with a number of other central banks in Sub-Saharan debt increases Africa, has been trying to lengthen the maturity profile of its domestic debt. Since the mid-1990s many Sub-Saharan African countries, like Kenya, have sharply increased their level of borrowing from domestic sources, but this has usually been in 91-day T-bills and overdrafts from the central banks. This has a cost, in that it needs to be constantly rolled over. But now that inflation rates are lower and many governments are running lower fiscal deficits, particularly in Kenya, there is not only a smaller supply of government securities, which increases demand, but the private sector is more prepared to accept longer- dated maturities on government debt (although it is still unwilling to accept

very long-maturing stock). The government is also able to price the debt at a more attractive interest rate than in the past.

Government domestic debt structure (KSh bn) 1999 2000 2001 Dec Dec Jun Nov Government domestic debt 190.3 192.7 211.8 217.6 of which: Treasury bills 111.7 110.7 116.4 105.1 Treasury bonds 28.4 34.1 44.5 71.0 Long-term stocks 3.0 1.9 1.5 1.5 Central Bank overdraft 6.7 5.8 2.9 0.0 Source: Central Bank of Kenya, Monthly Economic Review.

This trend was particularly noticeable in the second half of 2001 in Kenya, when the government successfully launched a number of longer-term Treasury bonds. As a result, T-bonds rose from 21% of the total domestic debt stock in June 2001 to 33% by November 2001. This figure is also set to increase following the offer by the Central Bank in December 2001of KSh7bn of two- year fixed rate T-bonds (this was heavily oversubscribed, attracting KSh10.96bn of bids). The government also recently invited applications for KSh7bn of one- year fixed-rate T-bonds and KSh3bn of three-year fixed-rate T-bonds, which would carry a fixed coupon rate of 13%, payable semi-annually starting on July 22nd 2002.

Agriculture

Coffee farmers get Stabex As international coffee prices are at a record low, the European Commission cash has released a second payment of KSh500m (US$6.3m) to coffee farmers under its price stabilisation (Stabex) scheme. Releasing the funds the head of the EU delegation to Kenya, Gary Quince, said that Kenya’s overall management of its Stabex funding had been given a satisfactory rating in an independent audit. Released to the Co-operative Bank of Kenya, the Stabex funds will raise to KSh1.9m the current EU revolving fund for lending to coffee farmers.

A new bill will reform the Support for farmers at a time of low global prices is important in the short run, coffee industry but more fundamental changes are being considered over the future structure of Kenya’s coffee industry. The Coffee Bill soon to be presented to parliament proposes far-reaching changes in the industry, in particular the transformation of the Coffee Board of Kenya (CBK) into a small regulatory body, thus ending its marketing function. This will be a significant change: for the past 60 years all coffee sales in Kenya have been through the CBK’s auction system, with the CBK as the selling agent. Though most analysts agree that there are faults with the CBK, as with many crop-marketing parastatals, Africa’s experience with more market-oriented systems has been mixed. The reforms also come at a crucial time in the Kenyan coffee industry when, owing to a general fall in production in the late 1990s, traders have struggled to obtain the quantities that they require at the right prices. This was recently emphasised by Jeremy Block of a leading coffee trading company, C Dorman, who argued that because of insufficient supplies, some international roasters had removed Kenyan coffee from their blends. There is therefore a pressing need to boost supply, and if the transition to a new system leads to lower production, buyers may begin to look elsewhere to meet demand despite the high quality of much of Kenya’s coffee crop.

Coffee productiona (‘000 tonnes) 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 Co-operatives 38.3 32.1 39.4 62.2 n/a n/a Estates 29.7 21.3 28.7 38.5 n/a n/a Total 68.0 53.4 68.1 100.7 51.6 60.0

a Crop years beginning in October. Sources: Ministry of Planning and National Development, Economic Survey 2001; Economist Intelligence Unit.

Tea production rebounds Low world prices have so far had only a limited impact on the country’s tea in 2001 production, as the crop has been recovering from the poor weather conditions in 2000 (ranging from frost to drought), which pushed production and exports down. According to the Tea Board of Kenya, the country’s total production in

2001 was an estimated 295m kg, a 25% increase on 2000. This translated into exports of 258m kg. But with an average price of only KSh137.18/kg (a substantial drop on 2000 when the Kenyan production shortfall actually pushed up prices), total tea export earnings are estimated at KSh35.4bn (US$450m) in 2001, only a very marginal increase on the KSh35.2bn recorded in 2000.

Tea exports

1997 1998 1999 2000 2001a Volume (m kg) 199.2 263.8 260.2 217.3 258.1 Average price (KSh/kg) 121 125 127 162 137

a Tea Board of Kenya estimates Source: Ministry of Planning and National Development, Economic Survey 2001; Tea Board of Kenya.

Cut flower exports boom With the ongoing problems in the coffee sector, it is not surprising that, according to the Kenya Flower Council (KFC), exports of cut flowers have overtaken coffee as the third most import source of foreign-exchange earnings (behind tea and tourism). Total exports of cut flowers in 2001 were US$110m, compared with the Central Bank’s estimate of coffee earnings of US$78m in the first 11 months of 2001. At US$110m, cut flower export earnings are about half of total horticultural export earnings. However, though the industry has expanded strongly, there is concern that the current turmoil in the world airline industry could undermine the potential for growth. Airlines such as Sabena and Swiss Air had been important carriers of Kenyan flowers to Europe and, with their future in question and flights to Nairobi reduced, the competition for air freight space will either increase or new capacity will have to be encouraged.

Flower exports (m kg) 1999 2000 Roses 24.6 28.4 Standard carnation 1.1 1.5 Alstroemeria 1.7 1.0 Lisianthus 0.4 0.5 Statice limonium 2.1 1.4 Lilies 0.3 0.3 Total incl others 37.0 38.2 Source: Kenya Flower Council.

The industry also faces a potential problem from Western environmental activists, who used the Valentine Day celebrations in 2002 to highlight what they see as glaring faults in the industry, ranging from low pay, to exposure to chemicals and the sexual harassment of employees. In response, the KFC has produced a code of conduct for its members, who produce around 65% of the country’s exports of cut flowers, and claims that its members pay their workers well above the average wage as well as providing other significant benefits. Arguments over differing working and environmental standards in the West and in Kenya, a country with high levels of unemployment and poverty, are

unlikely to die away quickly, but may be less important to flower growers and their employees than the issue of air freight space and its cost in their industry’s plans for expansion.

Kenya experiences a The problems of inefficiency and political patronage associated with state-run bumper maize harvest commodity marketing boards can clearly be seen with the National Cereals and Produce Board (NCPB). Following a bumper harvest, maize prices have fallen substantially, encouraging farmers to sell all of their output to the NCPB, which is offering a better price, KSh1,000 per 90-kg bag, than other traders. It is reported, for example, that before the NCPB’s decision to buy excess maize by the end of 2001, farmers were selling their excess stocks to middlemen at around KSh400 per bag, a price far below the estimated average production cost of KSh600 per bag. However, politics is never far from the surface when dealing with crop marketing boards and, despite the generous price offered by the NCPB, some members of parliament have protested to the board over the stringent conditions it set for the purchase of maize from farmers.

The large quantity being sold to the NCPB has lead to long queues of lorries and tractors waiting to deliver grain to NCPB depots in the North Rift, and for the last two months transporters have been demanding compensation for spending long periods before their maize is unloaded. The high price offered farmers by the NCPB has, unsurprisingly, been termed “excessive” by many economists, as it has created “an artificial glut” in the local market and simply institutionalises inefficiency among farmers who should be striving to increase their yields.

Infrastructure

New power tariffs will be The Electricity Regulatory Board has announced that a new electricity tariff introduced in March schedule will be published in March. This will be the first review of tariffs since August 1st 1999. The board’s chairman, Jeremiah Murithi, told a stakeholders’ workshop that their views would be collated by the board’s secretariat and consultants for incorporation in the final report. The electricity distributor, Kenya Power and Lighting Company (KPLC) and the Kenya Electricity Generating Company (KenGen) have presented their views on the new tariff structure, representing the interests of suppliers. The exercise is intended, among other things, to review the much criticised retail tariff and rationalise the bulk tariff agreement between KPLC and KenGen under the Interim Power Purchase Agreement. KPLC claims that it uses 92% of its revenue to pay power costs, which is an unsustainable situation. The new proposals also outline the possible establishment of a Drought Reserve Fund to cover the extra costs incurred during a drought, as in 2000 and 2001, which helped contribute to the huge losses borne by KPLC in the last financial year.

The sale of Telkom Kenya Although the government remains “committed” to privatising Telkom Kenya, falls through and it is one of the main conditions of the IMF, the communications minister, Musalia Mudavadi, has confirmed that a deal is unlikely to be made soon, following the collapse of talks with Mount Kenya Consortium (MKC; whose main shareholder is the Zimbabwean company Econet). The privatisation of

Telkom Kenya is seen by the IMF as a test of Kenya’s commitment to economic reform—the sale first went out to tender in April 2000. The government does have some excuse: because of the global downturn in the telecommunications industry, it would not get as good a price now as it would have done even as recently as 12 months ago. The problem for the IMF is whether the government is, as Mr Mudavadi claims, committed in principle to the sale, or whether it is using the downturn in the world telecoms market simply as a reason to stall the sale. Most local analysts argue the latter, claiming that the privatisation of Telkom Kenya has been deliberately stalled because the government is reluctant to cede its control to the private sector.

The government’s official reason for rejecting the bid by the MKC was that it failed to “live up to expectations”. But there were also doubts about the proposed purchase on the buyer’s side (many of the matters that concerned MKC were raised in the recent audit of Telkom Kenya’s accounts to end-June 2001 by KPMG Peat Marwick). These included:

• a KSh2.1bn deficit in the company’s pension scheme and provident fund and responsibility for funding those deficits;

• an interest-free loan of KSh2.6bn to Telkom Kenya’s cellphone arm to buy a mobile phone licence; and

• the lack of information about employee benefits, making it difficult for either Telkom Kenya, or the purchasers, to draw up a plan for reducing its huge staff of close to 20,000 workers.

Foreign trade and payments

Kenya’s partners are wary A major obstacle to an East African trade agreement is the concern of the of its economic strength Ugandan and Tanzanian governments that Kenya would dominate the affairs of the revitalised East African Community (EAC) because of its stronger economy. At the centre of their concern is the fear that Kenyan goods would flood the region, and that their exports would make no headway in the expanded market. At a recent session of the EAC’s 32-member parliament in Kampala, a conciliatory note was sounded by a Ugandan member, Sheila Kawamara who, opening the parliament’s recent debate on the issue, stated “some people fear that if we open borders Kenya will flood the market with her goods, [but] we must undergo this painful transition with a lot of sacrifices”. In contrast, most of the other MPs from Tanzania and Uganda argued that freeing the market, zero-rating tariffs and creating a customs union would benefit only Kenya. With such firmly entrenched positions against moving towards free trade between the three countries, the key to progress is likely to be the commitment of the three countries’ presidents. As with the EU, trade integration is as much a political commitment as an economic one. However, as Kenya’s president, Daniel arap Moi, is currently deeply involved in domestic politics, a commitment from all three leaders is unlikely in the short term.

Kenya benefits from AGOA Recent official data confirm that clothing exports doubled to an estimated US$70m in 2001 thanks to the US’s Africa Growth and Opportunity Act (AGOA). However, manufacturers believe that growth is being stifled by high electricity costs (which account for one-quarter of total costs), high import duties on imported raw materials and declining local output, as a result of which 80% of manufacturers’ cotton requirements are being imported. Kenya has until 2004 to eliminate this reliance on imports or lose some of the preferences available under AGOA.